MultaQa 2015 conference report

MENA insurers at crossroads as competition hits rates The growth trajectory of insurance markets in emerging economies is frequently unpre-dictable and erratic. Nowhere is that more true than in the Middle East North Africa (Mena) region, to the south of the Mediterranean, and bordering the Gulf of Arabia, where insurers and reinsurers face tough challenges. The economies of the Mena region grew at an annual inflation adjusted rate of 4.1% from 2008 to 2013, boosting insurance markets that are now collectively worth $50bn. But while Mena may have outperformed mature economies in the post-crash period, it is not like other Bric or emerging markets. Speaking at the recent MultaQa congress, held in Qatar’s capital Doha, Giles Ward, ACE’s regional president for Eurasia and Africa, put the local markets in international perspective. He pointed out that, at 381 million, the population of Mena is around the same as the European Union. However, the combined size of the major Middle East insurance markets is around the same as Belgium.hideAt around 15 million square kilometres, Mena’s landmass is close to that of Russia’s, a market that also benefits from great mineral wealth, Mr Ward said. Yet Russia’s insurance market, one of the smaller among the four Bric nations, is significantly larger. For both cultural and institutional reasons, insurance penetration across Mena is among the lowest in the world. MultaQa’s host Qatar has an insurance penetration rate of 1% of GDP, which has not significantly risen over the past 10 years despite the state’s rocketing economic growth. High growth potential is usually considered as the flip side to low insurance penetration. But looking ahead from a macro-economic point of view, the current picture for Mena watchers couldn’t be less uncertain. Conflict and/or tension in the surrounding region is worse than it has ever been and continues to evolve in new and unforeseen ways. At the same time, a substantial and possibly persistent decline in oil prices, along with slower-than-projected growth in the euro area, China, Japan, and Russia have changed the economic prospects for all of the oil-producing countries in the region for the foreseeable future. In its last economic outlook for the region, the IMF noted that oil prices declined by about 55% from September 2014 to the start of 2015. In late November, the Organization of the Petroleum Exporting Countries [Opec] decided not to cut production. As a result, markets now expect oil prices to be around $57 per barrel on average in 2015—a decline of about 43% from the IMF’s October 2014 Regional Economic Outlook (REO) baseline. Prices are expected to recover partially over the medium term, rising gradually to $72 per barrel by 2019, due to the likely decline in investment and future capacity growth in the oil sector. But that is still about 23% lower than was projected in the IMF’s October 2014 REO. As the IMF points out, a decline in prices results in losses in export and fiscal revenues for oil-exporting countries, with possible knock-on effects on government spending and non-oil economic growth. The problems posed by the difficult socio-economic outlook for Mena were a recurring theme at the MultaQa conference, but the familiar soft global insurance market chatter was always to the fore. As in the mature markets of North America and Europe, competition between insurers is intense, with pricing in Mena widely considered to be unsustainable. Mena’s resource-rich states undoubtedly hold untapped insurance potential and the region’s location as a bridge connecting east and west bodes well for the future, delegates heard. But, the need for insurers and reinsurers active in the region to reconsider their strategies was a recurring theme. “The key question for the Mena region is whether there is enough adequately-priced business to feed all the ‘mouths’ there are now…let alone if more capacity comes in,” Mr Ward said. “Today, many more are entering the market than exiting, given the region’s advantages…and its reputation as a region which is ‘cat-light’. “Mena’s market is, I would argue however, not growing at a rate fast enough to absorb all of this. Essentially, an increasing number of participants are betting on superior growth that is not guaranteed and fighting for what remains a relatively small slice of the global pie,” Mr Ward warned. Bassam Chilmeran, General Manager of the UAE’s Al Wathba National Insurance Co (AWNIC), echoed Mr Ward’s concerns. “Results for 2014 show technical underwriting more and more in the red and it’s because of pricing. Meanwhile, the future outlook is clouded by the oil price trend, conflict and instability in the region, not to mention the increasing complexity of risks—in construction for example,” he said. “Insurers must take a more technical approach to setting rates.” Bassam Hussein, CEO of Qatar’s Doha Insurance Co, warned about the pressure on insurance boards to grow their business unsustainably at a time when investment in the energy industry is slowing. It’s more important to focus on strengthening relationships in an environment of strong competition, he said “There’s no shame in reducing the underwriting ‘budget’, just don’t delay claims payments as a reaction to lack of profits. Sometimes Mena companies have a problem hiring the best people—the quality of employees has to be improved,” he told delegates. Regulators in Mena countries have an important role to play in protecting the sustainability of the region’s insurance