Interview: Corneille Karekezi
What impact has the depreciation of the Egyptian pound had on the reinsurance industry?
CORNEILLE KAREKEZI: An immediate negative effect for reinsurers is the loss of their local income and reserves in local currencies. Despite the fact that the devaluation is partially compensated by high interest in the pound, it does not fully compensate for the negative effect on balances. Furthermore, companies also have difficulty transferring money to foreign service providers as well as dividends to foreign countries.
From another viewpoint, depreciation of the local currency may actually have a positive effect from a reinsurer’s point of view. It will most likely result in lower liabilities expressed in Egyptian pounds to be taken into account by reinsurers. The main problem with the currency is not necessarily depreciation, but the availability of foreign currencies and the difficulties that local companies will have transferring their profits. In some cases this will lead to reinsurers threatening to wave liability if premiums are not forthcoming.
In addition to issues surrounding currency depreciation, reinsurers may face other imminent challenges, such as an increase in the number of players, which puts greater pressure on pricing levels and pushes down profit margins. These low margins may not allow enough resources to further develop the market and introduce new products. This will limit opportunities for real growth in the future.
How have the new regulations from the Egyptian Financial Supervisory Authority (EFSA) affected the reinsurance sector?
KAREKEZI: Regulators in many countries are a main driver for insurance market reforms and development. Egypt is not an exception. The regulator, EFSA, has laid out procedures to improve market conditions and minimise reinsurance risks facing local cedants by limiting the number of business ceded to any reinsurer of their choice. This action sends a clear message that insurers need to rely more on a diversified list of strong reinsurers to secure their portfolios and meet their minimum requirements. This in turn means more focus on the profitability of businesses and better appreciation of the quality of reinsurers instead of a scattered and overloaded market. The revised minimum requirements for reinsurers have improved the quality of the reinsurers that can do business within the country.
It can be expected that organising reinsurance placements in this way will lead to more effective utilisation of available capacity, and improved market rates and results. This ensures that the market avoids any negative impact in the event that a reinsurer decides to pull out of the market. The results since the implementation of the June 2013 guidelines have been excellent.
How would you rate the level of competition in Egypt’s reinsurance sector?
KAREKEZI: Competition in the Egyptian insurance market is intense, which adversely impacts market performance. In the reinsurance market, the presence of international players should lead to higher operating standards. They should help fill the experience gap by offering new training opportunities and technical assistance. In reality, many reinsurance companies are only offering capacity. Lower rates put pressure on the bottom line, thus producing very thin margins for companies, if any at all. It may be better in some cases not to open the market fully to international players, thereby leaving space for preferred companies.
Egypt used to have a local reinsurer, Egypt Re, which was one of the most successful players in the region. While competition is high, there may be space for a local player. After Egypt Re’s merger in 2007, market leaders were thinking of establishing a new company to help improve market conditions and coordination among the local players. Having a local reinsurance company may require certain preconditions to guarantee a successful launch, which would support market development.
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