Lloyd’s of London is banking on under-penetration in the Middle East region to boost its gross written premiums as the world’s oldest insurance market pursues a strategy of beefing up its international business, its chairman said.
Premiums in the Middle East rose 3.7 per cent to US$594.3 million from a year earlier. The market opened its first Middle East office in Dubai in March last year to tap insurance growth in the region.
The speciality insurance and reinsurance market started three centuries ago from a coffee shop, and is renowned for insuring anything from ships to coffee tasters’ tongues.
“What we will see is that non-life premiums, specialist premiums will probably grow ahead of the rate of GDP growth because of under-insurance in these countries [in the Middle East],” said John Nelson in a recent interview in Dubai.
“In these conditions of great competitiveness, we don’t want to see too much GWP [gross written premiums] growth because that would indicate people are buying business.”
Lloyd’s optimism in the non-life insurance business is supported by industry forecasts.
Non-life segment in the Gulf region is forecast to outperform the life segment between 2014 and 2020, growing at a compound annual growth rate of 20.2 per cent, compared with 5.9 per cent for the life business, the Dubai-based investment bank Alpen Capital said in a report last year. Non-life insurance has been growing largely thanks to mandatory insurance levied through regulations, the report said.
Insurance penetration in the Gulf remains low, at 1.4 per cent of GDP in 2014, a fifth of the global average and half that of emerging markets. The penetration rate, though, is projected to grow to 3.3 per cent of GDP by 2020.
Non-life premiums in the Middle East and North Africa region grew about 6 per cent last year, according to Swiss Re, one of the world’s biggest reinsurers.
Globally, demand for non-life insurance is set to increase this year and next, with emerging markets driving the growth, according to Swiss Re.
From Peru to Singapore, Lloyds insurance market is expanding outside its home base in London as it taps emerging markets for growth.
Besides opening an office in Dubai, it also opened in Beijing and representative offices in Colombia and Mexico.
Emerging markets will account for close to 40 per cent of worldwide non-life premiums by 2025, according to Lloyds.
Lloyd’s market, though, is dominated by business from advanced economies, where market conditions remain tough.
Lloyds’ biggest market is North America, where total gross written premiums last year accounted for 47 per cent of its market.
“Conditions in the market have deteriorated further,” said Mr Nelson. “We don’t see any improvement [but] we probably see a further deterioration. We also see no improvement in the prospects of higher interest rates, so think it will be very tough for a while.”
Central banks around the world have kept interest rates low or adopted negative rates to stimulate growth and nudge inflation.
A low interest rate environment is hurting Lloyd’s investment income while continued pressure on pricing is hurting premium income. Lloyd’s net profit plunged 30 per cent to £2.1 billion (Dh11.12bn) last year, while gross written premiums rose 6 per cent to £26.7bn from 2014.
“The challenge is that with these very low interest rates our investment income is very, very low,” said Mr Nelson. “Equally because the insurance industry still seems to be attractive to the capital markets as an asset class, we have more and more capital coming in, exacerbated by low investment returns in other lines. So we have a kind of a perfect storm here.”
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