Covering Arabia

The Gulf's insurance sector could face an uncertain future if awareness and modernisation efforts are not seized upon now.

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By  Evelina Shmukler Published  January 27, 2005

|~||~||~|In many ways it's an insurer's dream: a massive and largely uninsured population; a growing number of expatriates in need of local coverage; a real-estate boom that has resulted in hundreds of new buildings requiring construction and property insurance; and, as anyone who has sat in rush-hour traffic in Dubai knows, an increasing number of cars on the road, all of which are now required to pay auto insurance premiums regularly. Insurance premiums in the Middle East were about US$5.3 billion last year - that's less than 1% of the global total, but it's up 12% on the year before and growth is expected to continue in the near future: some predict that Middle East insurance premiums will hit US$44 billion by 2010. Growing populations and incomes, more stringent and sophisticated regulation, increasing public awareness, and more and more insurance products geared specifically to Muslim customers, are all expected to help propel the industry forward during the coming decade. "There's a huge amount of money currently being spent by governments in the region on large projects that will require insurance to cover basic construction and project risks," says Kevin Willis, a director at Standard & Poor's, who analyses insurance companies in the region. "This will result in increased employment, and those workers will bring in their own assets that require protection." The influx of workers will also raise the demand for employee compensation and medical insurance - not to mention all that third-party liability motor insurance. Meanwhile, continuing economic liberalisation means that, as states back out of their involvement in public enterprise, new ways to spread the risk among multiple private sector partners will need to be found. Governments are also working to shift the burden of increasingly expensive social security systems - including health care and pensions - on to the private sector. But it's proving to be a long and arduous journey. Towards the end of October, the United Arab Emirates (UAE) insurance market was thrown into a spin, following the shock resignation of Emirates Insurance Association (EIA) chairman, Juma Saif bin Bakheet, amid allegations of continuous meddling in the industry's operations. "The whole world is heading towards privatisation to limit the role of the state and allow more room for the private sector to grow and excel. I guess the insurance sector, which is considered to be one of the strongest service sectors, will face many problems if the intervention continues," said bin Bakheet in an interview with a local newspaper shortly after his resignation. He alleged that the Ministry of Economy and Commerce had banned the publishing of any advertising matter from the industry until it is "properly" checked by the ministry. "This has caused a lot of ambiguity and confusion in the industry. Let alone the intervention in the timing and working hours of the insurance companies, which have caused inconvenience to the employees and the companies' clients in the region and abroad," he added. "The insurance sector needs to attract more of investors' capital and grow in a healthy environment with the full support of the government and its departments." Others believe the industry needs to work harder too, if it wants to reap the benefits of a new wave of growth. Middle East insurers have traditionally sold off much of the risk on their books to foreigners, acting more like brokers than true insurance companies. With the expected jump in insurance needs, and the pricey and fluctuating cost of capital on the international markets, experts say that insurers will have to start keeping more of the risk in the region. And they'll have to start shaping up quickly: though local companies know the markets best, globalisation is allowing foreign companies in, and governments are also raising the bar by introducing minimum capital requirements and tightening other regulation, says Fetooh Al Zayani, head of insurance and reinsurance at the Dubai International Financial Centre (DIFC). "Very few local companies have taken up the rights to modernise and raise capital," she says "Eighty percent will be happy to go on as usual, just earn commissions and act as brokers. But things are changing, and they will have to shape up or they will simply disappear." This means the industry will need to consolidate, broaden its access to capital, heighten expertise and increase cooperation. To this end, financial centres such as Dubai and Bahrain are revving up their engines to try to become the region's insurance hubs, places where insurers, reinsurers and brokers can all meet to try to build the region's insurance future. The Dubai International Financial Centre has targeted insurance as one of its areas of focus, estimating that demand for aviation and other types of commercial insurance will grow at 10% to 20% per annum over the next decade. JLT Risk Solutions, a specialist risk broker, was the first broker to receive a license to operate in the DIFC and opened a Middle East office this autumn. "It attaches us to what we think will become a major international financial centre for insurance and re-insurance," says Mike Good, who is heading up JLT's Middle East office. "That gives us a