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GLOBAL REINSURANCE SEPTEMBER 2012 27

Global market report

The big picture: Spotting risk amid uncertainty

Timeline: Saudi Arabia’s booming market

Horizon: Struggling with low penetration levels

Market map: Land of opportunity for insurers

Inside / out: Overcoming the challenges

MIDDLE EAST

2 5 ° 1 6 ’ 0 0 ” N / 5 5 ° 1 6 ’ 0 0 ” E

FIGURES FOR GCC STATES (UNITED ARAB EMIRATES, BAHRAIN, SAUDI ARABIA,

OMAN, QATAR AND KUWAIT)

GDP (2011 ESTIMATE): $1.386 TRILLION

POPULATION 42 MILLION AREA 2,500,000 SQUARE KMIN ASSOCIATION WITH:

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SEPTEMBER 2012 GLOBAL REINSURANCE28

Global market report: Middle East

THE BIG PICTURE

The Middle East is itself the single biggest threat to its growth. Globally, the past 18 months have been characterised by unprecedented political, social and economic unrest spurred by the 2008 global fi nancial meltdown, but none more so than in the Middle East.

Owing to the importance of the region’s oil and gas reserves, long-lasting peace in the Middle East is critical to a stable global economy, but seemingly impossible to achieve.

Unlike recent riots in Europe, which are unlikely to lead to wholesale political upheaval or revolution, relatively minor political unrest in Syria and Libya sparked full-scale armed combat in 2011.

Hiscox chief underwriter for war, terrorism and political violence David Guest says the constant fl uctuation is proving a diffi cult operating environment. “Over the last 18 months, whenever I have switched on the TV for the 10pm news I have been holding my breath to see what is happening. I know of several

attacks by successfully infi ltrating extremist groups. In addition, the nature of Muslim diaspora means much of the communication between extremists groups tends to be through technology such as mobile devices and the internet, making it easier for international forces to detect.

Though the Middle East has long been a region of confl ict, the ability to underwrite and insure these risks is a relatively new process.

Ernst & Young’s head of insurance for MENA, Justin Balcombe, says that it is only post-11 September that businesses in the region have been able to truly underwrite their risks for the fi rst time.

“This is a plus for the region because they’re bringing discipline and competency on the back of something that was seen as a bit of a problem child. There is now a mechanism for businesses to address those risks. We have even seen companies benefi t from events around the region like the Arab Spring, and have been able to use insurance to remunerate their businesses.”

insurers that suffered damages in the upheaval of the last year.”

Guest adds that once uncommon terms such as “Arab Spring” are becoming common parlance. “We have seen in North Africa and certain parts of the Gulf changes in the way the population wants, or expects, to be governed. That has thrown up a lot of challenges for our clients operating there, including in countries that previously have been thought of as highly stable.

“Egypt is a prime example of this. Two years ago, the government had a stronger control of the more militant areas of the population. Politically they were friendly with Israel and the USA. It was a stable operating environment for our clients. But fast forward to today and you have volatile elections, large proportions of the population feeling disenfranchised and no middle-of-the-road political candidate.”

Identifying the threatsWestern security forces have made some headway since the September 11, 2001 terrorist

Libya

Tunisia

Italy

Living with the risks ● Unrest continues to bring challenges

● Progress on terrorism fi ght aids underwriters

Greece

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Egypt

Sudan

Ethiopia

Eritrea

Red Sea

Saudi Arabia

Yemen

Oman

UAE

Somalia

KEYPolitical risk

Likelihood of political forces negatively affecting business

Low

Medium

Terrorism risk

6

6

Turkey

Syria

Israel

Jordan

IraqIran

Persian Gulf

Afghanistan

Pakistan

Kuwait

Low risk

Medium risk

High risk

Medium-low risk

Medium-high risk

Very high risk

High

Extreme

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TIMELINE


➤

7th century 1977 1979

2003 The insurance sector in Saudi Arabia was unregulated prior to the Control of Cooperative Insurance Companies Law, which came into force on 20 November and is enforced by the Saudi Arabian Monetary Agency.

WHAT HAPPENEDTHE STORY

Flaws hold market back Since Saudi Arabia started to regulate its insurance market a decade ago, business has boomed. But there are doubts over how many fi rms are making money. Lauren Gow reports

Prior to the implementation of the Cooperative Insurance Regulations in

Saudi Arabia in the mid-2000s and the subsequent establishment of licensed insurance companies, insurance-based options for businesses in the region were limited.

Businesses operating in one of the most volatile regions in the world could take out conventional insurance either overseas in markets like Lloyd’s or the USA, or with an unlicensed provider in Saudi Arabia.

