MENA reinsurance market: 2022's renewal

The global trend of stronger rates will actually work in favor of regional reinsurers that are affected by weak underwriting performance.

They also face several other challenges such as:

• abundant available capacity,
• highly competitive pricing,
• increased competition that could limit the improvement of market conditions,
• significant losses especially in the construction, fire, and engineering businesses,
• the emergence of new risks and the impact of climate change [4],
• the economic impact of the Covid-19 pandemic,
• the decline or low return on investment.

Reinsurance in the MENA zone: a market in turmoil

Faced with a difficult environment, the reinsurance landscape in the MENA region is in constant mobility. Unable to generate sufficient profitability, some players, estimated at 15, have either withdrawn from the market or disappeared from the regional scene in recent years. This is the case, most recently, of Trust International Insurance and Reinsurance Company, the latter having reduced its activity since 2018 and Arig undergoing liquidation since August 2020.

Before these two Middle Eastern leaders, other local and regional reinsurers have ceased all activities in recent years: Best Re in 2013, Gulf Re and Takaful Re in 2016, ACR Retakaful in 2017 and Emirates Retakaful in 2018.

More recently, several Lloyd's syndicates and international players have also withdrawn from the region or reduced their presence. Qatar Re, for example, moved its headquarters from Qatar to Bermuda, while GIC Re (India) closed its branch in the Dubai Financial International Centre (DFIC) in August 2021. AIG has also reduced its reinsurance capacity in the region from 2 billion USD to 500 million USD according to the broker SIACI Saint Honoré.

On the other hand, other players are entering the Middle East, with the American General Reinsurance recently opening an office in the Dubai International Financial Centre (DIFC). Established in 2014, this financial center is emerging as the leading reinsurance hub in the Middle East, Africa and South Asia (MEASA) region, with a total of 1.7 billion USD in reinsurance premiums underwritten by 2020.

This hub is home to more than a hundred insurance and reinsurance operators including Munich Re, Lloyd's, Berkshire Hathaway Specialty, RGA, Korean Re, AIG, Zurich, ...

MENA reinsurance market: an abundant capacity

The capacity available in the MENA region comes from several sources: global reinsurers [5], players domiciled in the region, and African and Asian groups.

Despite the withdrawal of a significant number of operators, market capacity remains plentiful, mainly provided by international reinsurers.

The region's direct market has long enjoyed abundant reinsurance capacity. This windfall, or laxity of reinsurers, allows local cedants to cede business at competitive rates and extremely high commissions.

For foreign players, the deployment of capital in the region is motivated by the diversification of their portfolios within a region where the level of exposure to natural catastrophes remains low. For regional operators, the region offers an important growth opportunity.

MENA reinsurance market: evolution of premiums and technical results 2016-2020

Premiums underwritten by reinsurers domiciled in the MENA region continue to grow despite the decline in the number of operators, going up from 1.914 billion USD in 2016 to 2.273 billion USD in 2020.

Evolution of MENA reinsurers’ gross premiums: 2016-2020

⁽¹⁾ Turk Re was created in 2019⁽²⁾ ARIG is in run-off. The company is no longer underwriting new business
Source: Atlas Magazine

MENA reinsurers: gross premiums and shareholders' equity in 2020

MENA reinsurers: technical ratios 2018-2020

The region's reinsurers are facing the volatility of their technical results. More than half of them have an average non-life combined ratio above 100% over the last three years.

The highest average combined ratio is reported by Milli Re, a reinsurer with high exposure to natural catastrophes in Turkey.

MENA reinsurers: return on investment and return on equity 2018-2020

Despite challenging market conditions, reinsurers' profitability remained robust with returns on equity (ROE) well above the global average of 2.4%, with the exception of Arab Re. The average ROE for all reinsurers in the region is 8.5% in 2020, with a rate of 17.2% for Hannover Retakaful, 13.2% for CCR Alger and 13% for SCR.

Return on investment in 2020 have also remained strong despite market volatility. Many reinsurers reported strong investment returns in 2020: Milli Re (10.4%), Tunis Re (8.8%) and SCR (7.1%).

MENA reinsurance market: risk exposure

With climate change, claims related to natural catastrophes are on the rise, particularly affecting the performance of reinsurers domiciled in the MENA region.

In addition to earthquakes and cyclones, the region is also exposed to floods, a risk that has become frequent, periodically affecting several countries in the zone, including Turkey, Saudi Arabia, the United Arab Emirates and Algeria.

The market is not immune to a major event, such as an earthquake, particularly in the property, engineering and energy sectors. Cyber risks are also a real threat to the region.

MENA reinsurance market: 2022 renewal

During the January 2021 renewal, there were already signs of a strengthening market, with reinsurers deploying their capital more selectively and imposing targeted increases for lines reeling from losses.

In order to keep on tapping into favorable conditions, MENA reinsurers are required to overcome a number of challenges:

• distancing themselves from the status of "followers" or players dependent on conditions imposed by larger competitors, with the latter being willing to accept lower rate increases,
• improving the pricing of their acceptances to meet the rising cost of retrocessional investments,
• facing competition from direct players. The primary market's growing appetite to underwrite facultative business increases the available reinsurance capacity,
• leveraging their local expertise and long-standing relationships with direct market players to improve their technical performance,
• strengthening regulatory restrictions on the supply of reinsurance capacity,
• diversifying their business portfolio in terms of the risk and geography,
• better capturing emerging risks: cyber threats, natural catastrophes... through appropriate modeling and pricing,
• taking advantage of the improvement of rates globally to readjust rates and achieve sufficient margins on MENA business.

The strategies adopted by regional reinsurers in the MENA region vary considerably. Some reinsurers benefit from long-standing legal cessions or strong positions in their domestic markets, while others focus on providing proportional capacity.

Strategic shifts are underway, with some seeking to increase non-proportional and facultative business and achieve regional and international diversification.

Most of the reinsurers domiciled in the MENA region have had their ratings confirmed over the past 12 months, with only Arab Re's AM Best rating having been downgraded by one notch and its outlook lowered from stable to negative. This stability reflects the good level of risk-adjusted capitalization.