Dubai: Reinsurance companies operating in the GCC are experiencing softening renewal rates in line with similar global trends, according to Moody’s.
The GCC’s reinsurance market is characterised by overcapacity, with many international and local players competing for reinsurance business.
This, coupled with limited natural catastrophe risks, has resulted in a continued softening of reinsurance rates — something witnessed in January 2016, the time for renewals across the region.
However, despite the softening rates, the region remains a growth target.
“The additional pressure of softening rates on underwriting margins is credit negative for reinsurers, since it comes at a time when ... companies’ investment returns will likely remain low. We expect these trends to continue over the short-to-medium term, absent significant deterioration in underwriting loss ratios,” said Mohammad Ali Londe, Moody’s assistant vice-president and analyst.
Globally reinsurers are experiencing the fourth consecutive year of rate deterioration across most key regions, bringing further negative credit pressure on the sector.
Recent reports by brokers Willis Re and Guy Carpenter show that reinsurers’ average renewal rates across most regions have fallen in the property, casualty and speciality sectors.
Willis reported that in the Middle-East and North Africa (Mena), the risk loss-free rate fell by 10 per cent while catastrophe loss-free rate declined by 12 per cent at the time of renewals on January 1, 2016. The rate reductions in the Mena region had been lower relative to most of the other regions except for the US.
Despite the rate reductions, the region remains an attractive segment for reinsurers given the lack of extreme losses, growth potential driven by low insurance penetration and primary insurers’ continued need for underwriting expertise for large commercial projects. As such, Willis reported that the region’s capacity has increased.
The risk excess of loss capacity is up 15-20 per cent, catastrophe up 15 per cent and pro-rata up 10-15 per cent due to new entrants in the region.
Low oil price backdrop
But the low oil price backdrop has adversely impacted the region’s economic growth, thereby slowing down commercial and infrastructure projects. The consequent spillover effects of the latter will hinder commercial reinsurance growth.
The increasing retention rate across the region is also adversely impacting reinsurers. As local and regional insurance carriers have become increasingly sophisticated, insurers have sought to capture more of the value chain by retaining more insurance business on the balance sheet and ceding less to reinsurers.
Therefore, retention levels in the GCC have increased, with the average retention among Moody’s-rated GCC insurers at 60 per cent in 2014, up from 53 per cent in 2010. But this is still low compared with other global insurers whose average retention level is around 90 per cent.
A general decline in primary insurance rates is also expected to impact the reinsurance business across the region. We expect primary insurance rates to remain under pressure in the majority of GCC countries, with a slightly more positive picture in Oman. This might put further downward pressure on reinsurance rates,” Londe said.
Despite the softening reinsurance rates and a potential decline in renewals, the GCC remains an attractive region to reinsurers because of its high growth potential, as reflected by its compound annual growth rate (CAGR) of 16.8 per cent in the primary insurance market between 2006 and 2014, with the low insurance penetration and size accounting for less than 0.5 per cent of global insurance premiums.
According to a recent report by global reinsurance major SCOR, the Middle East is deemed to provide adequate attractiveness based on profitability in the property, casualty and motor sectors. Furthermore, the property sector’s natural catastrophe segment was deemed “very attractive”.
