A reliance on reinsurance providers is a characteristic of the GCC market, with regional players ceding an aggregate of 40% of their non-life premium income in 2011, according to the Qatar Financial Centre’s 2012 “GCC Reinsurance Barometer”. While some of this is directed to local and regional firms, the majority is placed with the more developed reinsurance markets of Europe, such as the UK, Switzerland and Germany, and insurance hubs even further afield, such as Bermuda. The phenomenon has engendered a commonly held view that the insurance business in the GCC is primarily a reinsurance market, with local players seeking easy profit to be found in “risk-free” reinsurance commissions, acting more as commission agents than traditional insurance companies.
REGULATIONS: The regulatory framework governing reinsurance in the UAE certainly makes the business of ceding premium a straightforward one. There are no specific requirements in UAE law requiring reinsurance companies to monitor the claims, settlements and underwriting activity of the cedant company (although reinsurers can include a monitoring clause when they negotiate contracts). Similarly, UAE law makes no demands on companies on disclosures and notifications to reinsurers.
The only exception in this regard is within the Dubai International Financial Centre where, according to Article 61 of its Law of Obligations, there is a duty to "disclose to the insurer every fact within his knowledge which would influence the judgment of a prudent insurer in determining the terms and conditions of the contract or in determining whether to enter into the contract of insurance".
UAE reinsurance regulation allows for both treaty reinsurance, which entails a general agreement between insurer and reinsurer that automatically protects entire classes of insurance contracts, and faculty reinsurance, which covers only one underlying insured item and is written one account at a time. In general terms, faculty insurance in the UAE has, as with other markets, been traditionally deployed for larger or unusual risks, such as for the reinsurance of large and expensive oil tankers. The MENA insurance survey of 2012 revealed an increase in this form of reinsurance activity in the region, as companies sought to gain more control over their exposure after a series of losses due to their exposure to a rising number of natural catastrophe events.
According to data published by Swiss Re, a leading global reinsurer, 2011 witnessed the highest catastrophe-related economic losses in history, at around $350bn, and proved to be the second-mostexpensive year in history for insurers. Swiss Re estimated that, as a result of tragic incidents such as the earthquake and tsunami in Japan, which saw 30,000 people lose their lives in the first 11 months of the year, total insured losses for the global insurance industry reached $108bn in 2011 – more than double the $48bn of the previous year.
MORE FACULTY REINSURANCE: The trend towards increased facultative reinsurance has also been buoyed by relatively low rates. As long as pricing remains soft on faculty insurance, insurers that are writing for gross premium can convincingly argue that transferring as much of their risk as possible onto reinsurance companies is the most logical strategy.
A further regional characteristic which has fostered the growth of faculty reinsurance in recent years is a comparative lack of co-insurance arrangements, where the insured covers the losses up to a certain level (frequently seen in the health insurance segment, but also in other lines as well). Given that few regional insurance firms have the capacity to retain 100% of large risks, the low incidence of co-insurance deals in the Gulf has resulted in faculty insurance filling this business space.
There are a number of market forces that account for the large level of reinsurance activity in the region. However, while the general assumption that the GCC market traditionally cedes around half its gross written premium (GWP) to the regional and international insurance industry is correct, and that reinsurance commissions account for a large share of overall income displayed in the balance sheets of regional players each year, such a simple appraisal ignores an interesting trend toward increased retention in recent years – one in which Abu Dhabi's insurance companies are playing a leading role.
RETAINING PREMIUMS: At the national level, UAE insurers have exhibited a long-term trend of decreasing their cession rates. According to a 2010 report by regional investment bank Alpen Capital, the average ratio of ceded to retained premiums fell from about 61.3% in 2007 to around 56.4% by the second quarter of 2009, a move the investment bank attributes to greater sophistication and underwriting capacity on the part of the UAE’s insurers. The report also posits the idea that insurers in the country altered their retention policy in 2009 to cede less business in response to slower growth in the wake of the global economic crisis.
An OBG analysis of the balance sheets of Abu Dhabi's largest insurance companies reveals that the emirate is very much in tune with this trend. Abu Dhabi National Insurance Company (ADNIC), Al Ain Ahlia, Emirates Insurance Company (EIC) and Al Wathba National Insurance Company ceded an aggregate 52.85% of their GWP in 2011, compared to 56.9% in 2010, with Al Wathba showing the lowest cession rate at 41.8%. The trend was also evident in net commission derived from reinsurance as a percentage of net underwriting income.
All but one of Abu Dhabi’s major insurers derived a smaller portion of its profit from ceding business to reinsurers in 2011, showing an aggregate net commission of 21.3% compared to the 24.3% in 2010. Of the big four, ADNIC derived the smallest amount of its income from commissions on reinsurance, at 6.8%, followed by EIC (22.7%), Al Wathba (25.7%) and Al Ain (30.1%). While retention rates decline further down the list of Abu Dhabi-based insurers by asset size, the market leaders have established a clear pattern of expanding retention.
IMPROVING PROFITS: The move toward greater retention bodes well for the domestic insurance sector as, assuming that retained risk is adequately assessed and managed, the most obvious bonus of lowering the cession rate is improved profitability. The retention outlook is a bullish one: the strengthening of balance sheets that has been a market feature over 2011/12 will allow domestic insurers to ramp up their retention level.
The anticipated market consolidation resulting from new solvency regulations will also provide a platform by which local insurers can maintain more business on their own books, while an increasing level of technical expertise within the local industry is enabling the level of risk management needed to accommodate this growth safely.
Risk management will remain a priority for local insurance companies, and many believe there is still work to be done in the area. “Risk management is at an early stage; many companies do not have risk officers, which remains one of the main challenges of the market,” said Fareed Lutfi, the secretary-general of the Emirates Insurance Association. However, while challenges undoubtedly remain, the reliance on reinsurance that has defined the regional and local markets for so long is now slowly being eroded.
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