Geopolitical instability, Nat CAT and continued high inflation are some drivers behind the hardening reinsurance rates in the Middle East, with Munich Re’s Messrs Roland Eckl and Belhassen Tonat expecting continued firming of prices.
Reinsurance rates in the Middle East are influenced by a combination of global and regional factors, two Munich Re executives, whose portfolio includes MENA, told Middle East Insurance Review. They are Munich Re’s Australasia, Greater China, MENA, Africa, cyber chief executive Roland Eckl and client management executive MENA Belhassen Tonat.
“Drivers include the local markets’ loss experience. We have seen that the region was subject to some unprecedented Nat CAT losses, which have influenced reinsurance prices,” they said.
“The previous perception that the MENA region is a CAT-benign environment does not hold anymore, and many reinsurers are updating their Nat CAT pricing models (adjusting upwards to cater for climate change effects) for the region”.
Mr Eckl and Mr Tonat pointed out that trade tariffs imposed by the US do not have “a direct impact on the domestic insurance landscape in the Middle East”.
“However, there is an indirect impact on the cost of projects in the region,” they said.
This is because the Middle East has a limited trade balance with the US, except in the oil and gas sector, which is not part of the tariff discussions, they noted.
Reinsurance rate drivers
According to Mr Eckl and Mr Tonat, the Middle East’s geopolitical situation “is very challenging and unstable”.
As a result, reinsurers without a presence on the ground may find it difficult to assess the situation, and have even more difficulty understanding and reacting to the constant changes.
The increased uncertainty has been translated into less capacity in the region, they said. Additionally, existing capacity comes with higher prices.
“Moreover, ongoing tensions in parts of the region increase risk perception, especially in lines like political violence, engineering and trade credit,” they said.
At the same time, they have observed prolonged high-inflation environments in certain areas, exacerbated by a continuous weakening of the local currency. The expected higher inflation is reflected in present pricing, which translates to increased prices.
“In other areas, like casualty, the MENA region was considered as a good diversifier of exposure and a litigious region,” they said.
“However, prices of casualty reinsurance have fallen drastically in the past three years to a level below technical. But at the same time, the industry faces new casualty losses as never seen before in the region.”
Capacity
The Middle East is no longer considered a diversification region. Instead, it is seen as a region highly impacted by climate change and other developments, and risks such as cyber, liability and political instability have grown, Mr Eckl and Mr Tonat pointed out.
They said, “As a result, reinsurers are becoming more cautious. Capacity remains adequate but selective, and the quality can be improved.”
As such, they pointed out scenarios where it is not always the case that the placement of difficult risks could be completed with A-rated capacities.
An example is polyethylene panels in high-rise buildings. According to the Reinsurance Association of America, “polyethylene is a plastic derivative of petroleum or natural gas and is capable of burning quickly and with great intensity”.
The material has been used in building claddings, such as London’s Grenfell Tower, and makes safe evacuation of residents difficult in the event of a fire, the Reinsurance Association of America said.
When asked if they predicted any adjustments to capacity in the coming year, both Mr Eckl and Mr Tonat answered in the affirmative, with both expecting increases in the cyber and energy lines of business.
“Also, we expect more facultative placements as insurers seek capacities amid evolving risks and huge investments in infrastructure,” they said.
“On the other hand, capacity for political violence and Nat CAT-heavy portfolios are likely to remain stable at best or even decrease. Medium- and low-quality property risks are likely to face reduced capacity after the series of losses in the past.”
Comparing reinsurance rates
Mr Eckl and Mr Tonat also said, “Compared to mature markets like Europe or North America, reinsurance rates in the Middle East have historically been more competitive due to a lower Nat CAT exposure and a relatively young insurance market.”
Additionally, they highlighted that the region still sees insurance premium growth of more than 10% p.a. on average due to sovereign investments and global events.
But they also noted that the region’s insurance market is changing, and listed several reasons why, including rate hardening in specific lines such as property, energy and political violence; less commoditised pricing, with more emphasis on risk quality and data transparency; and higher volatility in pricing due to geopolitical and macroeconomic uncertainties.
Outlook
When asked for their outlook on reinsurance rates in the Middle East over the coming year, Mr Eckl and Mr Tonat said they anticipate “a continued firming of rates in the Middle East, particularly in segments exposed to geopolitical risk, Nat CAT and large industrial risks”.
Within the company, this outlook has translated into a focus on disciplined underwriting, innovation and resilience, with a strong emphasis on data-driven pricing and risk selection, they said.
“The outlook is cautiously optimistic, with opportunities for profitable growth in specialty lines and facultative reinsurance,” said Mr Eckl and Mr Tonat.
“If original markets do not achieve a risk-adequate pricing, we are prepared to limit our capacity to excess-of-loss participation at technical risk commensurate pricing.”
Additionally, geopolitical developments are “likely to harden pricing in political violence, war risk and trade credit lines”, they said.
“Terms and conditions are expected to tighten, with more exclusions and sub-limits, for highly exposed countries,” said Mr Eckl and Mr Tonat.
“At the same time, we expect an increase in demand for bespoke covers, especially in logistics, energy and infrastructure sectors.” M