In this briefing, we look at the development of the private trade and political risk insurance market in the Islamic world and MENA. It has been a story of evolution. How best can it work in partnership with public credit insurers to improve sustainable growth?
The private market in the Islamic world for private credit and political risk insurance (CPRI) is very much a work in progress. That progress has not always been linear, but there are positive signs. ICIEC provides insurance and reinsurance solutions for the private sector which help it unlock transactions that may not otherwise get over the line. Nonetheless, partnerships with the private sector are going to have to be a key driver for the market if capacity is to be improved, and ESG goals met.
Looking at the positive, policy numbers for the region have seen significant ongoing increases since 2014, according to statistics provided by BPL Global, the world’s leading insurance broker specializing in credit and political risk insurance (CPRI). After a small stagnation/hiatus mirroring the trend across the entire market through the early impact of the pandemic in 2020, 2021 witnessed an unprecedented 70% increase in policies bound for transactions in ICIEC Member States.
According to BPL data, this trend is continuing into 2022 with a new policy count in Q1 alone already at 55% of the entire 2021 year total.
Exposures represent over 20% of BPL’s worldwide portfolio with the vast majority of this being medium-term non-payment cover with tenors averaging beyond five years. This is mainly in support of trade and export contracts but there is also support for inward investment in infrastructure with political risk coverage being provided to a total of $2.7 billion as of April 2022. Tenors on this investment piece are longer, as is to be expected, averaging approximately 7.5 years.
Capacity constraints persist
BPL data is positive, with the underlying figures showing an upward trend for MENA and for the OIC members in general. This shows that CPRI as a product is well supported by the market generally but there remain significant capacity constraints in a few countries such as Côte D’Ivoire and risk appetite issues in others. Nonetheless, private insurers will look to the micro-level of the risk in those countries, and not solely reject writing policies based on the macro situation.
Others are less sanguine about the progress of the market so far. The Middle East, for instance, is still considered to be a new market for CPRI and is considered to be an emerging market with a high degree of volatility.
The Islamic world has well established Property & Casualty (P&C) national insurance companies, yet none of them has been able until now to write CPRI business on a ‘follow the fortune’ basis. To clarify, the follow the fortunes doctrine provides generally that a reinsurer must follow the underwriting fortunes of the reinsured company. That means it is bound by the claims-handling decisions of the insurer before it so long as there is no evidence of fraud or collusion with the insured or bad faith. The principle treats the insured as if the reinsurer were a party to the original insurance.
There remains a clear cover gap, that has encouraged many governments in the region to invest more resources to build this capacity internally. Many public insurers in the region are now evolving quickly to achieve more independence in their underwriting process and provide wider products coverage to their underserved markets. Sometimes, that means going beyond the traditional limits of ECAs in OECD countries.
The scope for partnership in MENA
How about the private market? Are private insurers seeing export credit agencies and public insurers in MENA as threats or allies? “First and foremost, the private insurance market is complementary,” says one private broker. The Lloyd’s insurance market, for instance, opened up its platform within the DIFC in 2015, and provided a clear boost to the private market in the region where personal relationships are seen as vital.
Relationships are important, and memories are long. One of the drags on the MENA private insurance market dates back to the beginning of the decade when a private insurance cover failed to pay on a local risk. It’s a cautionary tale.
“Export Credit Agencies are very good at holding people’s hands through this situation, but having wording that works specifically for your deal is so important,” one broker says. “Unfortunately in this instance the local banks were hoodwinked into being given an off-the-shelf product which the insurer knew wouldn’t pay out in the event of a fraud.”
What is the solution to problems like this? “Have a policy that says non-payment for whatever reason. And it is absolutely critical. I spend a lot of time trying to say to clients or prospective clients, ‘Please don’t go at this blind and think that an off-the-shelf product will work for your specific risk. It doesn’t always, and you have to be extremely careful about the conditions of the policy’.” Naturally, that is why that broker is keen to stress, having a broker to hold your hand can be helpful.
That also is a constraint to digitisation in this particular part of the market. Bespoke products tend to be off the shelf, specific to individual risks and are less able to be digitised (though, of course, digitisation of certain elements will naturally evolve).
Education and relationship building
Education is key to getting more understanding of the products available. “That was exactly the reason why we had a representative in Dubai from 2019. In this region face to face meeting is important. This is not only facilitating, it’s building business,” says one senior European ECA official based in Dubai before the pandemic hit. “We have already concluded some smaller facilities in different industries and this has a catalyst effect. There are green shoots of hope in this region. Also, banks have started to employ dedicated insurance purchasers too, which helps to have that specialism.” The pandemic may certainly have put constraints on that face-to-face dimension, but the trend will remain.
Gaining local experience – whether that be through feet on the ground, or relationship building through networks, will continue to be important in order to understand the markets.
ICIEC has been a trusted partner in the political and credit risk industry for almost three decades, relied upon for its regional risk expertise, product understanding, and diverse network. In recent years our focus has evolved to additionally meet the growing demand for sustainable investments, so that we can strive to ensure that all economies thrive together. Evolving private partnerships in the CPRI markets will be important to keep capacity strong in emerging markets.
