The practice of retaining a percentage of the risk and local or legal cession is done in order to develop the local market to become fair and competitive. In contrast to retention requirements, which impose a percentage of risk insurers need to retain themselves, local cession is usually imposed by regulators as a way to protect the local market and to help local companies grow, instead of being overcome by established international reinsurers.
A high rate on local compulsory cession to Societe Central de Reassurance (SCR) has effectively hindered healthy competition in Morocco. In an effort to increase competition and to open the market, the process of winding down local cession requirements has been taking place since 2006. In all but one category, that of civil liabilities (motor and industrial accidents), legal compulsory cessions have been relinquished. As for civil liabilities, the percentage was first reduced to 10%, but has been even further reduced to 7.5% and is expected to be entirely abolished very soon.
Algeria on the other hand has progressed in the opposite direction and has increased its local cession rates. Insurers need to cede 50% to the country’s national reinsurer Compagnie Centrale de Reassurance (CCR), whereas it used to impose a 5-10% compulsory local cession. This excessive increase in local cession can only be explained by market practice in line with the aim to mainly protect the local industry. We believe that going forward more flexibility and fewer restrictions will be imposed, simply because such practice will prevent the economy to adhere to international organisations’ anti-monopoly and free market practices.
Due to political instability, Egypt, Libya, Syria and Lebanon have a suffering economy, thus development in the insurance sector has become stagnant. We believe that companies who are looking to establish in these emerging markets with relatively low or no compulsory retention levels (Libya has 25% local cession on facultative reinsurance and Syria requires 10% to be ceded to Africa Union Re; Egypt and Lebanon do not have local cession requirements), should refrain for the time being. The problem being that standard deviation is very high due to past or expected regime changes. The risk of regulatory changes to the industry cannot be calculated at the moment in these countries. However, entry to the market with a specific proactive strategic objective would be viable at this moment.
Dubai has an open market and adapts an open market approach which is why they do not impose restrictions on reinsurance as long as it is in line with international standards. Dubai and the DIFC are both regulated in terms of mandatory health insurance, therefore the Dubai Health Authority (DHA) captures health insurance in the free zones, including the DIFC. The DHA requires insurers to retain 30% of their health insurance risk. However, this restriction is not meant to protect the local market, as is the case in Saudi Arabia for example, but rather is a tool to safeguard the development of healthcare through the DHA.
In Abu Dhabi the picture is slightly different as there is no explicit regulatory requirement. However, healthcare cannot be offered in the form of a fronting business model that is 100% reinsurance. In order to mitigate the losses an indirect retention rule to safeguard the health insurance scheme (the practice of retaining at least 5-10% of the underlying risk) is commonly being operated.
SAMA, the Saudi Arabian regulator, requires insurance companies to cede 30% of the risk in the local market. Saudi Arabia is one of those countries which prefer to retain their skill and intellectual prowess in the country, by imposing high local cession levels. There are a number of restrictions to classes of businesses, namely oil-related insurance coverage which is set as an exception to the rule. As a result of discussions taking place between regulators and industry leaders, we anticipate that the rules will become reformatted in a way that will further reduce restrictions. With the current restrictions there are many practices that adapt a business model that effectively allows companies to ultimately cede more than 70% through the use of retrocession and other means. We believe – based on the current discussions and the way the market is going – there will not be a need to overcome the regulatory challenges, as we anticipate the framework will be changed in due course.
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