_2.2. The Small Size of the Insurance Sector: Controlling for Income Levels and Demographics_<sup>_4_</sup>

**MENA’s relative position does not change significantly controlling for income levels.** As shown in Figure 1, only Jordan, Morocco, and Tunisia have larger non-life premiums than those predicted by their levels of per capita income.  Lebanon and Syria‟s non-life sectors are close to their predicted levels, but most other MENA countries have much smaller non-life sectors than predicted by their income levels.  Regarding the life sector (Figure 2), only Morocco‟s penetration ratio is above the predicted level, albeit by a small margin.  Lebanon‟s life sector is only slightly below the predicted level, but most other MENA countries have life sectors which are much smaller than those predicted by their levels of development.  The same general pattern holds for the ratio of assets to GDP (Figure 3).  Morocco is again the only exception, reflecting in part the greater role of employer provided benefits including group life and pensions. Pensions are tax effective for employers in Morocco and together with personal savings products (largely sold through bancassurance channels) account for nearly 60% of life premiums. Egypt, Jordan and Lebanon are close to the predicted levels, but the insurance assets of most other MENA countries are much smaller than predicted by their income levels.

**The relative position of MENA countries remains essentially the same after also controlling for basic demographic factors and inflation (Figures 4, 5 and 6).** Besides income, basic demographic factors such as the size of the population, population density, and the age dependency ratio may also affect significantly the demand for insurance products.  Likewise, inflation may have an impact on the demand for insurance products, especially life products.<sup>5</sup> However, the relative position of MENA countries does not change significantly after controlling for all these factors.  As shown in Figure 4, Jordan, Morocco and Tunisia are the only countries that have non-life sectors above their predicted levels, Lebanon, Syria and Iran are close to their predicted levels, while most other MENA countries are below their predicted levels.

**In the case of life insurance, the differences between actual and predicted values declines somewhat when accounting for demographic factors, but Morocco remain the only positive outlier in the region.** The somewhat better fit in life insurance reflects the small populations and low population densities of several MENA countries, as well as their relative youth. Egypt, Jordan, Lebanon and Tunisia are closer to their predicted values, but only Morocco remains significantly above.  The same pattern holds for assets under management.  The countries that have larger life sectors tend to have larger assets, reflecting the larger technical provisions and reserves required for longer terms contracts written in this subsector.  Again, Morocco remains the positive outlier in this area.

> 4 This section draws on the panel regression models developed in Feyen, Lester, and Rocha (2010).

> 5 Population captures the potential for economies of scale and population density captures the scope for distribution efficiencies. Age dependency is relevant for life insurance and captures the demand for life cycle financial products (e.g. education and retirement).  See Feyen, Lester, and Rocha (2010).

6