As fresh reports of political controversy appear daily in the Egyptian papers, political factionalism and infighting threaten to destabilise economic growth. Meanwhile the oversupplied insurance market is going about business in a new way

As Iran looks to resume exporting commodities to European countries through the Suez Canal, the economic potential of Egypt as the gateway to the West is significantly undermined by the nation's political fragility. Underpinned by religious and political factionalism as well as a decreasing demand from China for North African commodities, the Egyptian government has looked to drive bottom up growth through small-medium enterprise (SME) funding, whilst maintaining infrastructure projects through foreign investment. Yet the outcry against President Abdel Fattah el-Sisi's deal to cede control of two Red Sea islands to Saudi Arabia in April demonstrated Egypt's shaky political foundations, and insurers are maintaining a cautious outlook in light of potential market volatility.

Insurance landscape

The shifting political landscape over the last 12 months saw Egypt's insurance industry record a fall from 15.6% to 12.1% year-on-year growth in 2015, a dip in form from previous performance growth which saw the North African insurance sector record a CAGR of 9.5% between 2006 and 2014. This outperformed the global market which only reached 3.2% during the same period. The country still suffers from considerable market fragmentation with the six largest players accounting for 74% of the GWP, which has also encouraged pricing and performance volatility across the market. However the entrance of French insurance giant Axa into the country last May demonstrates a confidence in Egypt's longer term economic resilience.

Infrastructural investment

With internal conflict weighing down the country's economic development, the Egyptian government have been forced to consider significant economic reforms. Subsequent considerations have prompted Sisi to make numerous deals with foreign investors, including Saudi Arabia, with whom a $20bn deal to finance Egypt's petroleum needs over the next five years and a $1.5bn deal to develop its Sinai region were signed last month. Data from the United Nations Conference on Trade and Development state that Egypt's foreign direct investment rose 56% year on year to $6.7bn in 2015, while Reuters reports the country is aiming for foreign direct investment of around $8-10bn over 2016.

Foreign investment and ambitious infrastructure projects, including the continuing expansion of the Suez Canal have required international expertise, encouraging insurance giant Axa to seek domestic partnerships and entry into the national market last May. "We were able to insure two tunnels from an engineering perspective, and around this we were able to secure things like railway projects, so we were immediately received by the Egyptian players as a partner for growth and economic development," explains Hassan El-Shabrawishi, CEO of Axa Egypt. We're currently working with a national provider, the state owned insurance company Misr Insurance," adds El-Shabrawishi. "So instead of being in competition, we partnered with players who are very knowledgeable locally to make sure that we work together hand in hand.

Political/terrorism

While hampering the country's economic development, political volatility and the ever present threat of terrorist activity across Egypt has led to growth across PV and terror lines. Bolstering this development, last year saw the Egyptian government enact new anti-terror legislation which ensured the country's military and police forces would be covered by compulsory insurance against death and disability resulting from acts of terror. While the commercial benefit of these new regulations is likely to be spread pretty thin (with plans set for a pooling arrangement to distribute the risk across a number of domestic insurers) the legislation does show a governmental recognition of terrorism cover as a growing necessity. This is something reflected in rising premiums, and the corresponding loss ratios over the last few years.

However, the rising internal tensions within Egypt are encouraging an interest in less traditional perils, and creating an "increased risk of crimes of opportunity, including kidnap and ransom," according to Smita Barghava, VP of political programs and risks at Clements. With the violence increasingly drawn along religious lines since the fall of Muslim Brotherhood's president Mohamed Morsi in 2013, researchers from the Egyptian Initiative for Personal Rights put the number of kidnap and ransom cases at almost one a week at the end of last year.

The long-entrenched political grievances and developing local dimension of the conflict is changing the fundamental aims of many terrorists, and subsequently, the way insurers are forced to adapt to them. "There's been shift in the nature of terrorist events recently, moving away from physical property towards loss of life," states Kit Welsh, assistant VP, war and terrorism at Liberty Special Markets. In only the first four months of 2016, Egypt has seen two separate attacks leading to physical injury and loss of life. For insurers, the increasing frequency of attacks leading to loss of life requires a change in perspective. "We're now trying to look at liabilities or coverages following a shooting or a loss of life event," says Welsh. "In doing so we're trying to work on wordings where the BI extensions can be triggered due to a loss of life event rather than a property loss," he adds.

SME growth and micro-Insurance

In a report released last month, the Egyptian Banking Institute revealed that SME's not only provide 75% of national employment, but contribute 50% of the country's industrial production. Despite being in its infancy, there's already a recognition that the SME sector could be a primary channel for building a stronger national insurance market. With microinsurance premium being put at only EGP 100m ($13.72m), covering 750,000 individuals nationally, the sector has huge potential for growth.

At the end of last year the Central Bank of Egypt passed legislation requiring 20% of any bank's loan book to be small to medium-sized enterprises by 2020. In an interview with Mena Insurance Review, Alaa El Zoheiry, managing director at Arab Misr Insurance Group predicted that "SME business is going to be driving the insurance market".

Draft proposals, written by the Egyptian Financial Supervisory Authority (EFSA), making provisions for entities to offer micro finance insurance and allowing  the establishment of mono-line healthcare insurers, are set to be sent to the central government in November. The limited exposure of micro-insurance cover also mitigates the industry's increasingly rigorous reserving regulations. The EFSA's proposal would see minimum capital requirements for insurers increased from EGP120-150m ($16.5-20.8m), however, monoline health insurers would be required to have a minimum capital of only EGP10m ($1.3m).

Outlook

As Egyptian economic resurgence is undermined by political divisions and unpopular military influence, investment from Riyadh has given Sisi a lifeline. After having the country's predicted growth rate downgraded in January on the back of dangerously low foreign cash reserves and declining tourism figures, how foreign investment is utilised will define the current regime's durability for some time to come. For insurers this creates opportunity to innovate as economic growth is pushed through bottom-up investment and major infrastructure upgrades. 2016 is a pivotal year for the country and we could see a number of players look to diversify into Northern Africa as Egypt's insurance market begins to open up.

© Mena Insurance Review 2016