Arab Spring Could Affect Regional Insurance Markets

Posted on Nov 29, 2011 by Sergio Ulloa (G+)

The ongoing civil strife and revolutions occurring throughout the Middle East and North Africa could have a negative impact on the further development of insurance markets in the region, according to a new special report published this week by AM Best. 2011 will forever be known as a year of mass social unrest and political turmoil in the Middle East and North Africa (MENA) region, where revolutions in certain countries have not only taken a considerable human toll on local populations but have also affected the region's financial risk systems and overall business environments for potentially years to come. In 'Protests Alter Forecasts for Premium Growth in MENA,' worldwide insurance information and credit ratings agency AM Best examines the financial impact of the Arab Spring protest movement, country by country, and how it has altered the international insurance industry's prospects in the region. In general, periods of sociopolitical unrest and upheaval will pose considerable problems to a nation's insurance industry, disrupting business patterns and affecting liquidity, according to AM Best. For the insurers themselves, premium levels can often stagnate due to business days lost due to unrest and other prolonged inabilities to collect on policies. In addition, while claims directly resulting from revolution and civil war are typically excluded, the incidence rates of claims overall can be higher in the aftermath and firms will have to find ways to absorb these losses. Moreover, if wide scale changes to a country's government occur, insurance regulations could follow suit and the performance of previously prominent state-backed companies could be affected. Alternatively, the rating agency noted, certain business lines can in fact benefit from these tumultuous times, with premium levels for cargo and marine cover due to rise in tow with expected oil prices, as well as reinsurance opportunities arising from reconstruction efforts and government infrastructure spending. Overall, AM Best reiterates that premium growth will continue to be closely linked to economic activity. "Specifically, a country's growth in inflation-adjusted insurance premiums is determined, at least partially, by the overall level of real economic activity in that country. Nominal gross domestic product growth historically is highly correlated with insurance premium growth," the ratings agency noted. Thus political turbulence which fosters business uncertainty could affect the development of the region's insurance markets going forward. Although the political situations in several MENA countries are still far from resolved, AM Best was able to use the most recently revised economic growth data provided by the International Monetary Fund (IMF) to forecast how the region's insurers may expect to perform in the near future. In September, the IMF downgraded the economic growth projections of 8 MENA region countries, including Algeria, Bahrain, Egypt, Syria and Tunisia, and raised the forecast for 7 others. Although Syria is the only country expected to slip into a formal recession, the IMF noted that the unrest is expected to negatively impact the economies of many MENA nations in 2011, with growth rates generally returning to their original pre-crisis path by around 2013 or 2014. The IMF held the potential long-term disruptions in key business sectors of MENA economies, chiefly, tourism, private financing (particularly foreign direct investment) and the oil industry, accountable for the reductions in GDP projections. Tourism and investment activity, in particular, are highly dependent on consumer and investor confidence, and have been shaken by the pervasive turbulence of the Arab Spring. Equity markets across the MENA region have been down 16 percent on average since the start of 2011, ranging from the full rebound in the Qatar exchange to a massive 41 percent drop on the Egyptian exchange. Using the IMF's updated forecast, AM Best found that the Arab Spring protests will affect the insurance industries of each country in different ways, although the projected impact on premiums overall in the region is not expected to be too severe, owing primarily to the relative immaturity of the MENA insurance sector in general. According to AM Best's calculations, the impact the widespread unrest will have on markets ranges from Syria's projected insurance premiums in 2015 being around 14 percent lower than they would have been before the protests, up to Turkey's projected premiums in 2015 being in fact 1 percent higher. Of the 16 countries surveyed in the MENA region, 10 are expected to post lower premium growth in the aftermath of the Arab Spring, namely, Algeria, Bahrain, Egypt, Jordan, Kuwait, Lebanon, Oman, Qatar, Syria and Tunisia, with Egypt and Syria experiencing the largest expected declines in growth due to unrest. Relative to country risk metrics, with the exception of Tunisia, all of these markets where the impact from the Arab Spring is judged greatest were already classified in AM Best's highest country risk tier. Meanwhile, 5 MENA countries are projected to remain unaffected or experience modest gains, with more than US$2 billion in projected premiums in 2015. These countries are Israel, Morocco, Saudi Arabia, Turkey, and the UAE. While these findings could indicate a significant shift in the MENA insurance industry, premium levels for the whole region are projected to only be 0.7 percent lower in 2015 than they otherwise would have been without the protests. "Thus, while the overall effect of the protests in the short-to-medium run is negative, it will be relatively minor on the regional insurance industry," AM Best noted. The rating agency's findings leave us with two profound conclusions, one is that political upheaval does not necessarily destroy a domestic insurance industry, and the other is that there is still considerable opportunity for foreign investors to build the insurance trade in the MENA region. Rating Agency Mentioned A.M Best A.M. Best Company was founded in 1899 and is a full-service credit rating organization dedicated to servicing the financial services industries, including the banking and insurance sectors.