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MENA region needs cross-border reinsurance to distribute risks

  • Publish Date: Posted over 6 years ago
  • Author:by Alan Jarque

Emerging EMEA insurance markets are at different stages of development, with some open to further market liberalisation and others moving towards greater protectionist measures, notes A.M. Best in its Special Report, titled "The Role of Protectionism in Emerging EMEA Insurance Markets".

The report focuses on the impact of measures particularly in the insurance markets of the Commonwealth of Independent States, the Middle East and North Africa, and Sub-Saharan Africa.

For most of these markets, a key consideration is the level of restrictions on foreign participation within these economies, in addition to minimising the outflow of income generated in the country.

Mr Salman Siddiqui, A.M. Best associate director, said: “Excessive protectionism, such as the discouragement of cross-border reinsurance placements, may have major negative implications as it creates an unnecessary exposure of national assets and government funds to claims from catastrophes or man-made disasters, as well as to an accumulation of losses. On the other hand, the availability of reinsurance capital from a diversified international panel brings down risk-transfer costs and helps to disperse risk.”

According to the research, protectionist measures have been taken by regulators in emerging markets to safeguard local policyholders and insurers. Other protectionist steps include the expansion of domestic insurance capacity and the retention of premium income and capital flows within national borders.

To develop local insurance markets, some insurance regulators in emerging economies have urged measures such as compulsory domestic cessions to a state reinsurer, restrictions on foreign ownership, limits on foreign investment, the introduction of minimum net premium retention levels and higher capital requirements for reinsurance cessions overseas.

Ms Valeria Ermakova, senior financial analyst, said: “Placing risks primarily within national borders creates a problem of potentially weaker reinsurance security, given that participants in the emerging markets generally have lower levels of financial strength by international standards.

“This issue is amplified by premium funds being invested in devaluing local assets, considering the challenging economic conditions and volatile financial markets that some of the countries experience. Furthermore, isolation of insurance markets may lead to a lack of consumer choice and inadequate service levels as national players are not able to benefit from the expertise of their peers in the global market, where technology and innovation are drivers of the industry.”

A.M. Best said that it expects oil-producing countries to seek a balance in the coming years by opening up their economies while also ensuring “adequate levels of insurance domestication”.