A Disciplined Response
Middle East and North Africa insurers change underwriting approach in response to quarantines, low oil prices.
- Meg Green
- January 2021
COVID-19 quarantines and the resulting drop in oil prices are likely to impact insurers and reinsurers in the Middle East and North Africa, according to panelists at AM Best's Insurance Market Briefing–MENA.
COVID-19 is less likely to affect direct underwriting losses, said Alex Rafferty, associate director, analytics, AM Best.
“Looking forward at COVID-19 and the oil-price-environment-driven investment volatility, economic challenges and lower-for-longer interest rate conditions are likely to play into regional reinsurers' overall returns and return on equity over the coming years,” Rafferty said.
These conditions are fostering an increased focus on underwriting, he said, adding that the improving market conditions should contribute to stronger underwriting discipline so insurers and reinsurers operating across the MENA region generate sufficient returns to meet their cost of capital.
MENA insurers are being impacted by the higher rates in the global reinsurance market, said George Kabban, chief executive officer, United Insurance Brokers (DIFC) Ltd.
He noted hefty event cancellation claims, such as $141 million for Wimbledon and $650 million for the Japanese Olympics.
“About $80 billion is the upper range that I've heard being losses attributable directly or indirectly to COVID,” Kabban said. The reinsurance market began hardening in 2018, but these losses, and low interest rates, have added pressure.
“There's no alternative but for reinsurers to turn to a more disciplined technical underwriting and [charge] adequate rates to reflect the risks they are taking on,” Kabban said. “Unfortunately, it comes at a time when many clients can least afford those increases.”
There’s no alternative but for reinsurers to turn to a more disciplined technical underwriting and [charge] adequate rates to reflect the risks they are taking on.
United Insurance Brokers (DIFC) Ltd.
He said airlines are going out of business because of the reduction in travel while aviation insurance rates “are experiencing eye-wateringly high rate increases.”
Travel data company Cirium found 43 commercial airlines had failed in 2020 by the third quarter.
The rising rates are putting pressure on all insurance buyers to look at alternatives, including captives, Kabban said.
The pandemic and subsequent quarantines led to a disruption in supply chains, travel restrictions, and a general reduction in consumer spending, which resulted in a global recession, said Jessica Botelho-Young, associate director, analytics, AM Best.
Oil-exporting countries in the MENA region have had the additional challenge of low oil prices—which dropped in March due to decreased demand and increased supply at that time, Botelho-Young said.
AM Best believes the insurance markets in oil-producing countries will feel the effect of the lower oil prices on both their underwriting activities and asset valuations, given how heavily reliant these countries are on oil revenue. “Any fluctuations in the price of oil will, in our view, have a direct impact on national GDP growth,” Botelho-Young said.
The importance of oil prices and the relationship to public spending is significant, as regional insurers have historically relied on government spending, particularly on infrastructure projects, for premium growth, she said. “In general, government-related engineering and property policies are highly profitable for local insurers who benefit from those strong levels of inward reinsurance commission,” Botelho-Young said.
However, if the projects are just delayed, it may not have a material impact on insurers, she said.
Asset volatility is a concern, because Middle East insurers tend to take on more asset risk than insurance risk, which tends to be the opposite in mature markets, Botelho-Young said.
“The prospects of a resurgence of COVID-19 and a new national lockdown … have introduced renewed volatility in the stock market,” she said, noting oil prices recently fell to as low as $39 a barrel.
Volatile investment results could erode the technical profitability of insurers in the region. She also pointed toward the difficulty in collections due to the challenging economic conditions.
The main challenge is likely to be in 2021, when companies will have to face the impact of reduced rates—especially in medical and motor—combined with increased claims, Botelho-Young said.
Insurers also are still analyzing insured losses from the Aug. 4, 2020, port explosion in Lebanon, which is estimated to be the third- or fourth-largest nonnuclear explosion in the world. Estimated insurance claims were at $400 million by mid-August and expected to rise, AM Best said.
Samer Abou Jaoude, general manager of Arabia Insurance Co., based in Lebanon, said all insurers in Lebanon have been hit by this catastrophe.
While 90% to 95% of the estimated losses would be reinsured, the remaining 5% to 10% are considered to be quite heavy for the local insurance community and industry, he said.
One interesting effect of the pandemic is that it's highlighted the importance of innovation and technology to ensure operational resilience during these uncertain times, Botelho-Young said.
Those that had already invested in digitalization and technology before the pandemic were in a better place to navigate the new or challenging market conditions than the others who are effectively playing catch up, she said.
Selling and managing policies online will be the key to profitability, Jaoude said.
“I expect for those players who were able to digitalize and who became one step ahead of the others to be able to finish the year with a fair amount of growth, both in their top and bottom line,” Jaoude said.
Vasilis Katsipis, general manager–market development, AM Best, asked how challenging it is for reinsurers used to doing business face-to-face to switch to digital. “I don't think it's going to last forever,” said Adham El-Muezzin, managing director, Hannover Re Takaful and Hannover Re Bahrain Branch. “Once this situation returns to 2019 levels, we'll all be crowding planes and running into each other at airports.”
But for now, the technology is working to keep communication open.
“We've all been doing it, and we continue doing so. ... We'll get closer in relationships rather than farther away, because we can do it as frequently as possible. Booking a flight and traveling ... needs a bit more effort,” El-Muezzin said.
When the pandemic is over, the improvements to technology will remain, Kabban said.
El-Muezzin added that public-private partnerships are likely to grow in importance.
“This situation has shown us that there are things that are too big for insurers to carry, and also too big for governments to carry,” he said.