2012 Middle East

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2012 Middle East Powered By Docstoc
					                      Insurance Market study
In assocIatIon wIth

Middle East:
Market of the future

spring 2012            
                                                                                                *References the 2008 Forbes
                                                                                                  Tax Misery & Reform Index

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 Middle East report editor                 Welcome to this special report on the Middle East insurance and reinsurance market
 Helen Yates                   published by reactions in association with the Qatar Financial Centre Authority. The
 Managing editor
 Michael Loney, T: +1 212 224 3346         report aims to provide an in-depth review of this dynamic emerging insurance market, its
                                           current stage of development and future prospects. It contains the results of high-level
 Deputy editor
 David Benyon, T: +44 (0)20 7779 8193      research, a roundtable discussion and a series of articles charting all the current trends
                                           and perceptions surrounding risk and re/insurance in MENA.
 Senior staff writer
 Mark Sands, T: +44 (0)20 7779 8824             The market has been shielded from the worst of the global financial crisis and while
 ADVERTISING SALES                         the Arab Spring has brought disruption to some markets, these setbacks are seen as
 Deputy publisher
 Goran Pandzic, T: +1 212 224 3711
                                           short-term hiccups. The region continues to enjoy rapid GDP growth and hundreds of
                                           billions of dollars worth of investment in infrastructure is being made over the next few
 Business development manager
 Dominic Lutterloch, T: +44 (0)20 7779     years as energy-rich states drive their economies forward.
                                                Insurance penetration is low and the market remains relatively immature, but this is
 Subscription sales executive              changing fast. The introduction of compulsory covers, major construction projects and
 Candice Bartlett,T: +44 (0)20 7779 8285                thriving cities all spell opportunity for the international re/insurance industry as it looks
 Marketing manager
 Gill Chalk, T: +44 (0)20 7779 8212
                                           beyond the mature markets. The challenge, in what remains a highly competitive space,                   is finding and exploiting the right niche.
 Office manager/reprints
 Christine Jell, T: +44 (0)20 7779 8743         Helen	Yates,	Middle	East	Report	editor
 Publisher (Americas)
 David Samuel, Tel: +1 212 224 3466,
 Managing director
 Stewart Brown, T: (44) 20 7779 8184
 Design & production
 Siobhan Brownlow, RSB Design,
 Print Wyndeham Grange, UK
 Divisional director Roger Davies
                                                                         12                                    20                                 26
 Reactions subscription hotline
 London: +44 (0)20 7779 8999;
 New York: +1 212 224 3570
 Annual subscription rates: £850/          Middle east survey                                          Political risk
 E995/US$1,400. Reactions
 (ISSN Nº 002-263) is a full service       4      A snapshot in time                                   20   Unpicking the Arab Spring
 business website and e-news facility      	      The	results	of	an	in-depth	study	to	                 	    The	unprecedented	wave	of	political	
 with supplementary magazines.
                                                  gauge	international	re/insurers’	current	                 unrest	in	the	MENA	region	has	mixed	
 Padraic Fallon (chairman and editor-             perceptions	of	the	Middle	East	market                     implications	for	the	reinsurance	industry
 in-chief), Richard Ensor (managing
 director), The Viscount Rothermere,
 Sir Patrick Sergeant, John Botts,         interview                                                   infrastructure Projects
 Jaime Gonzalez, Martin Morgan,
 David Pritchard, Neil Osborn, Dan         12     Spotlight on Qatar                                   22   Incredible infrastructure
 Cohen, Colin Jones, Simon Brady,
 Diane Alfano, Christopher Fordham,        	      Shashank	Srivastava,	acting	CEO	of	the	              	    The	countries	of	the	GCC	plan	to	invest	
 Jane Wilkinson, Bashar Al-Rehany
                                                  Qatar	Financial	Centre	Authority,	explains	               $968bn	in	major	projects	over	the	next	
 Customer services
                                                  how	Qatar	is	bucking	the	economic	trend                   ten	years
 T: +44 (0)20 7779 8610
 ©Euromoney Institutional Investor
 PLC. London 2012                          reinsurance rates                                           interview
 Although Euromoney Institutional
 Investor PLC has made every               16     Re-evaluating rates                                  24   A regional focus
 effort to ensure the accuracy of          	      With	the	market	turning	internationally	and	         	    Gulf	Re	now	has	three	years	under	its	belt.	
 this publication, neither it nor
 any contributor can accept any                   a	growing	sophistication	in	the	region,	                  Michael	Gertsch,	Gulf	Re	CEO,	talks	about	
 legal responsibility whatsoever for
                                                  there	are	signs	prices	are	becoming	more	                 the	journey	so	far
 consequences that may arise from
 errors or omissions or any opinions              risk	adequate
 or advice given. This publication
 is not a substitute for professional                                                                  Middle east roundtable
 advice on a specific transaction.         risk ManageMent
                                                                                                       26   Market of the future
                                           18     Changing risk culture                                	    Reactions	in	association	with	the	Qatar	
                                           	      Risk	management	awareness	is	growing	                     Financial	Centre	Authority	brought	together	
                                                  across	the	Middle	East,	with	progress	in	                 a	high-level	panel	to	assess	Middle	East	
                                                  numerous	industry	sectors,	but	there	is	a	                growth	potential
                                                  still	a	long	way	to	go                                  Reactions Insurance Market study: Middle east 2012                                                3
Mi dd l e e a st surve y

