The rise of risk and capital modelling in the Middle East

Regulation and rating agencies are triggering a drive towards capital modelling in the Middle East and North Africa, as the growing number of regional insurers look to more established markets to benefit from best practice. Despite the troubles in the region, the MENA economies are experiencing high growth even in sectors outside of natural resources.

Dubai, Bahrain and Qatar have positioned themselves as international hubs for insurance and reinsurance and the region is growing in international importance in this sector. Many multinational industry players are establishing themselves in these regions, such as Catlin and Lloyd’s which have made the headlines recently with their new operations in Dubai. Moody’s says that the insurance industry in the Gulf Cooperation Council (GCC)—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates—has almost tripled through 2006–13, with insurance premiums increasing to $18.4 billion from $6.4 billion.

In correlation, regional insurers are increasingly turning to more sophisticated analytics and tools to better understand the risks and drive their reinsurance purchase. Notably, there has been a significant increase in the use of risk and capital modelling in the region with a focus on driving growth while managing external pressures from rising regulatory and rating agency pressures.

According to Moody’s July 2014 special comment, Evolution of the GCC Insurance Regulatory Landscape is Positive for Credit Quality, regulators have been working hard to improve the credit profile of the region’s insurance market and aid market stability and transparency. Risk-based capital measures are being discussed by various regulators to ensure that the amount of capital held is aligned to the amount of risk undertaken. This is on the agenda of the Saudi regulator SAMA and is seen as a positive step forward.

Qatar Re recently purchased Aon Benfield’s risk and capital modelling software ReMetrica in order to provide analytic analysis.

Peter Frei, chief risk officer at Qatar Re commented: “We require a capital modelling tool as it forms an integral part of our enterprise risk management (ERM) framework, which lies at the core of Qatar Re’s approach to risk.

“No longer can they rely on a profitable book of business with a good level of cash sitting behind it to maintain their rating.”

“The use of capital modelling software is invaluable for a professional global reinsurer like Qatar Re, enabling us to make better informed strategic business as well as analysing our worldwide exposed portfolio. For example it allows us to quantify the diversification benefit of our above-average exposure in the MENA region and its impact on our required capital.”

Second, most of the larger players are rated on an international basis by the leading rating agencies. This means that they need to compare themselves to other international companies in more developed markets such as the UK and US. ERM is high on the agenda of these rating agencies and a crucial part of ERM is an internal capital model. Hence there is a push for companies to look at their capital and solvency positions actively and use internal capital models for decision-making.

No longer can they rely on a profitable book of business with a good level of cash sitting behind it to maintain their rating. Rather, they need to take a more robust approach to understanding risk. If a company can understand its risk profile and clearly articulate the results of its capital model, then they will be taken more seriously by the rating agents. If a company does this for the business as a whole, as well as individual departments, and takes into account the correlations and interdependencies across the whole of the organisation, this is the ‘enterprise’ part of ERM.

Even if a company has a poor result, it will be looked upon favourably by the rating agencies if they can demonstrate that they understood their profile and that they had taken into account this negative impact. Companies need to use capital modelling software to do this and there has been a significant increase in interest in the MENA region.

Third, we have seen that local insurers in the primary market are increasing their retentions. While historically this region relied heavily on reinsurance, the trend is now moving towards retaining more risk or shifting to non-proportional reinsurance. This means that much more of a company’s capital is exposed and as a result they now need to have a greater analytical understanding of their position.

No longer can companies simply rely on a spreadsheet to gauge the effect of various scenarios on their business. Capital modelling tools allow them to quickly and efficiently understand the outcome of multiple scenarios in a dynamic way.

Specialist lines

Another growth area of business for the region is the specialist lines of Takaful and Retakaful. Regulators are now focusing on Takaful and are tightening up the rules around the availability of capital in order to strengthen policyholder security. Modelling firms have taken this on board and ReMetrica, for example, has invested in building logic for modelling the impact of risk upon capital and investments specifically for Takaful business.

All of this means that the demand for capital modelling tools and the experts required to use them has increased. Hatim Maskawala, an actuarial and risk management consultant in the UAE, has noted that historically there were very few actuaries working in non-life companies. Recently this trend has changed and now companies either have their own actuarial departments or utilise consultants to assist in decision-making. The use of actuaries is also increasing the amount of stochastic modelling undertaken by non-life insurers.

In conclusion, we see regulators and rating agencies pushing the MENA region towards actuarial analysis and capital modelling. At the same time, with the increase in the amount of business and the levels of retention, insurers and reinsurers in the region are realising that these tools will give them a competitive advantage in the market. This has created a shift in culture with an increase in investment of actuarial skills and capital modelling tools leaving the region’s insurance industry in a stronger position.