The risks of protectionism lurk in the region's reinsurance industry, AM Best says

Markets such as the UAE and Saudi Arabia must open up their insurance sectors to avoid the dangers of domestication

Insurance penetration rates in the UAE reached 2.76 per cent in 2016 with a total premium growth of 1.04 per cent, according to AM Best. Silvia Razgova / The National

An open and competitive reinsurance market is vital for emerging economies in the Middle East to ensure risk transfer and market development, a new report from AM Best revealed on Saturday.

According to the insurance rating company's study,  this approach is needed at a time when economic integration and globalisation have been cast aside in favour of "populist and nationalist sentiments around the world" amid geopolitical pressures, the fallout of low oil prices, Brexit and the protectionist stance of Donald Trump in the US.

Examples of protectionist measures can be found in Middle East countries such as Saudi Arabia, the UAE, Jordan and Egypt where regulators, looking to safeguard local policymakers and insurers, have introduced restrictions on foreign ownership and limits on foreign investment.

Valeria Ermakova, a senior financial analyst at the rating agency, said that placing risks primarily within national borders creates a problem of potentially weaker reinsurance security, given that emerging markets generally have lower levels of financial strength by international standards.

“This issue is amplified by premium funds being invested in devaluing local assets, considering the challenging economic conditions and volatile financial markets that some of the countries experience,” she said.

“Furthermore, isolation of insurance markets may lead to a lack of consumer choice and inadequate service levels as national players are not able to benefit from the expertise of their peers in the global market, where technology and innovation are drivers of the industry.”

While a number of catalysts for the growth of the UAE's insurance industry are in place, its profitability has been weighed down by cut-throat competition with 61 insurance firms registered by the UAE Insurance Authority at the end of 2015.

However, insurance penetration rates in the UAE  reached 2.76 per cent in 2016 with a total premium growth of 1.04 per cent, according toAM Best. The biggest growth area was seen on life premiums with a 3.54 per cent increase compared to a 1.16 contraction  on non-life premium growth. This reflects some firms quitting the non-life insurance business altogether in the UAE, such as Zurich, which exited in November 2015.

Saudi Arabia, meanwhile, saw its insurance market penetration reach 1.55 per cent last year but with a higher total premium growth of 1.43 per cent.

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The rating agency highlighted a number of domestication moves for the region’s insurance sector, such as regulations mandating staff localisation.

This presents an issue for the market as until now insurance companies in the Middle East have largely been staffed by expatriates, and the intention to protect domestic writers “has come at a time when Middle Eastern countries are looking to reduce dependence on oil and open up their economics to increased foreign investment”.

Saudi Arabia’s nationalisation programme has seen a complete Saudisation of its banking industry, something it now wants to replicate in its insurance sector with similar efforts also adopted in Qatar and the UAE.

AM Best said this can create pressure for companies to employ staff that lack the requisite skills to manage insurers.

Salman Siddiqui, associate director, said: “Excessive protectionism, such as the discouragement of cross-border reinsurance placements, may have major negative implications as it creates an unnecessary exposure of national assets and government funds to claims from catastrophes or man-made disasters, as well as to an accumulation of losses. On the other hand, the availability of reinsurance capital from a diversified international panel brings down risk-transfer costs and helps to disperse risk.”

However, the landscape is changing as the Middle East’s hydrocarbon producers, including the UAE and Saudi, have faced fiscal pressure amid low oil prices encouraging them to diversify their economies and increase the involvement of private companies in the sector.

Consequently, the Saudi government is now considering allowing the level of foreign ownership in legal entities to increase from 30 per cent to 49 per cent with the UAE considering an increase from 20 per cent to 49 per cent.

AM Best said that it expected oil-producing countries to seek a balance in the coming years by opening up their economies while also ensuring “adequate levels of insurance domestication”.

The report also highlighted protectionist moves made by other Middle East nations, such as Jordan and Egypt, where restrictions have been placed on the investment activities of insurance companies, something the rating agency considers a risk for the insurers in those countries.

In Egypt and Jordan, insurance companies are permitted to invest their funds only in local securities and assets. This reduces investment opportunities for insurance companies, who require well-rated, highly liquid assets to support their underwriting operations, said the rating agency.

"As a result, Egyptian insurance companies have primarily invested their funds in short-dated Egyptian government bonds, while Jordanian insurers largely target domestic equity listings,” the report said.