16 April 2013 Reinsurance

Correcting the balance

For the last five years, reinsurers in the Middle East and North Africa (MENA) region have observed a continuous deterioration of terms and conditions. This trend now appears to be slowing, with corrections occurring on some lines of business.

On the treaty side in particular, several programmes that expired on December 31, 2012, had still not been placed by the middle of January. This was because poor results on the underlying portfolio make the business unprofitable for reinsurers and negotiations are continuing, says Michael Gertsch, chief executive officer at Gulf Re.

He believes that this will ultimately translate into a need for insurers to adjust the terms of policies, particularly on motor and medical policies—two of the largest growing segments in the market.

The market has now come to an end of its growth for growth’s sake philosophy, a strategy used by many companies in the past. “They now need to engage in more technical underwriting and probably more risk selection,” he says.

“However, there is still a lot of capacity in the market. Businesses and the market overall continue to grow, which is very positive, but I think we will also see much more careful underwriting by most insurers going forward.”

The situation remains serious, however. Falling rates have been compounded by weakening underlying terms and conditions such as deductibles and exclusions. Combined with the absence of significant investment returns, these factors have created a situation that is not sustainable for reinsurers.

While loss trends remain stable, pricing continues to deteriorate. This is steadily eroding the margin for reinsurers, according to Gertsch.

“Although there is enough capacity in the market, reinsurers realise the terms and conditions offered in the past are not sustainable and need to be adjusted to enable reinsurers to make some margin,” he says.

Another problem for reinsurers is a disparity between their margins and the retro market, where prices are rising.

Part of the solution is a closer relationship between insurers and reinsurers, according to Gertsch. Until now in the MENA region, this relationship has been very transactional, with insurers often taking the cheapest reinsurance deal available.

This must change. Insurers must allow reinsurers to make long-term profits in return for paying out on large losses in the short term. Then, both can profit in the better years, according to Gertsch. “The relationship needs to become more of a long-term partnership,” he says.

This is the route that Gulf Re is taking. By developing more in-depth relationships with clients, the company can better understand their needs and address them—while still making a profit and remaining sustainable.

Part of this relationship involves providing analysis of cedants’ portfolios—something reinsurers are often better equipped to do as they can draw on experiences in other markets. Gulf Re also provides training for underwriters and actuaries, to enable cedants to increase their market knowledge.

“We can offer our clients a very broad expertise within the company,” says Gertsch. “We’ve brought specialists in from all over the world. We want to work on lines that are sustainable and long-term oriented, while continuing to support our clients and reducing their dependence on foreign reinsurers.”

Gertsch is clear that the company must turn a profit and create returns for investors and shareholders. Consequently, that means growth is not the primary driver or target for Gulf Re. It has sacrificed growth in certain areas, he says, to make a technical underwriting profit instead. This requires a good understanding of the market.

“We are managing that,” says Gertsch. “We see where the trends are going. We saw this happening when we started the company in 2008 and we knew that the markets would continue to deteriorate. We took that into consideration and therefore it is not really a surprise for us.

“It remains to be seen how strong the change will be this year but what we are witnessing right now is that there is a return to more technical underwriting by the ceding companies, which will enable us to broaden the support we are giving to the market.”

Rather than chasing growth, Gertsch says that opportunities will lie to a large extent in reinsurers offering a broader range of products in the future. Although the MENA market is driven by motor and health on the private side, and energy and construction on the commercial, the development of economies in the region will necessitate more lines of business being covered.

“New products will be introduced and together with a continually growing economy, this will provide a lot of opportunities for clients going forward,” says Gertsch.

The past, present and future of Gulf Re

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