Are Middle East Insurers Subtly Shifting Towards Brokerage?
These are interesting times for the insurance industry in the Middle East. It has remained resilient despite challenges, including economic headwinds, geopolitical tensions, intense competition, elevated combined ratios, and rising cost of compliance and regulation.
According to the MENA Reinsurance Barometer 2016, in the GCC, an average of approximately 37% of non-life insurance premiums are ceded to reinsurers, which is high compared to the global average of approximately 8%. However, the gap has been reducing over time. The overreliance is in part driven by a number of factors, including a lack of expertise and a low risk appetite underwriting complex risk. Consequently, there are questions about whether insurers in the region are operating more like brokers.
BMI Research suggests that penetration rates in the GCC have broadly averaged 1% to 3% over the last few years compared to a global average of 5% to 10%. While this may portray the regional market as underdeveloped, this could be seen as an opportunity. Specific opportunities that could help insurers re-align their models and contribute to the next level of growth include the following.
Development of commercial lines of business: For a long time, the insurance industry has been heavily reliant on the mandatory roll-out of motor and healthcare lines of businesses, which has helped fuel growth in penetration rates. However, this impact has now subsided, and insurers are looking at alternative lines of businesses.
New asset classes could also offer opportunities, particularly with respect to cryptocurrency. While still in its infancy, global insurers are increasingly looking to insure this new asset class. Life insurance penetration rates have historically been low compared to non-life. However, this could offer an opportunity to significantly roll-out family Takaful products via effective product marketing.
Development of distribution channels:
In the U.A.E. alone, there are more than 170 brokers, which represents the main form of distribution for insurers. As the region is becoming more digitized, there could be an opportunity to use social media and mobile applications as a form of low-cost and efficient distribution channels.
Technology: In other parts of the world we are seeing blockchain-enabled bancassurance platforms, allowing the insurer and its bank distributors to share policy data and digital documents in real time, streamlining the onboarding process, improving transparency, and reconciling commissions automatically through smart contracts. In the long run, insurers could also use sophisticated data analytics and artificial intelligence for the pricing of policies and fraud prevention.
Balance sheet optimization: Historically, insurers’ balance sheets have carried elevated risk due to the dominance of high-risk assets in investment mix, such as equities and real estate. However, the sector is witnessing an improving investment exposure to debt instruments, which is mainly due to increasing sovereign bond issuances and regulations imposing investment limits. While this move has reduced risk to some extent, non-life insurers have to meet liabilities of a much shorter duration due to the typical three to five-year underwriting cycle, and therefore an element of highly liquid and high return assets, such as equities in established corporates and banks, could be attractive.
Inorganic growth: The insurance market is heavily fragmented in the region and a number of insurers are unable to gain scale, which is reflective of their net underwriting performance. This, combined with increasing cost of compliance and regulatory capital pressure, particularly in light of new solvency requirements, could drive consolidation in the market. We are already seeing consolidation to some extent in Saudi Arabia and Oman, however much will depend on shareholder alignment and valuation.