different platform: rather than starting as a local broking operation and building from there, we are coming in at a major international level and will be able to evolve a strategy in more detail for the region." JLT is just one of a number of insurance firms keen to be granted the right to operate within the DIFC market. Insurance giant, Aon, has also applied for a DIFC license, and other insurers are following suit. In Bahrain, the 14-story Bahrain International Insurance Centre is being built within the country's US$1.3 billion financial harbour project. Bahrain is also working on new insurance regulations that will increase transparency, improve governance and ensure that insurance professionals are being trained and available. "We are really trying to make it easy for insurers to be based here," says Tawfiq Shehab, director of insurance supervision at the Bahrain Monetary Agency. Training will be much needed, as there is a huge task ahead. At the moment, the Middle East is the most under-insured region in the world, with insurance penetration and premium totals in the region far below other markets of similar size and economic profile. Looking specifically at five GCC countries for which data is available - Kuwait, UAE, Bahrain, Saudi Arabia and Oman - insurance premiums in 2003 totalled US$2.6 billion, less than 1% of global insurance premiums of US$2.9 trillion. Currently, the UAE is the biggest insurance market in the GCC, with US$971 million in premiums last year. But countries such as Singapore and Taiwan, which have a GDP per capita at about the same level as the UAE, enjoy much higher insurance premium levels - US$9 billion and US$32 billion, respectively. With an insurance penetration rate of just 1.1% of GDP, the Emirates still have a long way to go to catch up with Singapore's 7.6% and Taiwan's 11.3% penetration. Premiums per capita even more pointedly illustrate how much room there is for growth: Insurance premiums in the UAE averaged US$310 per person in 2003, US$149 per person in Kuwait and just US$41 per person in Saudi Arabia. That's a fraction of the premiums paid by policyholders in Taiwan, who shelled out an average of US$1,433 in insurance premiums last year, and in Singapore, where the per capita average was US$1,620 - not to mention the premiums earned in highly developed insurance markets, such as the UK, where the average person paid more than US$4,000 in premiums last year. Low take-up in the Middle is in part due of a lack of public awareness and familiarity with insurance. Though motor insurance, for example, is mandatory in many countries in the region, it is often seen more as a burden - a kind of additional government tax - than as a benefit. "People only insure their car because you can't register it with the ministry unless you have a policy," says DIFC's Al Zayani. "This is an issue right now - people only buy insurance it if it is a necessity." This could change, however, as driver profiling systems improve, and insurers are better able to assess the risks of individual drivers and thus charge rates according to experience and driving history - proper insurance, in other words, that takes into account individual risk factors and can thus price the insurance accordingly. "For the time being, it's one price fits all, which doesn't work in insurance," says Salah Al-Halyan, the founder and director of Gulf Insurance Consulting, an insurance consulting firm based in Dubai. Insurance in the region also has cultural barriers to cross. Since it's arguably a way of betting on the probability of catastrophe, insurance has been perceived as a form of gambling and thus illegal under Islamic law. Increasingly, insurers are trying to find insurance products that are compliant with the tenets of Islam. Islamic insurance, known as takaful, is another business with the potential to boom - estimates place future growth at more than 10% annually. Overall, general insurance - which includes motor, as well as property, construction and health insurance, among others - dominates the local market and is being propelled even higher by population and economic growth in the region. The Arab Insurance Market review, an annual study published by Bahrain-based Arab Insurance Group (AIG), noted in its most recent report that GDP in the Middle East and North Africa is expected to grow by an average of 3.6% annually until 2010, while the population in the region is estimated to reach 330 million during the next six years, from 282 million last year. "This rapid population growth requires substantial investments in infrastructure improvements (energy, water, transportation, etc.), which will lead to an increase in demand for insurance protection and related services," the study said. Meanwhile, privatisation of state assets and new compulsory insurance requirements will also prompt non-life insurance growth. Saudi Arabia, for example, put in place mandatory insurance requirements for motor insurance and health insurance for expatriate workers in 2002, which led to a 30% jump in general insurance premiums that year. The state-owned Company for Cooperative Insurance (NCCI), which has almost one-third of the market in the kingdom, saw premium growth of more than 40% in 2003. With a population of almost 25 million - the largest by far in the Gulf - Saudi Arabia is being eyed, hungrily by many insurance players. The kingdom is opening up its insurance market to foreign players for the first time - it's even putting part of NCCI