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Searching For A Hard Market
| January 24, 2010 by Helen Yates
While the region still has a low insurance penetration, the introduction of compulsory covers should drive greater take-up. Awareness of insurance is growing, while the introduction of takaful could prove an attractive solution in the more traditional Islamic states.
Rates reach unsustainable levels
But market dynamics need to change before the region can become a major market for global reinsurers. Rates in the GCC have reached levels that are unsustainable in Mueller’s estimation. “If you look on the engineering side and also on property – and property has performed very poorly over the past five years – there are no margins left so if there is another major claim both the insurers and reinsurers will suffer heavy losses.”
A number of significant fire losses in 2007 and 2008 – including the Fortune Tower, Atlantis Hotel and Al Quoz warehouse fires in Dubai and Port Khalid edible oil plant fire in Sharjah – have tarnished the recent loss record. Losses should drive reinsurers to seek more risk-adequate prices, but past experience makes Mueller doubtful if they actually will. “Of course losses always help to turn the market. The problem is how long the memories are. Sometimes it’s unbelievable how fast our industry forgets.”
In order for the market to develop, greater discipline is required in the primary insurance sector. “At the moment the majority of the insurance companies are retaining zero to nothing – they have more of a broker approach than a risk carrier approach and up to 89 per cent is ceded to reinsurers,” explains Mueller. “This led to the situation that companies didn’t have the proper interest to write good business, because you know that if you’re hit with a claim you basically have your reinsurance partner being affected most.”
Greater risk retention is essential, as is consolidation. Stricter supervision and increased capital requirements have driven some M&A activity in Saudi Arabia, reducing the number of competitors in that market. But more is necessary across the region in order to stabilise pricing. “If you look at the balance sheet and you really want to create a healthy market then consolidation is necessary,” Mueller says.
Curbing cash-flow underwriting
The GCC market continues to be dominated by a large number of family-owned insurers, many of which rely on commissions and investment income to subsidise cash-flow underwriting practices. The impact of the financial crisis on global stock markets means this is no longer a business model they can fall back on, explains Ahmed Rajab, regional director for Willis Mena. “Those who have been relying on giving very cheap rates and financing the loss by investment in the stock market can not do that any longer. It’s driving much greater discipline in the market.”
Another factor helping to end the softening cycle is the contraction of the co-insurance market. In the years before the GCC attracted sufficient reinsurance capacity, many large risks were split up and co-insured among the local carriers, often at their rock-bottom prices.
“Risks in excess of US$2bn to US$3bn were co-insured locally by direct insurance companies and were not reaching European reinsurers or the London market,” explains Rajab. The influx of regional and international reinsurers has marked the beginning of the end of co-insurance. Greater awareness of catastrophe exposures could also help maintain risk-adequate pricing in the region. While not typically associated with the natural hazards that plague other markets, the assumption that the Middle East is catastrophe-free is incorrect. Earthquake exposures exist, while the Gulf is prone to flash floods and the occasional hail storm. Even moderately small waves can threaten Dubai’s manmade islands and, as Oman’s Cyclone Gonu proved in 2007, in a changing climate the unexpected can happen.
In a rapidly developing region, there are increasing exposures at stake. “Clients and reinsurers are more aware of these risks, and companies are willing to know more about their cat exposures than before,” says Rajab. At present there is one earthquake catastrophe model for the Gulf, but it is more than 10 years old and does not account for the vast cityscapes that have sprung up over the past decade.
North Africa experiences significant earthquake activity. In 2003 Algeria had its worst quake in two decades, a magnitude 7.3 that led to approximately 2,266 deaths, leaving more than 10,000 injured and destroying more than 1,243 buildings, leaving 150,000 people homeless. It prompted the introduction of the first catastrophe pool in the region, the Algerian Catastrophe Insurance Programme. “Other countries are interested in looking at how they can protect their population against natural hazards,” Rajab says.
While there is a growing professionalism in the market, prices are still a long way from hardening in the Middle East. Reinsurance rates look unlikely to match the hardening witnessed in the more mature markets. But even an end to the softening cycle is something of an achievement, Rajab explains. “Prices are flat, but they haven’t gone down and they used to go down by 10 per cent to 20 per cent a year.
“For major risks exceeding US$2bn to US$3bn rates have started increasing because these risks now – due to the lack of coinsurance – need to be placed in the international reinsurance market, which is pricing them according to international prices.”
