Reinsurance has been a significant path for international participation in the market and it remains important for Egyptian insurers. The subsector began in Egypt in 1957 with the formation of Egyptian Reinsurance. That mandatory cession to Egypt Re, originally established as a state-owned firm in 1957 but subsequently merged with Misr Insurance in 2007, has ended, but companies must still offer 5% to African Re, a regional multilateral insurance company with a local presence.
Other participants in the Egyptian reinsurance market include: Hannover, SCOR, Generali, GIC, Lloyds, Partner Re and Tokio Marine, according to Axco Information Services. Other reinsurers include Arab Re, Gulf Re, Saudi Re and Oman Re. The movement of risk offshore is tightly regulated. Fronting is allowed, but a certain percentage of the risk must be retained depending on what’s being covered and the size of the client. Non-admitted insurance is prohibited, according to the 1981 insurance law, but exceptions are allowed.
In 2014 a total of 48.41% of non-life premiums were ceded to reinsurers, according to Axco. That is up from 41.92% in 2010, but down from 52.46% in 2013. The subsector ceding the most was construction and engineering, 80.82% in 2014, while the lowest was motor, at 14.25%.
New Rules
In 2014 the Egyptian Financial Supervisory Authority (EFSA) issued regulations pertaining to reinsurance, effective at the beginning of 2015. The rules, known as No. 122 of 2014, significantly increase oversight of reinsurers and require them to meet stringent requirements in order to cover risk within the country.
According to the new regulations, reinsurers must be registered with EFSA and to do so they must be rated by one of the four major international rating agencies – AM Best, Standard & Poor’s, Fitch, or Moody’s. Those without such a rating must have capital of more that $60m. The rules also say a study must be undertaken on unrated reinsurers to determine if they meet capital adequacy requirements and if they are regulated by a competent authority in another jurisdiction.
The new rules limit the total reinsurance exposure to any one company and limit the exposure to any single country. EFSA notes that insurance companies are ultimately responsible for choosing reinsurers that are sound and able to cover the risks they take on. Also, brokers dealing with Egyptian cedants will have to be registered.
Feedback
The rules have prompted discussion. In its 2014 report, the Insurance Federation of Egypt (IFE) issued comments on the proposed legislation. It noted that the limits on placement of risk did not include guidelines on when the limits would be measured. It also asked what action would have to be taken if thresholds were exceeded and when would it have to be taken, whether the fix would have to be immediate or whether the company could wait until renewal time to adjust exposures. The federation wanted to know how the ceilings would be applied – line by line or across all lines. It also noted that medical insurance requires significant reinsurance, making it difficult for some companies to stay within the limits. The IFE has requested that certain clauses be changed or removed altogether.
Some commentators have said that the rules would actually hurt the market more than help it. The Group Life Insurance Committee of the IFE believes that some aspects of the law may make it more difficult for local insurers to negotiate with the international insurers. Early indications are that implementation has been spotty. As of early 2015, the rule was not yet being fully enforced, and brokers are said to be reluctant to register.
New Reinsurer
Other developments are in the works that could significantly alter the landscape of the subsector. The government is seeking to create a new reinsurer in the country and, according to news reports in early 2015, it is to be up and running by the end of the year. A local reinsurer would not only help ensure premiums are kept onshore but increase competition within the market, lowering rates and potentially helping to improve inclusion. A local reinsurer would also be able to provide local currency cover, reducing dollar outflows and helping stabilise the currency.
The firm is to be formed by four insurers: Insurance Holding Company, Suez Canal Life Insurance, Egyptian Saudi Insurance House and Wethaq Takaful Insurance Company. They are to contribute a total of $200m to fund the entity. Banks and other institutions are to contribute funds and total capital is roughly $450m. It has been reported that 15 insurers are interested in being involved.
Proposals
The authorities are looking into several issues related to the creation of the institution. In 2014, the IFE issued a request for proposals (RFP) to Deloitte, EY, PwC and KPMG for a feasibility study that would assess the market for the proposed firm, create a business plan and suggest strategies. The consultancies were asked to outline the steps that would have to be taken to get a credit rating in the first three years of operation. In the RFP and in comments made at the time of its issuance, the authorities describe a proposed institution somewhat different than later news reports. It would have $150m of paid up capital and $500m of registered capital. In discussing the RFP, the federation said it has approached local and international investors, including regional insurance firms and investors, Egyptian banks and pension funds. The IFE said it wanted accountancy firms to advise whether outside equity participation is necessary. The idea behind the insurer is not to replace global reinsurers, but increase capacity.
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