These insurance products were largely unenforceable in Saudi Arabia on the basis that they contravened Shari’ah law, so the unlicensed insurer was not subject to any regulation.

Another option for businesses was to take out co-operative insurance with Saudi Arabia’s former state monopoly provider, the National Company for

Cooperative Insurance, now known as Tawuniya.

Since regulations were implemented in 2004, the Saudi market is operating more effectively and effi ciently. However, some market insiders have expressed concern about actual versus perceived market stability.

Ernst & Young head of insurance for MENA, Justin Balcombe, says in Saudi Arabia, unlike the UAE, there are structural weaknesses in the way in which insurance companies operate and the way in which the market allows them to operate.

“Effectively there is a strong regulator but a weak market, and that doesn’t work,” he says. “It is starting to show that, because a large percentage of insurance companies are not making the right sort of money, and therefore out of 30-plus insurance companies, only three or four of them are truly making any profi ts.”

TAKAFULRegion’s insurance market is born The concept of takaful, and by extension, re-takaful, has been practised for more than 1,400 years. The word originates from the Arabic word kafalah, meaning ‘guaranteeing each other’. Modern takaful has developed into three basic models applicable to all areas of the market: mudharaba, wakalah and waqf. Moving forward, the biggest challenges for takaful insurance is overcoming inherent misconceptions, integration into Western insurance and creating an effi cient operating standard.

Pioneering phase

Modern day takaful emerges as

‘community self-help’ – combined

fi nancial assistance for perils.

Fatwa issued in

Saudi Arabia

from Higher

Council

ordering

development

of Islamic

insurance

model.

Takaful launched in Sudan

with the

establish-

ment of

Islamic

Insurance

Co.Taw

➤

STABILISATIONRegulations pave the way for growthRapid development of the insurance industry in Saudi Arabia has spurred growth across the entire fi nancial services industry in the region. The introduction of insurance regulations for the fi rst time in 2004 stabilised the industry and opened the doors for more Western insurers and brokers to move into the region for business.

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➤ ➤

1984 1985 1995 1997 2003 2005 2007 2008 2009 2010 2011

● Market experts have predicted that Saudi Arabia’s GWP will reach $8bn by 2015. This growth has been triggered in part by the introduction of compulsory insurance, particularly in the health sector. A cross-territory approach to regulation across the Middle East will further strengthen the region’s ties to more established western markets.

2004Implementing regulations, in conjunction with the passing of the Cooperative Insurance Companies Law, are published on 23 April. Together the two form the Cooperative Insurance Regulations.

WHAT’S NEXT

2008The introduction of stronger regulations spurs growth as gross written premiums hit record levels – up 27% in 2008, rising to $2.9bn (from $2.3bn in 2007).

2009The rapid development of the sector is refl ected in a string of insurers undertaking IPOs in Saudi Arabia, including ACE Arabia and AXA Cooperative.

Expansion phase Boom phase

Europe spreads its wings

Takaful launched in Malaysia

with Takaful Act.

Conventional insurance products banned by OIC

Islamic Fiqh Academy in Saudi Arabia. Only Islamic

co-operative insurance allowed.

Takaful launched in Qatar.

Dubai launches takaful products

through Dubai Islamic Insurance

& Reinsurance Company.

International Takaful conference

held in London.

Saudi Arabia enacts SAMA

regulations for co-operative

insurance supervision. Bahrain

follows suit.

Britain launches fi rst takaful

product with establishment of

Salaam Insurance.

Swiss Re enters

re-takaful industry.

Munich Re enters

re-takaful market.

Palestine launches

takaful product.

Germany’s Hannover Re

enters re-takaful industry.

GWP up 26% in 2008 to

$2.9bn

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HORIZON

Sector struggles with market penetrationTough regulation and regional harmonisation are vital if the insurance sector is to fulfi l its potential in the Middle East, reports Lauren Gow

Insurers should be contributing a much higher proportion of the Middle

East’s fi nancial and economic development. But slow development of compulsory policies in occupational injury and health, ineffi cient market players, and a fragmented region outside the GCC states mean the region is struggling to gain a consistent foothold.

The insurance sector across the region is struggling with extremely low insurance penetration levels, well below that of developed nations. The average non-life premium of 0.99% of GDP is comparable to East Asia and central and eastern Europe, but is smaller than other emerging markets, such as Latin America.

One area of concern for non-life insurers operating in the region is an inability to create a large enough pool to adequately underwrite motor risk. The small number of players means there is little competitive pressure, and so a lack of impetus to create new products. This in turn affects the attractiveness of the product for a wider market.

