MENA regional report: Tough conditions in MENA markets

Insurance markets in the Middle East and north Africa (MENA) have not escaped the impact of the global hard market – indeed, lack of reinsurance capacity has meant that for larger risks, pricing has seen big increases and capacity can be an issue, says Tony Dowding

According to AM Best, the MENA reinsurance market has long suffered from weak pricing, driven by ample supply, creating challenging operating conditions for the region’s reinsurers. It notes that available reinsurance capacity in the MENA region comes from many sources, with global reinsurers, regionally domiciled players, as well as reinsurance groups from Africa and Asia all operating in the market.

Traditionally, MENA has offered diversification for reinsurers as a result of the low level of catastrophe risk. But Best notes that several regional and international players have withdrawn from the market, often because they have struggled to generate sufficient returns.

“For the past several years, reinsurance market conditions across the region have been characterised by highly competitive pricing, an abundance of capacity, as well as incidences of large losses,” says Best.

There are other pressures on the market. The insurance markets of the Gulf Cooperation Council (GCC) have been affected by Covid-19 and oil price volatility. An Aon report, 2021 Insurance Market Review – Middle East, notes that insurers in the Middle East are altering their pricing to offset losses, volatility and low interest from the global market. It states: “Even though the Middle East region is relatively small, the impact of the hard market is severe. Certain insurance products, such as property and construction, saw premium increases of 30% or more on ‘clean’ risks.”

‘Two-tier’ market
The insurance market in the MENA region is much like other regions currently in that it is somewhat ‘two-tiered’, based on occupancy and client profile, according to James Battersby, chief broking officer for central and eastern Europe, Middle East and Africa, Willis Towers Watson (WTW). “What we mean by two-tiered is that for smaller, less complex risks that can be absorbed by local and to an extent regional markets, there remains an abundance of capacity and therefore competition. For larger or more complex risks, where perhaps the local or regional markets need help, we continue to see less capacity on offer and what is available is normally more expensive,” he explains.

He adds: “From a coverage perspective, underwriters are continuing to remediate their books and the industry is tightening up on certain perils, such as communicable disease cover (exclusions) and ‘silent’ cyber. Insurers are generally making coverage amendments at renewals driven by coverage restrictions that were imposed at the renewal of their treaties.”

Anne Vinny, chief underwriting officer, commercial insurance, Middle East, Zurich Insurance Group, notes that market conditions continue to remain hard, especially on the larger risks that require significant reinsurance capacity. She says this is driven by the adverse weather events and disasters faced globally, especially in the US and Europe. “Although the Middle East has not been affected by any major nat cat events, the frequency of wind and wet perils and floods in territories like Oman and other GCC countries has increased over the years and impacts the loss activity, resulting in terms which reflect the exposure,” she explains.

There is some positive news in the markets. Joseph Bejjani, chief distribution officer GCC and North Africa, AIG, says that although some players have decided to exit different MENA markets, new players are entering or expanding their existing presence, noting that the United Arab Emirates (UAE) remains an attractive market, while Saudi Arabia and Turkey are growing extremely quickly, together with Morocco and Egypt.

Sebastien Loeffel, network partner relationship manager at AXA XL, says post-pandemic recoveries are generally better than initially anticipated. “As the market is still not fully mature, the dynamics are still changing, but authorities are doing their best to educate local businesses to make the most of the insurance mechanism for risk transfer,” he says.

But he adds: “Capacity remains a major concern in the region as, comparatively, there is very little local capacity deployed and what exists is mostly driven by reinsurers from western markets. This means that global capacity and rate issues are echoed here in the local market.”

Distressed lines
There are of course a number of distressed lines in the region, generally reflecting the global picture. The two mentioned most by insurers and brokers are D&O and cyber.

D&O continues to be challenging, and Aisling Malone, head of executive & professional lines, Middle East, Berkshire Hathaway Specialty Insurance (BHSI) points out that while there has been more capacity available in recent months, programmes with large limits (over $50m) can still prove hard to place in full. “Similar to the rest of the world, D&O programmes for US-listed companies in particular are very difficult to fill and there is very limited capacity for programmes with SPAC/de-SPAC exposure. D&O programmes for locally-listed companies are under less pressure but capacity on prospectus liability/POSI for newly listed companies is still in relatively short supply,” Malone says.

However, she adds that the hardening market for D&O does appear to have peaked. “Rates continue to increase but more moderately than previously, with capacity returning to the market both from new entrants and existing players. We expect to see rate increase continuing into 2022 nevertheless,” she says.

