JEDDAH – The GCC (Gulf Cooperation Council) reinsurance market is characterized by overcapacity, with many international and local players competing for reinsurance business, Moody's Investors Service said in its in-depth study this month on the sector. This, coupled with limited natural catastrophe risks, has resulted in increased levels of coverage and a continued softening of reinsurance rates at the Jan. 1, 2015 renewals for the region. The additional pressure of softening rates on underwriting margins is credit negative for reinsurers, since it comes at a time when the companies' investment returns will likely remain at historic lows. “We expect these trends to continue over the short-to-medium term, absent significant deteriorations in underwriting loss ratios. Nonetheless, the local reinsurance market looks set to expand in the long-term,” the study said. The majority of international reinsurers in the region primarily focus on conventional reinsurance. They underwrite larger commercial risks, often as the lead reinsurer, and in many cases providing the reinsurance expertise and capital to enable local insurers to effectively act as fronting agents.
Local reinsurers typically use their strong local knowledge and connections to reinsure personal lines risks, with several focusing on providing retakaful (Shariah- compliant reinsurance) coverage to the region. The capitalization of local reinsurers is often strong compared to the risks underwritten although, in many cases, their operations are concentrated in terms of geography and to a lesser degree, business lines. However, the economic activity in the region is correlated to global oil and gas prices. “As such, we expect the depressed oil prices to lower investment in new commercial projects, particularly in infrastructure and energy, which will reduce demand for (re)insurance coverage on such classes over the short-to-medium term,” the study noted. Moreover, geopolitical uncertainty in the region remains high, which could have some spillover effects in the GCC. With stagnant growth in many major Western markets, the growing insurance market of the GCC is an attractive opportunity to generate incremental revenues, as demonstrated by the compound annual growth rate of 17 percent during the period of 2006- 2013. Although the entire GCC region represents less than 0.5 percent of global insurance premiums, very low regional insurance penetration, and typically low natural catastrophe risk, makes the GCC market attractive to global reinsurers. Additionally, local insurers are often keen to partner with international reinsurers to help develop pricing and risk selection capabilities. However, offsetting these opportunities, the economic activity in the region is correlated to global oil and gas prices and geopolitical uncertainty in the region remains high. As a result of the sharp decline in oil prices, we expect demand for large-scale energy, infrastructure and construction projects, a key staple for many global reinsurers operating in the GCC region, to decrease in the short-to-medium term. The use of reinsurance in the region is generally significant, with premium retention levels in the Middle East often low – on average 63 percent, compared to around 90 percent for some of the largest global insurers, albeit it has been moderately increasing over the last five years. These low retention levels in GCC are often a result of providing insurance coverage to large hydrocarbon-related companies in the region. The potentially high claims such projects expose insurers to, as well as the specialist insurance skills required to effectively underwrite such risks, makes them a natural choice for ceding to reinsurers, although these projects expose reinsurers to the impact of lower current oil prices. “We expect this trend of increasing premium retentions among GCC insurers to continue over the near-to-medium term as insurers' risk/capital management capabilities improve, for example via new minimum capital requirements in Oman and Solvency regulations in the UAE. Historically, many GCC (re)insurers have only carried relatively modest levels of net underwriting risk on their balance sheets relative to their capitalization. Moreover, some of the larger insurers in the region are also broadening their reinsurance offerings and becoming, at least in part, direct competitors to local reinsurers. Retention rates tend to vary by product. They are typically higher in low risk, high frequency lines of business, such as motor, life and health portfolios, and much lower on high risk, low frequency lines, such as marine & aviation, construction, engineering, etc. The risk of potentially high claims from such projects, as well as the specialist insurance skills required to effectively underwrite these types of risks, makes them an obvious choice for ceding to reinsurers. The low retention rate replaces insurance risk with counterparty risk, albeit we note that such counterparties tend to be highly rated. The GCC reinsurance market is comprised of both international and local reinsurers. Established international reinsurers focus primarily on conventional insurance, primarily underwriting larger commercial risks, while regional players tend to focus on personal lines and Shariah-compliant risks. As a result of demand for Shariah-compliant reinsurance amongst takaful insurers, international reinsurers, such as Munich Re and Swiss Re, have also begun offering retakaful to cater to the rising reinsurance needs of takaful insurers. However, in absolute terms, the premium contribution from the GCC region for the largest global reinsurers remains only very modest, accounting on average for less than 5 percent of their premiums. Notwithstanding the impact of the current oil prices, we expect that demand for reinsurance will likely remain higher in commercial lines, such as marine, cargo and engineering, than in personal lines. The higher demand is due to the relatively unpredictable nature of these claims compared to personal lines, where loss ratios typically follow a low-risk, high-frequency pattern. Even allowing for profit commission payments from reinsurers to their cedants, Moody's sees commercial reinsurance to remain a more attractive segment for reinsurers than personal lines over the near-term. — SG
