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August 15, 2023

Romel Tabaja shares insights on favourable outlook for reinsurance in Oman

Reinsurers had to consider many factors in renewal negotiation in 2023. Global events such as the war in Ukraine, supply chain disruptions, interest rate hikes and climate change were top of mind for reinsurers. Oman Re CEO Romel Tabaja spoke with MEIR about how these events impact reinsurers in Oman.

“These challenges resulted in a reduction in available reinsurance capital, leading reinsurers to deploy capacities only when pricing adequately reflected the risks involved in order to maintain the desirable solvency ratio,” he said.

He said that there was a significant restructuring of property proportional treaties in the GCC region, which involved higher retention levels and quota share limits. Commission ratios also experienced a decrease.

There was a hardening in nonproportional treaties in the region with an approximate 20% increase in pricing and inconsistent increase in retention levels. He said in other territories, more stringent measures were implemented, including the introduction of loss participation clauses, reduced Nat CAT event limits for CAT-prone territories and stricter terms on facultative inward and co-insurance capacities. Nonproportional rates in Asia, Turkey and Europe surged by up to 50%.

Commenting on the renewal negotiations he said, “Insurers’ primary focus was on ensuring sufficient coverage and acquiring the necessary capacity to address the rise in asset values resulting from inflation.”

Exposures in Oman

In Oman, Mr Tabaja said he is concerned that the country is vulnerable to Nat CAT like cyclone and flood which can cause significant property damage, infrastructure disruptions and business interruptions that incur considerable financial losses.

He said Oman has been affected by several cyclones in the past such as Gonu which was one of the strongest in the Arabian sea, hitting the eastern region of Oman in 2007. Cyclone Phet brought heavy rain and strong winds to the coastal areas in 2010. Cyclone Mekunu caused extensive damage and loss of life in the southern part of the country in 2018. Cyclone Shaheen made a landfall over the northern part of Oman in 2021.

“These events have highlighted the necessity for the establishment of Nat CAT pools in the market to mitigate these risks. By transferring the risk of natural disasters to the pool, existing treaties that exclude coverage for cyclones will become more appealing to the international market. Moreover, the pool will provide financial stability and resilience to the country’s economy.

“At present, a steering committee comprising representatives from six local insurance companies is actively working on the technical aspects of forming the reinsurance pool. We are chairing the steering committee,” he said.

Strengthening cooperation with insurers to underwrite risks

He shared several areas where cooperation between reinsurers and insurers can be strengthened to enhance the ability to underwrite risks and to prepare for emerging exposures such as:
• Data sharing and analysis: Reinsurers and insurers should collaborate to share data and insights on emerging risks, loss experiences, and exposure trends. By pooling data resources, they can gain a deeper understanding of evolving risks and develop more accurate underwriting models.
• Product innovation: Reinsurers and insurers can work together to develop innovative products that address emerging risks and changing customer needs. By sharing insights and expertise, they can create customized insurance solutions and risk transfer mechanisms that provide comprehensive coverage for new and complex risks. For example, given the increasing threat of cyber risks, collaboration between reinsurers and insurers in the realm of cyber risk underwriting and preparedness is crucial. Sharing expertise, data and intelligence related to cyber threats can help in the development of comprehensive coverage options.
• Regulatory engagement: Collaboration between reinsurers and insurers plays a vital role in working with regulators and policymakers to shape risk management practices and regulatory frameworks. By joining forces, they can help create effective regulations that promote risk transfer and ensure stability in the insurance sector.

War risks

We also asked Mr Tabaja about the impact of war risks on the reinsurance business.

“Oman Re has minimal involvement in war risks and does not directly underwrite standalone war risks. Nevertheless, it is important to acknowledge that any war can have significant implications on the global economy. It has the potential to disrupt supply chains and contribute to inflation, impacting various sectors worldwide and various insurance classes of business,” he said.

He said war has a profound impact on the insurance and reinsurance sector. Such impacts include:
• Increased claims cost due to inflation, geopolitical and regulatory changes.
• Heightened risk assessment including adjusting premium, coverage restrictions and limits which would create uncertainty and market volatility.
• Reinsurers face increased exposure during times of war leading to higher reinsurance costs and the need for additional retrocession to spread the risk - the additional cost will be reflected into the direct reinsurance contracts.

“We protect ourselves against the risk of war via several risk management methods including diversifying the portfolio across several regions and lines of business by spreading the risk. Our underwriters evaluate potential risks associated with war and factor them into their pricing and coverage decisions. Specific clauses related to war risks are incorporated across reinsurance contracts. Our actuaries use specific tools to assess the potential of war exposure and such exposure is monitored periodically,” he said.

Outlook for reinsurance in Oman

Oman’s economy is expected to grow by 4.3% in 2023 which is the fastest rate among GCC countries. The sultanate received multiple credit rating upgrades from various international rating agencies and its current outlook is positive according to rating agencies like S&P, Fitch and Moody’s.

“When a market is in an expansion phase, the reinsurance sector generally benefits from a favourable outlook. Reinsurers can anticipate an upsurge in demand, revenue growth, opportunities for diversification, the development of innovative solutions and a favourable pricing environment. “These factors collectively contribute to the growth and profitability of reinsurers operating in a thriving insurance market.

“Furthermore, as the rating of a reinsurer is often linked to the sovereign rating, an improvement in the country’s rating is expected to positively impact the rating of Oman Re. Therefore, when the country’s rating is upgraded, we can anticipate an improvement in our rating as well,” he said.