Fahad Al Rakhis – head of specialty lines, commercial insurance, Middle East, Zurich Insurance Group, says: “We are still seeing capacity scarcity across financial lines; cyber markets continue to reduce line sizes further, which drives rates positively. The main reason for the increases is the correction in the pricing and controlled line sizes in some industries, which was affected heavily during the pandemic.”

hacker attack, cyber crime concept
Credit: Shutterstock/Song_about_summer
WTW’s James Battersby says there is severe dislocation in cyber as insurers manage systemic risk and a significant increase in the frequency and severity of ransomware. He explains that as well as hardening on prices/retentions/capacity/coverage, there is an increased focus on risk selection. “Most carriers now carry out internal assessment of prospects/clients, done by in-house cyber experts, and cover may simply be not available for risks that do not have state-of-the-art IT security and processes. We are seeing an increased number of prospects unable to find insurance no matter the rates available,” he says.

An area to watch out for is energy liability, which has struggled for the past couple of years, says Battersby, noting that prices are starting to moderate, although risk profile, limits purchased and industry sector continue to influence the ultimate pricing outcome.

And a broader point for the MENA market is the impact of ESG, says Battersby. “Projects with negative ESG impacts are becoming ‘red-list’ items regardless of risk profile. While thermo-coal has been in the spotlight for some time, carriers begin to focus more on local ESG-related issues such as works taking place in natural parks. Additionally, carriers no longer review ESG practices on the specific project in question and will review the insured’s business profile as a whole.

“In addition, there is a considerable reduction in capacity for projects with tailings facilities, be these new or refurbished, wet or dry. Fossil-fuel projects, including oil and pipelines which have been historically considered more favourably, are now becoming distressed, with lobbying of insurance companies by NGOs etc not unheard of,” he says.

Global programmes
Currently, energy/construction are the main lines in the MENA region in terms of multinationals and global programmes, according to May Hleileh, underwriting manager – energy, commercial insurance, Middle East, Zurich Insurance Group, although the insurer is starting to see growth from other sectors.

“We are seeing many of the energy and construction companies investing globally and growing exponentially with complex programme requirements. The industry has been heavily hit in the last couple of years but we are now seeing positive upward movement,” she says.

AIG’s Bejjani says that energy programmes are the largest in the region when it comes to multinational programmes, given the region’s economy. “However, multinational programmes on property and casualty continue to be in higher demand, especially in the real estate, retail and logistics sectors, as companies tend to consolidate their books and benefit from economies of scale,” he says.

Bejjani notes that construction remains the largest single sector in the GCC, and public projects lead that sector in the larger economies: UAE, Saudi Arabia, Qatar, Kuwait and others. As a result, Bejjani points out: “CAR is a main line for most general insurance companies across the GCC and north Africa, where projects have witnessed a surge before the last 18 months and are now recovering. CAR rates and deductibles continue to increase quickly while capacity is scarce. This trend is expected to continue in 2022.”

The Aon report states that construction insurance markets in the Middle East have been hardening since 2019 and can be attributed to reinsurers pulling out from the region and large losses due to weather-related perils, which historically were rare in this part of the world. As a result, the report notes: “Even for new projects, the markets are seeking a minimum of two or three times the premium rate that they used to charge in the past, of course with a lot of limitations on the coverage element… Current challenges are expected to continue during 2021 and the situation is expected to worsen in terms of market capacity as well as meeting the requirements of the clients.”

Zurich’s Vinny says the construction market continues to remain hard, more so in respect of the restrictive terms, conditions and limits available. She says major projects that were either delayed or suspended due to the pandemic or finance-related reasons are now being revived, and these mid-term projects are facing challenges in placements because of limited reinsurance capacity and appetite.

Project length and annual construction coverages continue to be challenging, with international carrier autonomy withdrawn from the region to be centralised within London and continental Europe, according to WTW’s Battersby. However, he adds that local capacity within MENA remains stable with several A-rated carriers available to provide supporting capacity on complex projects, and there is a constant level of capacity at lower security ratings with carriers willing to engage in the lower-value projects of less than $50m in contract value.

Limited international capacity

Lead lines within the region remain scarce with limited international capacity as yet unwilling to support local leading (re)insurers, but the outlook looks positive, he says, with additional local carriers beginning to offer capacity on a speculative basis and regional carriers expanding their geographical remit beyond their domiciled terrorism. While pricing increases have begun to tail off, pressure remains on coverage offering with a tightening of wordings and a continued increase of deductibles, both cat and non-cat.