up for sale - and introducing minimum capital requirements and other regulation that should help the industry formalise and expand. It's also further expanding its mandatory health insurance requirements, and NCCI recently said that gross written premiums for medical insurance in Saudi Arabia could eventually be worth US$6.4 billion, up from US$325 million in 2001. Saudi Arabia currently has the lowest insurance penetration of any market in the world, at just 0.5% of GDP. The world average is 3.8%, while its GCC neighbours have penetration rates that are more than double Saudi's: 1.1% in the UAE, for example, and 1.2% in Oman. The average spending per person on insurance in Saudi Arabia last year was just US$41.20 - Premiums per person in Lithuania and Argentina, which have a GDP per capita close to Saudi Arabia's, were almost twice that level. General insurance accounted for 96% of insurance spending in Saudi Arabia last year, whereas the average spent on life insurance was a measly US$1.70 per person. This breakdown between general and life insurance is particularly dramatic in Saudi Arabia, but it reflects the larger situation in the region, where general insurance massively overshadows the life market. General insurance premiums in the five GCC countries for which 2003 data is available totalled US$2.2 billion; life insurance premiums were only US$416 million. But experts believe that life insurers in the region should remain optimistic, in part because of the usual dynamics of increasing affluence. Swiss Re noted in a recent study that the "demand for insurance to cover the risks of old age and death increases in tandem with rising per-capita income," and the Middle East, particularly the Gulf countries, have witnessed strong economic growth during the past few years: from 1998 to 2002, for example, the UAE saw GDP per capita rise almost 60%; Kuwait, 37%; Oman, about 34%; Bahrain, 26%; and Saudi Arabia, 8%. The local life insurance industries have risen in parallel in some of these markets. In Kuwait, for example, life insurance premiums more than doubled from 1998 to 2002; in the UAE, premiums rose 45% during that same time period; and in Bahrain they went up 28%. However, in Saudi Arabia and Oman, life premiums declined, 4% and 6%, respectively. Large expatriate communities across the region are fuelling the rise in demand for life insurance products. Expatriates are usually not covered by national pension and other social security schemes, so they have to look elsewhere for products that will help them cover the costs of retirement. In addition, the ballooning of local populations means that government pensions will be spread increasingly thin, so even nationals are having to look for private sector life insurance to help supplement state retirement payments. In the UAE, where life premiums totalled US$226 million last year, insurance companies see much room for growth and are designing products to try to capture the market. The big insurers are stepping in to help fill that gap: Zurich International Life, one of the UAE's biggest life insurers, recently launched a product here geared specifically towards high-income expatriates. Some regional players are also making moves in the same direction. In October, Oman Insurance Company, another major local player, launched a new capital-guaranteed savings product in cooperation with Société Générale and said it would also offer it in other markets in the region. But the region's local players need to do more to develop and serve the market for themselves. "Companies in the region tend to be fairly small in absolute size and tend to be using very high levels of reinsurance protection," says S&P's Willis. "That reflects the fact that a lot of the countries have very high-value risks and the markets are not big enough to accept the totality of the risk on their own." By ceding out so much of the risk, local companies are essentially acting as brokers and putting themselves at the mercy of international prices. Having more locally based reinsurers could also solve the problem of finding reinsurance that fits the needs of local markets, such as takaful. "We encourage our companies to retain more of the risk in the region," says BMA’s Shehab, BMA. Insurance is a global industry, he says, and it's unlikely that countries in the Middle East will ever be able to retain all of the risk 'in-country', but regional insurers need to diversify more, and keep more of the risk local. "In insurance you have to spread the risk," he says. The GCC countries are considering the formation of a GCC reinsurance company that would be based in the region and provide reinsurance capacity to local firms. Shehab said the governments are still studying the proposal. A number of countries throughout the region are implementing minimum capital requirements that should mean insurers are able to retain more of the risk on their books. However, these minimum requirements - Saudi Arabia, for example, recently imposed a minimum capital level of SR100 million on its insurers - could also lead to a wave of mergers within the industry, as well as prompting smaller players to withdraw from the business entirely. The Saudi move is seen as positive, however, if local players act too slowly, the region could end up in the hands of the major global insurers, with a pitiful number of small, fragmented locals left fighting over a smaller slice of the cake.||**||

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