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With investment income curtailed, rated insurance companies across the Middle East and North Africa face greater scrutiny of their financial strength and risk management practice. Policy spoke to Anandi Nangy-Kotecha, managing senior financial analyst at AM Best, and Kevin Willis, director at Standard & Poor’s.

Please comment on rating changes that have been made in 2009 (Middle East & North Africa based insurance companies). What trends have you seen in company performance/strength/behaviour?

Anandi Nangy-Kotecha
The trend on rating actions during 2009 cannot be generalised as there were a number of them remaining stable, some moving upwards (even if not with a straight upgrade) and others moving down.

Most of the companies in these regions are heavily invested in equities and/or real estate, therefore the impact of investment losses for 2008 and part of 2009 varied according to each company’s exposure to these assets.

Takaful players were faced with defaults across some of their Islamic-compliant investments as there were issuers in financial distress. The majority of rated companies are well capitalised and were in a position to sustain the investment losses for their rating level; however that was not the case for all.

After the major liquidity issues that hit the market, the most common strategy was to keep their additional assets in cash and avoid exposure to more volatile type assets. The industry has become aware of the importance of investment risk management and corrective measures have been/are being taken by some players.

Kevin Willis
There have been two key drivers to ratings in 2009. In the first half ratings movements in the GCC reflected the sharp deteriorations in profitability and capital strength caused by the investment market volatility of 2008. In the second half our ratings have been more stable across the whole of the MENA region, but for those insurers in Dubai the impact of the recent significant uncertainty caused by the Dubai government debt actions have caused us to view the insurance industry risks there more cautiously.

In 2009, for GCC-based companies, we have seen continuing strength in most rated companies’ technical performance.

Underwriting remains profitable with generally favourable claims ratios, but inwards reinsurance commissions continue to be strong contributors to overall profitability. Net profitability has improved in 2009 as a result of greater stability and recovery in the regional equity markets, so reducing fair value adjustments.

However, those companies with particularly high investment leverage through holdings of equities and real estate, remain exposed to investment value and performance volatility.

Insurers in the GCC are trading in dynamic insurance markets, where commercial risks tend to dominate and competition among participants and producers is fierce. Looking at North Africa and the Levant, the markets tend to be driven more by compulsory lines such as motor and workers’ compensation where there is higher overall risk retention and less “high single value at risk” impulse.

Underwriting earnings are less strong, but still positive and the impact of the investment market volatility is less.

Please comment on the outlook/prospects for Middle East insurance companies in 2010.

Anandi Nangy-Kotecha
Growth prospects were tempered for 2009 as the global financial crisis unfolded with the market looking into 2010 with more optimism. However, recent developments in Dubai and the uncertainty about possible delays or cancellations of some major projects pose a potential risk of lower income to some players writing property and engineering lines. If this is to happen it will add to the number of projects that were cancelled/delayed following the crisis in 2008.

So, overall, there could be lower than initially anticipated growth of premiums volume. An already competitive market may become even more challenging and companies are likely to look for further opportunities in other parts of the world.

Kevin Willis
We expect the whole of the Arab world to continue to experience increases in premium volume in 2010 and 2011. There is no single common factor to each domicile, but there will be a broadly favourable response as the global economy recovers from the recession of 2008/2009 and insurance penetrations rise across the region.

In the GCC other influential factors will be the continuing expansion of compulsory medical cover, benefitting Abu Dhabi, Bahrain and Saudi Arabia particularly.

There is an expectation that this will be introduced in Dubai too in the near/medium term, and if this is the case, this could easily compensate for the slowdown in volumes experienced in 2009 through the economic downturn.

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