The Arab insurance industry is working to set up a new regional reinsurer. While reinsurance capacity is sorely lacking in the region, with the departure or shuttering of several players over the last few years, setting up a new entity to fill the void might prove to be tricky, with a multitude of challenges lying in wait.
Plans are afoot to establish a regional reinsurer in Egypt with Egyptian and Arab capital. To be established along the lines of Africa Reinsurance Company, the new reinsurer will have a minimum capital of EGP1bn ($63.6m). A study is already being conducted to examine the feasibility of establishing the new company and the new reinsurer is expected to bring in participation not only from Egypt but also from other Arab countries.
Setting up in Egypt
Financial Regulatory Authority of Egypt vice chairman Reda Abdel Moaty told the news daily Al Mal that contact had been made with a number of major entities in Arab markets and it was agreed that Cairo would be the location of the new reinsurer’s operations, regardless of the size of the stake of Egyptian companies in the reinsurer.
Mr Moaty said the aim of establishing a new reinsurance company is to support the Arab insurance markets, as well as to compete for a slice of the reinsurance pie in the global market, and he expects the proposed reinsurer to represent a strong Arab alternative with a major impact on the global reinsurance map.
He said the establishment of the new business will lead to a change in rules and affect dealings of the local insurers with foreign reinsurers. Reinsurance contracts will thereafter be restricted to major entities that have the capability to comply with the new conditions.
Geopolitical risks and archaic regulations dictate the new ecosystem
Mr Moaty said that there are two other reasons to consider revising reinsurance rules. The first is related to the changes that the world is witnessing, such as geopolitical risks. The second is related to the need to modernise regulations that were promulgated in 2014.
Establishing a regional reinsurance company for the Arab countries has been a longstanding discussion. Orient group president Omer Elamin raised the issue of establishing a regional Arab reinsurer in 2017.
Mr Elamin voiced his suggestion to set up a new Arab reinsurer again during a virtual seminar organised by General Arab Insurance Federation in early 2021. He suggested conducting a feasibility study for the establishment of an Arab reinsurance company with a capital base of at least $3bn. The stake in the proposed reinsurer was to be split 50% from the government sector and 50% from the private sector.
Proposals for regional reinsurers have been mooted earlier
It is not clear if the recent proposal by the Financial Regulatory Authority of Egypt is in furtherance of Mr Elamin’s suggestion or not. However, several reinsurers have shut their operations in the region over the years and there is a gap that needs to be filled up.
Industry experts have said that the Middle East and Arab region has its own specific requirements and therefore requires special attention. Hence, a dedicated, indigenous reinsurer that understands the region would serve the purpose better than overseas reinsurers.
While many in the industry have welcomed the establishment of a reinsurer to cater to the region’s needs, there is always the question about whether a newcomer would be successful?
Arig, the 40-year-old reinsurer up for sale
The Arab Insurance Group (Arig), after ceasing to write reinsurance business in August 2020, put up its reinsurance business up for sale in January 2022. The reinsurer was set up in 1980 by the governments of Kuwait, Libya and the UAE and has now called for the divestiture of up to 100% of its equity stake.
Industry leaders have not reacted positively to this move. They lament that a 40-year-old reinsurance institution is being allowed to fade away and if there is enough capacity in the market, it should be used to rejuvenate the old reinsurer rather than set up a new one.
Reinsurance is a long-haul and long-tail business
The setting up of a reinsurance company is a long-haul business that requires significant investment. In addition, investors need to have patience as any profit generation only happens after a five- to seven-year waiting period.
To ensure that the new reinsurer remains sustainable it would require substantial capacity. It is not clear what maximum capacity the new reinsurer will be looking for to ensure its sustainability in the long run. Very often even deep pockets do not ensure long-term sustainability.
The founders of the new reinsurer will need to define the specific risks it would be catering to. These could be natural catastrophes or cyber risks. A general all-in-one model may not be able to stand out in the long run and to create a distinct identity for itself in the Arab market.
Market hardening could make things attractive
It is quite possible that the hardening reinsurance market has made investment in a new reinsurance venture more attractive. It is, however, good to remember that reinsurance is a cyclical business and current market conditions have only emerged after many years of flat rates and prices and markets go through cycles.
A proposal for getting the government on board to ensure some dedicated capacity for the new reinsurer and a decision to impose compulsory cessions may also not be very useful – with the exception of a few very small markets, the trend has been to do away with compulsory cessions as they do not support the growth of the market in the long run.
Reinsurance is also a long-tail and highly regulated business. Hence, regulation in the region will also need be improved.
A new generation of talent
Establishing a new reinsurer will also require a lot of talent, which at the moment is not in abundant supply in the region.
The industry will need to groom a new generation of insurance professionals to face the challenges arising from digitalisation and the emergence of new risks like cyber as well as ESG requirements. M