Reinsurance buyers in the Gulf Cooperation Council (GCC) are benefiting from softening rates as a result of global reinsurance overcapacity, local insurers retaining more premium and therefore ceding less to reinsurers, together with relatively benign natural catastrophe losses during 2013 in the GCC and globally, says Moody's Investors Service in a Special Comment published today.
"The GCC insurance market presents an attractive medium-term growth opportunity for global reinsurers. The market's low insurance penetration, combined with rising awareness of the benefits of insurance and a high number of infrastructure and hydrocarbon related projects, has resulted in strong demand for both commercial and personal lines of insurance", says Harshani Kotuwegedara -- Associate Analyst in Moody's GCC Insurance team and co-author of the report.
"However, the high compound annual growth rate experienced in the GCC insurance market during the period 2006-2013 has not yet been fully reflected in reinsurance premiums, due to local insurance carriers retaining more risk, as well as a lack of extreme losses in the GCC in 2013, leading to pressure on renewal rates. We expect the trend of increasing retentions to continue over the short-to-medium term", adds Mohammed Ali Riyazzudin Londe, Analyst in Moody's GCC Insurance team.
In its report, Moody's notes that the global reinsurance market is characterized by overcapacity. This, combined with the low level of natural catastrophe claims in the region and generally healthy loss ratios for insurers, has placed additional pressure on reinsurance renewals rates as at January 2014. Moody's notes that upon renewal many commercial reinsurance policies are shifting from quota sharing arrangements to excess of loss coverage, which should help improve reinsurers' profitability over time.
The majority of international reinsurers focus on conventional reinsurance underwriting larger commercial risks, often as the lead reinsurer, and in many cases providing the reinsurance expertise and capital to local insurers. In contrast, local reinsurers typically leverage their strong local knowledge and connections to write personal lines risks, with several focusing on providing retakaful (Shari'ah compliant reinsurance) coverage in the region.
Moody's also highlights that although the capitalisation of local reinsurers is often strong compared to the risks underwritten, in many cases the local reinsurance market remains limited in terms of geographic diversification and to a lesser degree, line of business, exposing them to meaningful concentration risk. However Moody's expects local reinsurers to continue expanding their operational diversification, with many becoming increasingly active in Asian and African markets. Although such expansion needs to be subject to prudent risk management, over time additional diversification will strengthen local players' risk profiles.
Overall, Moody's expects that the international reinsurance community will continue to consider the GCC region an attractive market, and is likely to remain a core provider of reinsurance capacity over the longer term to the GCC.
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