Insurance Day Special Report on the Middle East – article by Adrian Spooner
The Middle East and more specifically those countries within the Cooperation Council for the Arab States of the Gulf (GCC) – Bahrain, Qatar, Oman, Saudi Arabia, Kuwait and the United Arab Emirates – remain a region of significant potential for the insurance and reinsurance industry. Consistent, positive growth over the past few years, fuelled by a combination of factors including economic development, the advent of compulsory health insurance schemes and the drive towards industry diversification, looks likely to continue, albeit at a slightly reduced pace.
However, several barriers exist that are impeding and, if not addressed, could ultimately curtail the insurance industry’s growth across the region. First, while awareness and market penetration of insurance products have increased at varying levels throughout the territories, insurance spend is still markedly low when compared with other developed markets. Recent reports suggest insurance penetration rates in GCC countries represent only a fraction of those seen in the US or western Europe.
Analysis of business lines across the regions highlights while premium growth has continued to increase year on year, pricing remains an issue, with many lines having negligible or even negative profitability. This situation is compounded by marketplaces that have become increasingly overcrowded, with a large number of small, often undercapitalised players competing for market share to the detriment of pricing levels. This is an area that must be assessed if pricing across the region is to increase to profitable levels. Recent regulatory missives expressing a desire for market consolidation in the GCC suggest while not inevitable, a period of market consolidation is becoming an increasing likelihood.
Market consolidation and as a result fewer, better-capitalised insurers benefiting from the increased expertise gained from the centralisation of knowledge could also counter another issue a number of market commentators have identified: that of the need for higher retention levels. For the region’s insurance industry to continue to grow there must be a greater focus placed on higher retention levels to encourage growth and retain business within local markets. There are a number of rationales behind the significant levels of premium ceded across the Middle East however, ultimately net loss ratios are not yet sufficiently profitable to incentivise insurers to retain more of the risk. Furthermore, the availability of increased reinsurance commissions, highlighted in the recent AM Best global reinsurance segment review published last September, has meant many primary insurers have come to rely on reinsurance commissions as a means of bolstering their balance sheets. Until pricing is adjusted and business lines become sufficiently profitable to encourage insurers to retain more of the risk, this situation is unlikely to change dramatically.
While the past few years have seen a trend towards greater retention rates, in part owing to regulatory encouragement, lower net loss ratios will undoubtedly engender a desire for increased retention to the benefit of the industry across the region.
Economies of scale
Market consolidation and the development of fewer, stronger players that benefit from the economies of scale that come with larger operations will allow for pricing to be set at levels capable of creating significantly improved loss ratios. Parallels can be drawn with the insurance markets of south-east Asia 20 to 30 years ago, where a wave of mergers and acquisitions saw an overcrowded marketplace of small to medium sized local insurers consolidated into a number of large insurers with the ability to compete not only in their own markets but also for global premiums.
For those of us who have been in a position to observe and where possible contribute to the growth of the insurance industry across the Middle East and who have the local knowledge combined with international expertise to playa role in its future, the outlook remains positive. Should regulators have the strength of resolve to make the necessary adjustments, growth in the region can not only continue unabated but can also facilitate the market’s transformation into a major player on the world stage.