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Reinsurance Round-up

The Middle East and North African markets experienced a softening in prices during the renewals season. The UIB Group provides a review of conditions and highlights from 2009.

The Monte Carlo Reinsurance Rendez Vous held at the beginning of September of each year is deemed to mark the opening of the reinsurance year. Over the past few years it has witnessed events or happenings which have had a major effect on all sides of the reinsurance industry, for example the tragic events of 9/11, and the downgrading of Converium in 2004.

By way of contrast, the buzz word of the 2009 Rendez Vous was “flat” – no major losses, no significant mergers or down gradings and the prediction that the 2009-10 renewal season would be “flat”.

This prediction proved to be justified as the overall result of the renewal negotiations was a limited reduction in excess of loss rates especially for cat business, and pressure to increase commissions for proportional treaties.

This was against a background of an over abundance of capacity, a very profitable 2009, and a concerted effort by reinsurance buyers to reduce their reinsurance spend.

Middle East
In line with expectations months before the January 1 renewal, the Middle East and North African markets (MENA) experienced a softening in prices across most lines of business and in almost all territories. Despite much talk earlier in the season by many leading reinsurers about increases, or at least a stabilisation of rates, this did not materialise.

The strong capital replenishments by major reinsurers along with the positive underwriting results of 2009, coupled with a projected recovery from the financial crisis, has shifted many reinsurers’ focus towards increasing market share and retaining business.

Although the MENA region continues to have a very low contribution to world premium, many reinsurers continue or have started to focus on that region due to high growth potential compared to developed markets attributed to its highly untapped market, rising awareness and government initiatives to promote the insurance sector. Reinsurers are also attracted to that region as a way to diversify their portfolio into relatively low-CAT exposed territories. This has been evident by the establishment of several branches of major reinsurers, Lloyd’s cover-holders as well as the creation of new reinsurance and re-takaful operators in the region. This abundant capacity by existing companies and by start-up reinsurance companies hungry for premium has negatively reflected on both original rates and reinsurance prices.

The region continues its heavy dependence on proportional treaties as the main form of protection coupled with excess of loss covers protecting the companies’ retentions. The results are very low net retention levels when compared to the gross treaty capacities meaning many companies are heavily dependant on earned commissions as opposed to underwriting profitability. Gross excess of loss covers are rarely used by direct insurance companies, even the more established and financially able ones; the only exception to that rule would be motor business, which along with medical premium continue to represent a significant percentage of most companies’ gross incomes.

This dependence on proportional treaties with reinsurers following the original rating of the direct companies meant that the deterioration in original rates along with an increase in treaty capacities and reduction or even stabilisation of reinsurance commission levels has put the underwriting margins of treaties under pressure. There is voiced concern by many regional and international underwriters that the current terms offered by the reinsurance market is not sustainable, which will be clear once the industry suffers some major losses.

Excess of loss protections did come under pressure and unless results were extremely poor, reductions between five per cent and 25 per cent were observed across property, marine and motor business.

The main international players on treaty business across the region continue to be Munich Re, Swiss Re, Scor and Hannover Re and in the 2010 renewal Scor and Hannover Re have increased their involvement across many territories, while the GIC of India has become a leading and influential player particularly in the Middle East markets. Lloyd’s involvement in the region is quite limited given their lack of appetite for proportional treaties and Motor Xl business, however, Lloyds continues to be an important leader and capacity provider for the retrocession programmes of the regional reinsurance companies.

Highlights in 2009
While the MENA markets were not directly affected by the bad debts of the banking industry in the US and Europe,  the effects of the financial crisis were strongly felt by almost all countries. The drop in oil price had a direct effect on the spending power of companies and governments, particularly the Arabian Gulf oil-rich countries which will affect the number of projects that see the light in 2010. Having said that, those governments have accumulated enough wealth during the boom years to see them through the crunch and it is most probable that the government will now play a bigger role as the main spender in those countries with focus shifting towards infrastructure projects as opposed to the more luxurious construction projects that have identified the region recently.

The slow-down in international trade and piracy off the coast of Somalia has affected the volume of cargo business particularly through the Suez Canal and Jebel Ali in Dubai, which was reflected in non-realisation of projected marine cargo premium.

The Jeddah flood loss, with an initial loss estimate of US$40m, is expected to mainly affect the motor line of business. It is yet to be seen how reinsurers will react to this loss particularly in a region where not sufficient premium is paid for the catastrophic exposure.

Cancellation of the compulsory share on marine business to the Societe Centrale de Reassurance (SCR), the national reinsurer of Morocco. This trend has already started in a number of markets and is expected to continue in compliance with the WTO requirements and will ultimately lead to the direct insurance companies having more control and negotiating power over their reinsurance placements and will promote increased competition among reinsurers.

Medical premium is rapidly growing following new laws in several GCC countries making it a compulsory cover with an expectation that other neighbouring countries will follow suit in the near future.

The Saudi Arabian Monetary Agency (SAMA) continues its strong regulation of the Saudi Insurance market following the ‘Cooperative Insurance Companies Control Law’ that was passed in 2005 and has re-structured the market since. The number of licensed companies has exceeded 20 with several more in the pipeline.

The Egyptian Insurance Supervisory Authority) has come under the umbrella of the newly formed Egyptian Financial Supervisory Authority which has become operational since July 1, 2009.

Life insurance penetration is on the rise with a number of international insurance companies realising significant growth through their local offices. Takaful products will prove to be of utmost importance for life covers which have been historically avoided by many consumers for religious considerations.