A snapshot in time
the results of an in-depth study to gauge international re/insurers’
current perceptions of the Middle east market.
Between December 2011 and January 2012 reactions, in                       Summary of key findings:
association with the Qatar Financial Centre Authority, spoke to            l the rapid economic development taking place in many
leading figures in the international insurance and reinsurance               Middle eastern countries continues to drive interest in the
industry. The aim was to gauge their current perception of                   local insurance and reinsurance market.
opportunities in the Middle East and find out more about their             l the global financial crisis and arab spring have had a short-
companies’ strategy for this market and other emerging markets               term impact on growth, but are not thought to be long-term
going forward.                                                               concerns.
    Representing 21 companies, we spoke to chief executives,               l factors hampering market development are an immature
chief underwriting officers, managing directors and other                    primary market defined by a large number of carriers,
senior executives from insurance and reinsurance companies                   intense competition and low premiums.
and re/insurance brokers. The respondents’ companies varied                l regulation and access to talent top the list of criteria when
considerably in their involvement in the Middle East insurance               choosing a financial centre in the region.
market, from having no involvement at all to having one or more
offices in the region.                                                     Rapid economic growth drives the market
    The survey provides an important snapshot of current feelings          At a time when the mature economies of the world are stagnating
about the Middle East market, particularly coming after the events         it is clear that the rapid economic growth in the Middle East is the
of the Arab Spring and the global financial crisis. The companies          most compelling reason for international insurers and reinsurers to
that took part in the survey were:                                         look at the region. With the IMF projecting real GDP growth of 4.2%
                                                                           for the MENA region as a whole for 2012 it is clear this is expected
Alterra                            Lockton International                   to drive the re/insurance market forward.
Clyde & Co.                        Marketform                                   “It’s where the wealth is, particularly in the oil-rich countries,”
Gallagher                          Munich Re                               noted the managing principal of an independent London-based
Gulf Re                            QBE                                     broker. “There’s been a shift in balance in where the wealth is in
Guy Carpenter                      RK Harrison                             the world and quite clearly it’s there in the Middle East.”
Integro                            RSA                                          Thirty-nine percent of respondents said rapid economic growth
IUA                                SCOR                                    made the Middle East most attractive to their business, followed
JLT                                Solidarity General Takaful Co.          by increasing insurance penetration (20.6%) and large government-
Kane                               Swiss Re                                backed megaprojects (16.7%). Of course, all these factors are
Kiln                               UIB                                     closely interlinked. Growth in the economy is driving investment
Lloyd’s of London                                                          in infrastructure, increasing the number of insurable assets and
                                                                           nurturing a growing middle class with insurance needs.

4                                               Reactions Insurance Market Study: Middle East 2012                  
                                                                                                              Middle east su rv ey

 Which of the following factors makes the Middle East more
 attractive to your business?