markets, MultaQa panellists agreed. Solvency rules strengthen market discipline around pricing adequacy, yet the level of sophistication among local market supervisors varies enormously and much of the region’s insurance capital requirements are still not risk-based, panellists said. The Mena Insurance Barometer cites effective solvency regimes in Bahrain, Jordan, Morocco and Saudi Arabia, compared with ‘rudimentary’ and/or insufficiently enforced frameworks in the Gulf region, for example. The Saudi Arabian Monetary Agency was highlighted as taking regulatory action over potentially unsustainable medical and motor rates when it recently mandated the use of independent pricing and reserving actuaries. Reinsurance re-set needed? Reinsurance companies operating in the Mena region share the challenges facing their cedants: cession rates, typically around 30%, are high compared to other markets. Global reinsurers are active in the market, standing behind local insurers on large commercial risks. Numerous local reinsurers, on the other hand, compete strongly across the region for personal lines business. But again, the effect of price competition on technical results is leading some to question the sustainability of such a well-populated reinsurance market. AM Best analysis shows that among 13 of the region’s largest locally domiciled reinsurers, six reported a combined ratio of more than 100 in 2013. The average was 99.4%, compared to 88.6% for their international counterparts. “So it feels to me, as far as Mena is concerned, that we are well into the competition phase, and perhaps heading for the crunch,” ACE’s Mr Ward warned in Doha. “The market is increasingly pricing risk according to market trends rather than technical analysis.” Speaking on the reinsurance panel convened at MultaQa, Chedid Re CEIO Farid Chedid said that competing reinsurers are sometimes guilty of supporting poor underwriting at the primary level. “Results are very challenging but they are less challenging where there is less reinsurance; results are better when the retention is higher,” he said. “The heavily reinsured business is showing the worst results.” Local insurers are unlikely to reduce their reliance on reinsurers any time soon, however, judging by comments made during a panel session. Although buying strategies do appear to be evolving. Masood Bader, General Manager at Bahrain National Insurance Co, called on reinsurers to abandon their insistence on protections based on line of business. “We are grateful to reinsurers for their role in growing the insurance industry but we need partnership across all our needs,” he said. “We would like to obtain coverage across lines of business and not according to reinsurers’ profit centres.” Lazhar Charfeddine, Chief Reinsurance Officer at Abu Dhabi National Insurance Co, stressed the importance of partnering with a select group of reinsurance companies around cost-effective, mutually agreed terms. He said many insurers mistakenly believe they have to choose between partnering or competitive reinsurance: “In fact, neither strategy is wholly efficient and a combination will bring mutual benefits on a long-term basis.” On the question of the relative strengths of regional reinsurers and international reinsurers, Sai Gopal, Chief Underwriting Officer at Gulf Insurance Group, said security is a priority. “We want to grow with regional reinsurers but security ratings can be a problem.” The regional reinsurance model could soon come under increasing pressure, according to some MultaQa participants. Gunther Saacke, CEO of Qatar Re, said the concept of a regional reinsurer is essentially flawed: “Reinsurance is all about diversification and that applies in Mena as it does anywhere else,” he said. “The long term trend is for [smaller] regionals to become part of larger operations.” Promising outlook despite price pressures In the face of intense competition and against an extremely challenging economic and political backdrop, senior executives working in the Middle Eastern and north African [Mena] insurance markets are confident about the medium-term outlook for their business, according to a new survey. The third Mena Insurance Barometer, published by the Qatar Financial Centre and launched at the annual MultaQa conference in Doha last month, paints a picture of continued growth and a market ready to return to profitability. “According to the Mena Insurance Barometer the region’s strong fundamentals remain intact,” said QFC Authority CEO Shashank Srivastava. “Insurance penetration is on the rise, demographics are favourable and the ability of most Gulf countries to withstand short-term volatility in oil pricing is strong.” The survey of insurance executives and accompanying report covers 14 Mena countries—Algeria, Bahrain, Eygpt, Iran, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, Turkey and the UAE. Together, the countries have a population of 318 million and in 2013 generated a combined GDP of around $3.7tn, 5% of the world total. As an economic block, Mena would rank as the world’s fourth largest, ahead of Germany. However, while the region’s average income per capita is similar to the global level, insurance premiums represent just 1.3% of GDP, one fifth of the global average. Before the oil price drop, the IMF expected the region to grow only slightly faster than the world as a whole. More than two-thirds of executives polled for the Barometer said they expect regional premiums to outgrow GDP, however. Respondents were particularly bullish about personal