- _2.3 The Small Size of the Insurance Sector: Identifying the Constraining Factors_

**The slow development of the insurance sector in MENA is due to a wide variety of factors, including regulatory factors, market structure, lack of development of other segments of the financial sector, social/human development factors, and culture/religious factors.** Some of these factors have been identified and tested in recent empirical research.  Other constraining factors are less amenable to measurement and empirical testing, but will also be discussed in the sections below.  Most importantly, some of the constraining factors are out of reach of policy makers or can only be changed very gradually, while other factors can be addressed over shorter period of time.  The sections below make an effort to examine all the potential constraining factors, in order to identify a roadmap for the development of the insurance industry.

**Recent empirical research (Feyen, Lester, and Rocha (2010)) shows that the insurance sector is driven by a broad range of factors and explains in part why MENA insurance sectors remain undeveloped.** For example, this research shows that insurance sectors are less developed in countries with Muslim majorities, due to the lack of compliance of conventional insurance products with Shariah rules. This result is relevant for most MENA countries. Research also shows that the demand for insurance is partly driven by the existence of retail credit markets (mortgage loans, personal loans), which are not yet well developed in many MENA countries. Also, the dominant presence of state insurers tends to slow down development, a result which is relevant for at least four MENA countries which are transitioning from a historical legacy of state monopolies (Algeria, Egypt, Libya, and Syria).<sup>6</sup>

**There are other factors which are more difficult to measure and test empirically, but that have been powerful impediments to the growth of the sector.** For example, several MENA countries have been slow to introduce compulsory insurance in key areas such as occupational injury and health.  Also, MENA countries generate limited premium revenues from car insurance, despite a large fleet of cars per population.  This is due to several specific problems, as shown below. The excessive fragmentation of insurance markets in MENA may also have hindered the sector‟s growth – many insurers do not have critical size to build adequate risk pools, underwrite contracts and innovate.  The lack of professional skills in the industry has been another major deterrent.  Finally, weaknesses in regulation and consumer protection (resulting inter alia in lack of transparency and lack of trust) have also hindered the development of the sector.  These issues are examined in the following sections.

# **3. Main Business Lines**

**The analysis of the main business lines sheds further insights on the slow pace of insurance development in the MENA region.** This is because the development of the insurance sector generally follows some well defined patterns.  The non-life sector is more important in the early stages of development.  In the very initial stages, development is driven by coverage of transportation and trade risks.  In the next stage, households acquire motor vehicles and governments make motor third party liability insurance compulsory. Thereafter, mortgage markets develop and household insurance becomes more common. Eventually, a middle class

> 6 Annex Table 5 provides an illustration of research on the drivers of the insurance sector, with the share of insurance assets to GDP as the dependent variable (see Feyen, Lester and Rocha 2010).

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