Tough times for Middle East and North Africa insurance markets

With the economies of the Middle East and North Africa (MENA) impacted by the unrelenting low oil prices and persisting regional instability, their insurance markets are likely to face repercussions. Such, in fact, is the severity of the decline in the market price of crude that the price per barrel in January 2016 stood at approximately a quarter of its market value two years ago, and at the lowest point since 2003. Moreover, despite the substantial fall in the price of oil, there are further potential headwinds that can place greater pressure on the sector, including reduced levels of demand from emerging economies such as China, increased shale oil extraction mainly from the United States, and the prospect of Iran re-entering the market as a major supplier following the removal of certain oil-related sanctions.

With a clear imbalance between global supply and demand already in existence, there is concern that a further reduction in demand and/or increased supply could drive oil prices as low as USD 15 per barrel. The MENA economies displayed relatively strong levels of resilience to the 2008 global financial crisis; however, with oil production and refinement the foundation of most economies in the region, the impact and severity of a prolonged period of low hydrocarbon prices could be significantly more profound on these markets.

Political instability remains a further and somewhat interlinked challenge for the MENA. In the aftermath of the Arab Spring uprising, some of the countries affected have made positive strides from a political standpoint while others have seen a marked deterioration. Whilst the causes for political instability have not to date been directly linked to low hydrocarbon prices, there is a concern that heightened regional instability and political tensions over the longer term may exacerbate economic pressures on many MENA economies.

According to Best’s Special Report, the impact of these two key challenges on the insurance markets in the region is difficult to predict, but will undoubtedly hinge upon where the “new normal” oil price lands and how governments manage potential budgetary cuts and social unrest. In this report, A M Best examines the impact of oil prices, political instability and country risk on MENA insurance markets, and further notes the ability of those insurers in the region that it rates to absorb market deficiencies in the near to medium-term. It defines country risk as the risk that country-specific factors could adversely affect an insurer’s ability to meet its financial obligations.

As part of evaluating country risk, it identifies the various factors within a country that may directly or indirectly affect an insurance company and separates the risks into three main categories: economic risk, political risk and financial system risk. Financial system risk is further divided into two sections: insurance risk and non-insurance financial system risk.

Meanwhile, changes in the economic landscape may encourage the development of stronger capital markets, reduced social security benefits, and changes in taxation regimes. There is also the real prospect of some GCC economies implementing a Value-Added Tax, which could change the dynamics of the markets. Also, should the GCC economies decide to reduce social care and medical healthcare benefits for their local populations, this would provide a real opportunity for insurers to expand existing life and health operations.

Furthermore, over the last few decades, income from hydrocarbon production, both directly and indirectly, has been used to finance engineering projects, created a demand for skilled labour, enabled generous state backed benefits, and resulted in a general influx of business activity and prosperity across the MENA region. For insurance participants in the MENA, this has resulted in a continual influx of new business generation and strong growth in insurable risk. Engineering projects in the region, which have been amongst some of the most spectacular and complex in the world, have required significant insurance participation from both local and global insurance providers. However, with the concern that both public and private investment in the region may be subject to a slowdown, risk carriers may no longer be able to achieve topline premium growth at levels previously experienced.

In brief, whilst the short-term impact of political instability and related economic and financial systems risks can be absorbed by most insurers in the region, longer-term exposure ultimately requires enhanced enterprise risk management capabilities and practices. Many insurers in the region that are rated by A M Best have successfully navigated these issues to date and have a proactive and constantly evolving risk management approach. In their pinion, understanding the risks of operating in countries with higher CRT tiers exhibiting currency fluctuations, illiquid asset classes, investment market volatility, high inflation and business interruption is only one part of the challenge.

The real test for insurers’ risk management approach is the strength and agility of the controls, practices and measures that it puts in place to prevent issues triggering earnings and capital volatility. And as well as having adequate measures and controls in place, the strongest insurers are those that go one step further and consider “what if” scenarios and create contingency plans that target the unexpected. Determining the extent to which the profile, performance and balance-sheet strength of local and regional insurers is likely to be impacted by low oil prices and continued political instability in the region over the medium term is not easy.

Source: A.M. Best Company, Inc.