BSA Ahmad Bin Hezeem & Associates

Insurance trends in the Middle East

Insurance trends in the Middle East

August, 2016
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The Middle East is weathering the tumult of low oil prices. Slowly rising oil prices have restored a degree of calm. Some vital sectors such as construction see an uptake, yet investors remain cautious. Finance and banking are slow to recover. The combination of the recent financial trauma and the proactive measures many Gulf States have implemented to diversify their economy away from petro-chemical mono-cultures in the medium-term has modestly encouraged the regional insurance industry.

Contractual Risk

Corporate CR raises premiums. Consumer confidence has increased due to partial oil-price upsurge, which has encouraged export activity. Rising GDP in stable Gulf States also encourages higher premiums. This will affect key commodity importing nations, whose consumption benefited from recently depressed prices.

Exporters continue to struggle in development, engineering and infrastructural sectors, thereby tempering the effects of rising insurance premiums and eroding supply-side profit-margins. Some Gulf insurers/reinsurers tend to undercut pricing in order to encourage competitiveness, but others observe that this may trigger an operative “premiums” race to the bottom, which is aggravated by greater administrative costs and inflation, since price corrections have traditionally depended on consumer confidence.

Market Saturation

The Gulf’s insurance market is currently saturated, especially with intermediary actors. This blunts market penetration levels. Since competitiveness and the oil-price slump engendered competitive pricing, insurers have tried absorbing reduced revenue by slightly divesting from more costly risk-assessment pricing facets and entirely ignore low-yield reversing business plans in the short term, especially in Kuwait and Bahrain. Capital reserves tend to be restructured in order to supplement limited revenues.

In response to this trend, and to foster a more capital-cushioned buffer, some regional insurance players are actively looking into consolidation options. The UAE’s 62 insurance players may most likely merge into 30 or less. This will improve performance, and may reduce the need for externally-bound investment in the form of reinsurance. This trend is similar for places like Turkey whose market features low barriers to entry against foreign insurers and reinsurers. Still, competition there thrives, since protectionism does not hinder the infusion of multiple players for a finite market share.

Risk: brokerage vs. insurance

The tendency to conflate the roles of brokerage and insurer is prevalent in the region. Companies will collect insurance premiums from clients only to conventionally reinsure the risk outside the region, retaining minimal risk for themselves because of capital dearth, risk-aversion and regulatory laxity. While reinsurance is integral to the value chain, ironically, it creates a scenario where income-generating premiums flow outside the country due to a business modus operandi intended to increase revenue.

Regional insurers feel the need to retain more risk and adopt a conservative approach towards more familiar insurance activities, to better compete with mature markets. However, many still draft operational business plans upon how they intend to disburse and concentrate their capital instead of the business activity itself, which increases risk, concomitant aversion thereto, and the penchant for “playing the broker”.

Rising Sectors

Petro-chemical, Infrastructure (construction), refining and speculation, and Medical/Health insurance are quickly being standardized. Health insurance is mandatory in Dubai and Abu Dhabi. International insurers in the UAE fare better in the life insurance sector, whereas local players are better represented in the health insurance sector. This is unique as far as other Gulf states are concerned.

Health, third-party and social insurance are mandatory in Iran, Insurance-supported infrastructure in Iran currently undergoes vital reform to catalyze consistency with best international practices. This will encourage further capital inflows, especially with the lifting of Iran’s sanctions and FDI expected to reach almost 4 Billion by the last quarter of 2016.

Capital infusion will promote infrastructure to support better regulated industries, and better health services will require more sophisticated insurance policies.

 

Published: July 2016
Practice: Insurance & Reinsurance
Publication: MENAIR Insurance Review
Authors: Michael Kortbawi and Akram Rashid

 

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