MENA reinsurers benefit from positive pricing, but lag global trends

MENA reinsurers benefit from positive pricing, but lag global trends | Insurance Business Asia

Reinsurance

MENA reinsurers benefit from positive pricing, but lag global trends

Rising natural catastrophe losses and inflation shape market outlook

Reinsurance

By
Kenneth Araullo

Reinsurers in the Middle East and North Africa (MENA) region continue to benefit from favorable pricing trends over recent renewal periods, although the extent of this benefit lags behind that seen in the global reinsurance market, according to a new report from AM Best.

AM Best noted that MENA reinsurers have faced increasing challenges in recent years due to natural catastrophe losses and several large, single-loss events. In particular, reinsurers are being forced to adapt their pricing and risk modeling approaches to account for a growing frequency of weather-related events, such as floods in the Gulf Cooperation Council (GCC) countries.

Emily Thompson (pictured above), senior financial analyst at AM Best, said that reinsurers in the region are working to ensure that these risks are appropriately reflected in their underwriting decisions and risk appetites.

“Following greater incidences of weather-related losses, such as flood events (particularly in the Gulf Cooperation Council countries), reinsurers in the region are having to further adapt pricing and modelling capabilities to ensure these exposures are appropriately factored into underwriting decisions and risk appetites,” Thompson said.

The positive reinsurance pricing environment in the MENA region has largely mirrored global market trends, which have been shaped by rising claims inflation and an increased frequency of both large losses and natural disasters. However, local economic conditions have also played a role in shaping the market.

Countries across the region face differing challenges, from inflationary pressures and high interest rates to regional instability. Inflation, for example, ranges from 0.9% in Oman to 71.6% in Türkiye as of June 2024.

The hydrocarbon-producing economies in the region, which are benefiting from elevated oil prices due to political risks and OPEC+ production cuts, have fared better than energy-importing nations.

Many MENA economies are heavily reliant on revenues from the hydrocarbon sector, and government spending on infrastructure projects is a significant driver of premium growth in the region’s insurance markets.

These risks, often ceded by primary insurers to reinsurance partners, have so far provided profitable underwriting opportunities for MENA reinsurers. However, as natural catastrophe losses become more frequent, volatility in the region’s reinsurers’ performance could increase.

In contrast, countries that import energy face more challenging fiscal conditions, with high inflation and interest rates compounding economic difficulties. AM Best highlighted Türkiye, Tunisia, and Lebanon as examples of countries experiencing heightened levels of country risk due to ongoing geopolitical volatility.

The report suggests that these vulnerabilities could further impact the performance of reinsurers operating in those markets.

Underwriting profitability in the MENA region has historically been difficult to achieve consistently. However, hard market conditions have allowed reinsurers to reprice and review their business, leading to improvements in underwriting returns and return on equity.

Despite these gains, AM Best pointed out that MENA reinsurers often lack the scale and diversification of their international counterparts, and their role is frequently limited to following on reinsurance programs, reducing their ability to influence pricing and terms.

Economic inflation, while elevated in recent years, has been gradually decreasing across much of the MENA region, largely due to tight monetary policies. Nevertheless, supply-side inflation continues to impact loss costs for reinsurers in the near term. As inflationary pressures evolve, reinsurers will need to carefully adjust premium rates and reserves to ensure that loss cost inflation does not erode underwriting margins.

The performance of the region’s reinsurers has been further impacted by a growing number of natural catastrophe losses and large single-event claims. Recent weather-related losses, such as the February 2023 earthquakes in Türkiye and the April 2024 floods in the UAE, have heavily affected property, engineering, and energy lines of business.

In response, reinsurers have implemented changes to reinsurance structures and increased retentions at renewals in 2024, including higher return period retentions and reductions in profit commissions and event limits.

Government-backed natural catastrophe schemes are becoming more common across North Africa in response to the growing frequency of natural disasters. These schemes, which cover perils like earthquakes, droughts, wildfires, and floods, are already in place in countries such as Algeria, Morocco, and Türkiye.

In 2023, these schemes were activated in Morocco and Türkiye, providing local reinsurers with additional premium volume while helping to mitigate underwriting volatility by sharing catastrophe risk more broadly across the market.

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