DOHA: Low penetration presents attractive growth opportunities for some (re)insurers in the Middle East and North Africa (Mena) amid challenging operating environment, according to A M Best, an international insurance rating agency. Moreover, revenue generated from value added tax (VAT), along with an expected strengthening of oil prices this year, will help fund infrastructure spending in the Gulf Cooperation Council (GCC) and boost productivity, the agency said in a report.
‘Despite the inherent challenges of operating in the Mena region, there are opportunities for growth owing to the low penetration rates compared to other emerging economies and mature markets, in addition to the continued introduction of compulsory covers such as medical healthcare, A M Best said.
A number of Mena countries (including Kuwait, Oman, Saudi Arabia, Egypt, and Algeria) had total insurance penetration rates below 2% in 2016 compared to the world average of 6.3%, demonstrating that the region also has some of the lowest penetration rates amongst emerging economies, it said, adding despite the low penetration and premium retention levels, these indicators have been rising in recent years, driven by both regulatory changes and the desire of insurers to retain more risk.
The low insurance market penetration rates is partly due to the small size of the life risk cover, particularly for the GCC, it said, finding that at present, the expatriate population dominate the life insurance market in the Gulf region.
However, the agency highlighted that premium growth in the GCC remains robust compared to most mature markets, reflecting in part the GCC’s faster economic growth and the introduction of compulsory insurance. Observing that low hydrocarbon prices in 2017 negatively impacted economies dependent on oil and gas revenues, including several GCC members; it said as a result, many of these economies are currently operating below fiscal breakeven levels, and governments have been under pressure to diversify revenue streams. ‘In 2018, this saw GCC members begin to introduce VAT, with insurance products other than life insurance likely to be subject to a standard rate, according to the report.
Although the tax is not being introduced across all GCC members at the same time, A M Best believes that it could cause short-term cash-flow issues for insurers as they adjust to the new requirements. This is especially true given that many (re)insurers in the region appear unprepared for its implementation.
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