Defects exclusions remain under the microscope, according to Battersby, with few carriers willing to consider the wider ‘improvements’-based exclusions that were synonymous with the last decade; and ‘consequences’ now becoming the standard after a spate of high-profile losses. He adds that quality of technical information to underwriters and insured engagement with the (re)insurance market are seen as beneficial and often welcomed by carriers.

As for the energy market, Battersby believes that especially in upstream energy it is difficult to get local or regional markets to quote. “They are far happier following some kind of lead capacity from a reputable international insurer. The established Gulf market is something of an exception but even their appetite appears to fluctuate,” he says.

In terms of ratings, upstream energy has been relatively unaffected by the ratings environment seen everywhere else in the past three years, and rates remain relatively flat, he says, while downstream energy is slightly different and rates continue to harden in the region of 5%.

Emir Erdur (head of casualty, Middle East, BHSI, believes that capacity is slowly coming back in energy casualty markets, putting pressure on rate increases. “While in the past we used to see 30%-40% increases on renewals, we are now more experiencing increases in the region of 10%-15%. Going into 2022, the increase is likely going to dip to single digits. Rate increase is less so for the offshore energy casualty market but more for onshore and chemical exposures,” says Erdur.

As for other classes, the picture is generally of rates increasing, as with the rest of the global market. The Aon report notes that the regional marine market has followed the global and London marine markets, albeit slowly in terms of hardening of premiums and terms as well as reduction in capacity, and most insurers in the region have stricter and/or reduced marine capacity than they had previously. Cargo continues to be sought after by most insurers and there is more than adequate capacity in the region, although challenges remain. The report says that the regional hull market hasn’t performed well over the years and most policies are subject to a minimum 10%-20% increase, even for those with a clean loss record history. Aon adds that major regional insurers have imposed stricter underwriting measures and guidelines to ensure profitable underwriting for their hull portfolios, due to sustained poor results.

Port of Jeddah, Saudi Arabia.
Port of Jeddah, Saudi Arabia. Credit: Shutterstock/IVAN KUZKIN
Meenakshi Srinath, head of marine, Middle East, BHSI, says project cargo with delay-in-startup cover remains less attractive to insurers, particularly for difficult cargo such as arms and ammunition as well as pharmaceutical business, but adequate capacity is available from local insurers for standard risks as they are well supported by their treaties.

“Overall, the market is very competitive for standard risks and for risks that have good loss histories. Over the past couple of years, terms and conditions for complex risks have hardened, but to a much lesser extent than what is experienced in the London market. With improved underwriting results and additional capacity entering the market, we are sensing the market softening,” says Srinath. “On the other hand, as economic activities pick up around the globe, we expect that there will be more requirement for reinsurance capacity, which could turn or stop the ‘softening’ market trend.”

Regulatory issues
Regulatory standards vary across the region but AM Best notes the development of more robust regulatory frameworks in all GCC markets, for example. It points in particular to the recent introduction of more stringent regulatory requirements in countries such as Saudi Arabia, the UAE and Qatar, which have prompted companies in these markets to implement more robust risk management and governance frameworks. Kuwait, which Best says is historically viewed as having underdeveloped insurance regulation, has begun to take steps to enhance supervision of insurers, with the introduction of a new insurance law (Law No. 125 of 2019 on the Regulation of Insurers).

As far as the implementation and maintenance of global programmes in the region goes, AIG’s Bejjani says there are a few issues to consider, including requirements to have local retentions (Saudi Arabia, Egypt, countries of francophone Africa, Algeria), mandatory reinsurance and local underliers for the majority lines of business. But he adds that a well-structured multinational programme would take all of this into consideration.

AXA XL’s Loeffel says there aren’t any major issues with incorporating MENA operations into global programmes but adds: “With the implementation of VAT in the region, certain basic requirements are to be followed in line with best local standards, which may be perceived as issues. However, it’s a change that needs to be incorporated to make transactions smoother.”

In general, the region’s territories do not impose insurance premium tax (IPT). According to a recent guide to IPT compliance produced by Sovos, there is no IPT in Bahrain, Qatar or Saudi Arabia. In the UAE, there is an annual fee due to the UAE Insurance Authority, which is calculated on total written premiums net of locally incoming reinsurance premiums, charged on life insurance, health insurance, and property and liability insurance.

As for VAT, it was introduced in UAE in 2018, levied on general insurance and reinsurance business where the insured party is resident in the UAE, says the Sovos report. The supply of insurance and related services to a recipient established outside the GCC implementing states is zero-rated.

In Saudi Arabia, VAT on insurance and reinsurance business where the insured party is resident in Saudi Arabia was introduced in 2018. In Bahrain, VAT applies to general insurance including health insurance, while in Qatar, financial and insurance services are exempt from VAT.

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