lines business, such as medical and motor, that are increasingly subject to compulsory purchase requirements and are likely to be boosted by population growth. At the same time, falling oil prices are not expected to have any material adverse impact on planned infrastructure and construction projects in the Gulf, such as those related to Dubai World Expo 2020 and the Fifa World Cup in 2022. The current pipeline of investments in the Gulf Cooperation Council [GCC] into infrastructure and construction, for example, is around $690bn between now and 2018. There’s also a sense that GCC countries in particular will succeed in implementing strategies that diversify their economies away from oil and gas and into manufacturing and services, creating new opportunities for insurers. Realism over rates Participants are realistic about the challenges they face to realise their markets’ potential and build on penetration levels that have stayed stubbornly low at 1.3%. This compares to the global average of 6.5%. When it comes to the cost of insurance most executives consider rates to be at rock bottom, or at least below the average of the last five years. Competition is described as fierce, partly due to the abundant supply of reinsurance and what the report calls the increasing relevance of brokers. The Gulf insurance markets, which are considered attractive, accessible and relatively cat-free, are particularly overheated. Rainer Lehner, Senior Executive Officer at Asia Capital Re, said in the report commentary that there is no natural limit to the current rate of decline as there is no cat event in sight that could possibly turn the market: “In fact, rates may continue to fall,” he said. But the share of participants expecting rate increases has actually grown since last year’s Barometer, from 19% to 30% for commercial lines and 21% to 37% for personal lines. Low rates have inevitably contributed to the low profitability of business in the Mena markets. Eighty one per cent of respondents consider commercial lines profitability to be low, compared to 62% last year. The fall in sentiment is attributed to rate erosion as well as a series of expensive fire losses. Stronger investment returns led to looser underwriting too. Respondents took a more positive view of personal lines business, with 77% of executives describing profitability as average, up from 67% in 2014. The improvement was put down to regulatory tightening starting to take effect. Basma Barakat, Assistant General Manager at Arab Re, said: “The Mena insurance industry will move back to underwriting basics once new regulations aimed at adequate reserving have been implemented and enforced.” Nearly half of respondents believe the overall state of insurance regulation in the region to be inadequate. The most frequently mentioned shortcomings are lack of solvency margins (risk-based solvency rules), insufficient minimum capital requirements and a general lack of transparency. Progress is being made, however, and executives singled out Saudi Arabia, Bahrain, Jordan and Morocco as having effective and sophisticated regimes. UAE and Qatar are seen as being committed to modernisation. Speaking on the sidelines at the Barometer launch, author Kai Uwe Schanz said that several executives had voiced concern over the lack of regulatory harmonisation. “It is quite challenging if companies want to do business across the region. What many would like to see is a single passport as exists in the European Union,” he said. QFC Authority CEO Mr Srivastava said that harmonisation in Europe was possible because markets were more in step than is the case in the Mena region. “It would be good to have but I think it is some time away,” he said. No urge to merge When asked about the prospects for consolidation, relatively few executives (19%) anticipate an uptick in mergers and acquisitions among insurers, compared to 16% a year ago. Solid levels of capitalisation and family ownership were given as the main and ‘insurmountable’ obstacles to consolidation. Longer term, however, tighter regulations around capital requirements are likely to stimulate M&A. “Insurance market consolidation in the region would have to be spearheaded by lawmakers and regulators,” said Michael S Jensen, Managing Director for Mena at AIG. “Market forces on their own appear to be insufficient to deal with the excess number of players.” In what might be considered wishful thinking, only 32% of local insurer executives expect foreign insurers to gain market share. This could reflect the unwillingness of international companies to prioritise growth over profitability, the report said. Alternatively, it could be because local competitors are ‘stepping up’ their game, it pointed out. Those respondents anticipating an increasing share of business for foreign players identified specific competitive advantages such as superior financial security and technical expertise, especially in products like professional indemnity. Others pointed to the preferences of the growing ex-pat community. Takaful, or sharia-compliant insurance, has so far failed to live up to its promise and only one-fifth of respondents expect it to outgrow conventional insurance premiums in the next year. The report says that many executives feel that takaful offers no genuine differentiation from standard cover and does not even live up to the concept of mutuality, given the conflicting interests of policyholders and shareholders.

MultaQa 2015 conference report

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