Underpinning the penetration issue is regulation and its ability to sustain workable growth. Robust regulation is necessary,

Petrodollars mean market can afford to innovate

While outsiders may consider the Middle East an ‘emerging market’, the view from the inside

is remarkably less certain. Ernst & Young insurance leader Justin Balcombe, who is based in Dubai, says the market’s status differs between the singular and the collective assessment of the region’s countries.

“The bad news is that the market still doesn’t really have emerging-market status, so it is still seen as a frontier market collectively,” he says. “Each location, whether it is the UAE or Saudi, has its own view as to what that perception is. But there are still boxes to be ticked before they can reach that status.”

The big question is whether the Middle East is being held back because of this. According to Balcombe, the countries’ relative lack of fi scal burdens should permit continued growth. “They don’t

EMERGING OR FRONTIER?

and regulatory convergence across the region is vital. While there are signs of improvement the different rates at which regulation is developing are holding the region back as it struggles to make headway in both its own local market and international markets.

As one market insider said: “We want to do business in the EU but don’t have its structure. We need to improve that.”

Average non-life premium

Averagelife premium

MENA 0.97% 0.28%

East Asia

& Pacifi c0.8% 1.6%

New EU:

10 countries1.7% 1.1%

Other Europe

& central Asia0.9% 0.1%

High income

OECD2.3% 4%

Latin

America1.3% 0.7%

South Asia 0.5% 1.2%

PREMIUMS AS % OF GDP BY REGION

DATA: WORLD BANK, EUROPEAN COMMISSION

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have all the legacy constraints that the western markets have,” he says. “Take the level of debt that the UK is sitting on; the recessionary factors. There is a danger that if they don’t get it right, the UK will head backwards.”

“In comparison, the Middle East is heading forward owing to its petrodollars, so it can afford to innovate. It is quite agile in an obscure way. It is reasonably fi nancially stable, though no one is immune to global events, but it benefi ts from the lack of heavy regulations, lack of huge fi nancial exposure, and having natural resources in the region.”

Development may not have reached levels that are expected of a traditional market, but an infl ux of insurance-related businesses operating in the Gulf region has given the market hope. The setting up of offshore jurisdictions, such as the Dubai International Financial Centre (DIFC) and Qatar Financial Centre (QFC), have assisted in rapid growth in the region.

In turn, this has encouraged international players to set up offi ces without requiring a local shareholding. Looser regulations and the ability to develop fl exible insurance products, which fi t between Sharia law and traditional western insurance, may be encouraging international appetites, but local market players are concerned that this international interest means supply is still far outstripping demand.

WE SAY: The continued lack of development in the Middle East’s insurance sector is of concern, but taking longer-term views of regulatory frameworks would assist in the development of the region. Wider introduction of mandatory insurance lines would bolster the industry, while employing harsher capital-based and non-capital based rules would ultimately force the closure or takeover of smaller, unprofi table players.

SPONSOR’S WORD

Insurance regulations in the Middle East: tackling a perceived weaknessThe Qatar Financial Centre Authority’s recently launched GCC

Insurance Barometer found that 60% of respondents believe

the overall state of insurance regulation in the region to be

inadequate. The most frequently cited shortcomings include:

• Solvency regulation, which is considered less

sophisticated than the current European Union Solvency I

regime, which sets capital requirements as a function of

premiums and/or reserve levels.

• A lack of enforcement, transparency and consultation.

• Inadequate regulation of insurers’ investments,

disregarding the fact that market risk is increasingly

important, sometimes even eclipsing conventional

underwriting risk.

The latter is particularly relevant, as the region’s insurers

tend to invest a signifi cant portion of their assets in

equities and other high-risk asset classes. In light of the

global lessons learned from the fi nancial crisis, regional

regulators are therefore beginning to increase scrutiny on

investment portfolios.

Another encouraging trend is the move towards greater

harmonisation of domestic regulations with those of

international fi nancial centres. This will help overcome the

dichotomy between the fi nancial centre regulations, such as

those in the Qatar Financial Centre and Dubai International

Financial Centre, and onshore domestic regimes. Over time,

this trend should promote risk-based capital-type solvency

regulations, possibly even based on market-consistent valued

assets and liabilities.

But a note of caution: the commitment of lawmakers and

regulators to up-to-date regulatory frameworks is certainly a

necessary condition for a successful modernisation of the

region’s regulatory environments.

However, and this could be considered

the suffi cient condition, regulatory

initiatives must be closely aligned with

existing market and corporate realities

that may warrant a more gradual and

considered approach.

