The insurance industry in the Middle East has expanded significantly, driven by robust economic development and compulsory insurance lines. GCC member states’ efforts to diversify from oil dependency have led to substantial infrastructure and tourism investments, boosting demand for non-life coverage.
Favourable regulatory changes have also contributed, with non-life premiums growing by 5.5% annually over the past decade, Swiss Re said.
According to the EY global wealth research report published in 2023, 59% of wealth management investors in the Middle East are planning to move their assets to a new provider by 2026 - in comparison to 45% of global investors.
Trends in asset allocation in MENA
Putting aside the regional solvency requirements and central bank regulations on having a minimum allocation invested in local market assets, Mercer IMEA head of investments and retirement Robert Ansari said there are several trends in asset allocation in the MENA region.
“Whilst much of the MENA region has not seen the same levels of central bank policy fluctuations observed across many other markets, the shift to a more diverse range of asset classes is happening and accelerating,” Mr Ansari said.
“Alternatives have taken centre stage as they may offer not only better returns, but also can diversify a portfolios risk profile. The balancing act between interest rates and liquidity has seen allocations between traditional fixed income and private credit fluctuate as rates increased in the more liquid products,” he said.
Both private credit and private equity remain the alternative asset classes of choice for insurance CIOs in the MENA region, he said.
“As inflation remains stubbornly high, allocations to inflation protection have increased and an asset class familiar to regional investors - global real estate and global infrastructure - are commanding a bigger allocation in the portfolio,” Mr Ansari said.
He said, owing to the fact that most central banks in the MENA region follow the US Federal Reserve, rates have rebounded notably over the last three years and there has been a sharp recovery to investment-grade fixed income.
Promising areas in MENA
When asked about what some promising areas for insurance investments in the MENA region are, Mr Ansari pointed to the following:
- Non-life and non-oil GDP growth through infrastructure:
“The efforts by the GCC to diversify their economies away from dependency on oil production has brought substantial investment in infrastructure and tourism. This should boost demand for non-life covers, as will favourable regulatory developments.
“Non-life premiums in the region grew by 5.5% annually during the last decade, in nominal terms. The GCC states have seen rapid economic growth and urbanisation over the last 30 years. Many of the cities in the GCC are on the coast and, as the climate warms, these are becoming more vulnerable to flooding from rising sea levels and tropical storms,” he said.
- Life and population expansion:
“Life insurance penetration in the Middle East is well below the global and emerging market averages signalling scope for further growth and an opportunity for the industry to help strengthen economic resilience across the region,” he said.
“This is largely down to cultural reasons: In Islamic countries, takaful is available as an alternative to conventional cover. Also historically, appreciation of the need for life insurance has been limited. The pandemic experience has raised awareness of risk and of the utility of coverage, which should support demand,” he said.
He also said an expanding expatriate population in GCC member states, rising employment and high interest rates are expected to support the life insurance market growth.
“The three countries with the largest increase in the number of foreign direct investments (FDI) projects globally since the pandemic are all in the Middle East. This FDI has found its way into multiple sectors, including infrastructure as some of the world’s largest projects are executed across the region visions, energy, construction, finance and healthcare,” he said.
“Coupled with consolidation, more complex institutions arise and expand and thus face more complex risks, captives start to play an increasingly important role in their risk management strategies,” he said.
Governments in the Middle East have recognised the importance of captives in supporting economic growth and attracting foreign investment. As a result, they have introduced favourable regulations and frameworks to encourage the establishment of captives, he said.
Mr Ansari said embedded insurance is revolutionising the landscape in the MENA region, especially the Middle East, with the industry expected to grow by 40.2% annually, with revenue projected to reach $7.76m by 2029.
“The region is becoming more data-driven in its insurance practices. The essence of embedded insurance is offering convenient coverage within everyday interactions and is considered the most relevant opportunity to tap into new customer segments and reduce the insurance gap,” he said.
Asset classes
As CIOs push for well diversified ‘all weather’ portfolios, the asset class ‘winners and losers’ become something more of a relative term.
“In relative terms, whilst global equities are expected to return around 6% and rates have meant the retention of a healthy allocation to traditional fixed income, we see these allocations giving way to an increased allocation to alternative investments in both private equity and private credit and move to ‘real’ assets as inflationary protection asset like global real estate and infrastructure.
“Insurers and insurance asset managers are set to continue to increase their allocation to alternative asset classes not only driven by the expectation of higher returns and an appreciation of the diversification impact of alternative asset classes but also through greater transparency and reporting around investing in alternatives,” he said.
The outsourcing of asset allocation work in the MENA region is one that is evolving, he said.
“Given the size and increasing complexity of the spectrum of alternative assets, a lot of this work is being outsourced. It is often cheaper, easier and quicker to outsource to asset classes specialists than hire from a talent pool that is neither deep nor wide,” he said.
Long-term changes to insurance investment in the region
“From demographic changes as populations swelled and people chose the Middle East as ‘home’ to rapidly evolving customer needs and expectations, coupled with a dynamic shift in the buying behaviour towards online channels, insurers took the opportunity to rethink their long-term strategies, as notions of trust and societal purpose played a greater role in the industry than ever before,” Mr Ansari said.
He said the aftermath of the pandemic will continue to play out over several years with insurers seeing the impact of the pandemic in their profitability.
“Post-pandemic we have seen a boom in infrastructure projects driven by a swelling of and steady GDP growth, propelled by a recovering oil price. This in turn has powered an equivalent boom in the non-life market segment, which is projected to grow by $3.8bn by 2028,” he said. M