Another encouraging trend is the move towards greater harmonisation of domestic

regulations with those of international fi nancial centres

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MARKET MAP


BOOMING POPULATIONThe Middle East is, in terms of population, one of the fastest-growing regions in the world, according to World Bank fi gures. Of the three biggest insurance markets in the region by population growth, Qatar has seen its population double in fi ve years. This is positive for the region, as much of this increase

NON-LIFE LIFE

is made up of expatriates who require life and health products, as well as other personal lines products. Although Middle East life and non-life premium per capita is well behind developed nations, the growth rate for the Middle East is healthier, more than doubling in non-life in a 10-year period.

POPULATION GROWTH

WORLD PREMIUMS

QATAR

SAUDI ARABIA

UNITED ARAB EMIRATES

QATAR0.05%

SAUDI ARABIA0.24%UAE

0.27%

QATARN/A

SAUDI ARABIA0.001%

UAE0.04%

AFRICA 1.07%

AFRICA 1.87%

OCEANIA 2.29%

LATIN AMERICA AND CARIBBEAN

4.03%

OCEANIA1.57%

LATIN AMERICA AND CARIBBEAN

2.16%

NORTH AMERICA

39.8%

NORTH AMERICA

22.13%EUROPE

36% EUROPE 38.33%

ASIA16.81%

ASIA 33.94%

Big three %

2006 2007 2008 2009 2010

0.98 1.18 1.4 1.6 1.75

2006 2007 2008 2009 2010

24.8 25.5 26.17 26.81 27.45

2006 2007 2008 2009 2010

4.66 5.41 6.21 6.94 7.51

Population in millions

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Latest available fi gures, left and above, show that Middle East total premium growth is lagging behind other emerging markets. But in terms of fastest-growing region, the Middle East follows closely behind Asia, which tops the list. Many market insiders believe that one reason for this is that the Middle East should still be classifi ed as a ‘frontier’ market, since it is yet to hit key performance indicators of an emerging market.

TOTAL PREMIUMS

GROWTHRATE

EMERGING MARKET COMPARISON

$128bn 6.9%

LATIN AMERICA

$31bn 11.6%

MIDDLE EAST

$67bn 4.3%

AFRICA

$336bn 18%

ASIA

$88bn 6.4%

EASTERN EUROPE

PREMIUMS WRITTEN

PREMIUM PER CAPITA

INSURANCE PENETRATION

2010

2010

as a % of GDP

Life Non-life Total

QATAR NA $933m $933m

SAUDI ARABIA $340m $4,342m $4,682m

UAE $936m $4,939m $5,875m

Life Non-life

2001 2010 2001 2010

Developed $1,451m $2,069m $930m $1,458m

Middle East $16m $25m $35m $78m

Life Non-life

2001 2010 2001 2010

Developed 5.50% 5.10% 3.50% 3.60%

Middle East 0.10% 0.10% 0.70% 1.00%

KING OF THE FRONTIERS



MARKET MAP


MARKET MAP

120

100

80

60

40

20

0

SHARE

PRICE

BIG MOVERSTraditional markets insurers have made impressive headway in the Middle East in the past decade, with some big names listing on the Saudi stock exchange. In March this year, health insurance provider Bupa’s share price rocketed after the insurer reported its net income for the fourth quarter of 2011. ACE’s share price showed strong and stable growth throughout the past year, only faltering slightly in May. Allianz’s share price remained steady, but AXA’s fl uctuated in the third quarter of 2011.

BUPA 2 July 2011: Receives

approval from Saudi Arabian

Monetary Agency to renew

its activities licence for

three years.

AXA 26 July 2011:

AXA introduces international

health insurance to cover

policyholders who wish to have

access to worldwide healthcare.

AXA 27 May 2012: AXA unveils a one-

hour guaranteed roadside assistance

service for emergency or breakdown

for all subscribers, as well as a new

road safety campaign in the UAE.

AXA 11 June 2012: AXA Gulf

opens second retail insurance

outlet in Saar, Bahrain, aimed

at increasing local interest in

personal insurance products.

ACE 18 July 2011: Net profi t

is announced for the fi rst half

of the year 2011: 634,000

Saudi Arabian Riyal ($170,000),

compared to loss of SAR678,000

for the same period last year.

ACE 18 January 2012: Net loss

announced for the year 2011,

SAR2.84m, compared with a

loss of SAR2.52m for the same

period last year.

ACE 7 June 2012: Vijay Raghaven

is promoted to chief executive of

ACE Arabia Cooperative Insurance

company, and Ian Morrison

becomes chief underwriting offi cer.

ALLIANZ 7 February 2012:

Company reports customer base

in Saudi Arabia has expanded

by more than 141% in the fi rst

half of 2011 compared with the

same period in 2010.

ALLIANZ 21 December 2011: Allianz Saudi Fransi reports

the decision of the president of Allianz France to merge

Allianz France ‘AGF’ International (one of Allianz Saudi

Fransi’s founding shareholders) with Allianz France. All

the assets of Allianz France ‘AGF’ International will be

transferred to Allianz France.

BUPA 21 January 2012: Reports a net income, before zakat and income

taxes, for the fourth quarter in 2011 of SAR28.4m, compared with a

net income, before zakat and income taxes, of SAR26.4m for the fourth

quarter in 2010, representing an 8% increase.

ALLIANZ 19 October 2011:

Net loss of SAR474,000

announced for the nine months

ending 30 September 2011,

compared with SAR5.48m loss

for same period in 2011.

BUPA 26 June 2011: Bupa Arabia holds fi rst board

of directors meeting. It appoints Loay Hisham Mohy

al Deen Nazer as chairman, and Tal Hisham Mohy al

Deen Nazer as chief executive. Also appointed are the

members of the executive committee, audit committee,

nomination and remuneration committee, and

investment committee.

Jun ’11 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun ’12


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INSIDE / OUT

The truth behind the headlines Lauren Gow talks to internal and external experts about the region’s fragmented market, the challenges this poses and how they will be overcome

REGULATION

WHAT NEXT

David Guest War, terrorism and political violence underwriter, Hiscox

OUTSIDE VIEWINSIDE VIEW

Starting with the rest of the landscape [outside the Gulf Cooperation Council (GCC)], there aren’t any regulations to write home about. But when you look at the level of insurance penetration in the rest of the Middle East, we are probably only looking at markets like Morocco and Algeria, where at least there is good penetration and they have an understanding that is equivalent to the FSA. But the insurance market for GCC is very different.

Compared to some of the regulation that we have in more developed parts of the world, where it is never-ending, life is quite simple. Simple is good sometimes. I wouldn’t say at the moment there are any regulatory drawbacks as a Lloyd’s operator. There are different challenges in different areas, but regulation is not one of them.

As far as harmonisation goes, the challenge that the regions have got – which they are addressing – is that if I buy a motor policy in Dubai and I want to drive to Saudi, I need to drive through three countries and, by law, I need to have a policy in each country, which is crazy. You don’t need to do that in the EU, so there already exists a mechanism for this, but it should be discussed more at a communal federal level across the GCC countries. It’s not that they are not doing anything, because they are, but as ever the speed at which they are implementing this is certainly not fast enough, given the exceptionally fast growth of insurance in the region and the fact that the appetite for insurance is only increasing.

There is an operating environment challenge and a policy challenge. The business that we do in the Middle East has gone from somewhere around 6% of our portfolio to around 15%, and that is driven predominantly by a lot of new clients coming in, some price increases and, for some existing clients, we are selling a broader product. What we have seen in the past year is that 90% of our policies sold in Egypt were terrorism only; now 90% are political violence ones. We have seen clients look at what has happened. A lot would have read their wording for the fi rst time, talking with their brokers and buying a broader coverage that can encompass all of the challenges that we have seen in Egypt, Libya and Tunisia.

Doing business there isn’t for the faint-hearted, but the Middle East is in a far better position than some of the other global economies. People judge it by the news coverage, but it isn’t like that at all. The countries are reasonably fi nancially stable, though no one is immune from the global events. They have the benefi t of lack of heavy regulations, lack of huge fi nancial exposure and having natural resources in the region. Each region has its fair share of issues, but it has always been able to transit through that. The next 10 years are very exciting times for them, including integration across the region. That is going to offer huge potential.

What we saw in Egypt last year was a resurgence of 18th or 19th century terms such as insurrection, rebellion and revolution. While these might sound anachronistic, they all have very precise legal defi nitions that exist as exclusions on most policies and within political violence coverages. The scale of what was happening in Egypt and the intent behind it means real challenges for our clients. Those two words ‘insurrection’ and ‘rebellion’ are excluded under all property and terrorism policies. Clients have to be aware that we are in this brave new world now, where populations around the globe are fi ghting to have their lives under their own control. But for clients in those places, the perils that can operate now have mostly been excluded from all the policies they have bought in the past.

Justin BalcombeHead of insurance for MENA, Ernst & Young

CHALLENGES

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