                                  Increasing insurance penetration – 20.6%
                                  Rapid economic growth – 39.0%
                                  Large government-backed
         Middle East:             megaprojects – 16.7%
        most attractive           Sophisticated financial centres – 2.0%
           factors                Growing middle class – 5.0%
                                  Increase in compulsory covers – 5.0%
                                  Other – 11.7%

    Property and energy classes of business, including
construction and engineering, continue to dominate. However, from
a reinsurance perspective there is growing interest in financial
services lines, aviation and political violence, while on the primary
side, personal lines business is steadily growing.                            “The Middle East is seen as an exciting
    Asked why international insurers and reinsurers would
consider opening offices in the Middle East, respondents were
                                                                               prospect going forward – it’s an area that’s
agreed on the region’s future potential. “We see an insurance                  relatively undeveloped, it’s got very good
penetration in the Middle East of about 0.8% compared against                  growth potential and there are opportunities
1.3% in other emerging markets and 3.6% in other industrialised
                                                                               across the economic sphere, including
countries, so that’s quite significant,” said the MENA director of
a large global reinsurer. “So the Middle East has the potential to             insurance.”
grow over the next couple of years.”

On the ground
                                                                              “GDP in these markets are growing and
Survey participants were also clear about what they could bring to             growing per annum, which is healthy given
the region. “There isn’t necessarily the depth of underwriting exper-          where the rest of the world is at this point.”
tise in the Middle East at the moment,” said the managing director
of a global insurance management firm. “The model has always
been that they have ceded a significant part of risk to international         “The price of oil will remain north of $75 per
reinsurers and now reinsurers have been looking at is getting to               barrel. This means these governments will
understand and getting closer to the risk in the Middle East.
     “The attraction is significant increases in premium volumes
                                                                               have money to spend, which will be good for
from all classes, an increasing awareness of insurance at a                    insurance and reinsurance companies.”
general insurance level and increasing asset size with all the
infrastructure projects,” he continued. “There is also the need for
reinsurers to better understand the risk. Therefore putting people
                                                                              “The very low penetration that exists in the
on the ground is probably the best way of understanding the                    Middle East and fairly rapid change that’s
culture and inherently the risk itself.”                                       taking place there has been a beacon that
 Property and energy classes continue to dominate; other
                                                                               people have been attracted to.”
 classes becoming more important

                                   Property – 17.9%                           “You have a lot more underwriting decisions
                                   Energy – 17.0%                              taking place locally and the brokers are also
                                   Marine – 6.6%                               more present here than they were a couple
                                   Aviation – 4.7%
                                                                               of years ago.”
                                   Construction and engineering – 17.9%
             Market                Casualty – 12.3%
            share of               Medical and health – 7.5%
            business               Financial lines – 5.6%                      Changing distribution models
                                   Life re/insurance – 0.9%                    Business that once flowed straight into London is now increasingly
                                   Personal lines – 3.8%                       likely to be retained within the region, pointed out a handful of
                                                                               respondents. This is because of the growing local market, with
                                   Captive insurance – 2.8%
                                                                               international companies setting up in the main financial centres
                                   Takaful – 0.9%
                                                                               as well as the emergence of start-up reinsurers dedicated to the
                                   Terrorism and political risk – 2.8%
                                                                               MENA region.
                                                                                    “Proximity to clients is the reason why we would open an                                Reactions Insurance Market Study: Middle East 2012                                         5
Mi dd l e e a st surve y

office in the Middle East,” said the managing director of an
international broker. “That’s enhanced by the increased tendency
over the past decade, not just for primary insurance but for some
of the reinsurance, to be placed locally. Sitting in London waiting
for the world to come to you is not the best option these days.”

Driving diversification
While economic and insurance growth is the region’s big pull
factor, there are also push factors encouraging global re/insurers
to further diversify their business geographically. While 38% said
the reinsurance opportunities in emerging markets were driving
current diversification and 29% said it was a desire to be closer to
cedants, 12% pointed to Solvency II and other regulatory and rating
agency pressures.

 Reinsurance opportunities in emerging markets are driving
 geographic diversification

                                      Solvency II and diversification credit      “The Arab Spring is a movement that over
                                       – 12%
                                      Rating agency pressure to build a            time will bring higher democracy, higher
                                      diversified business model – 8%              transparency and in a more favourable
        Factors driving               Shareholder / stock market pressure
        diversification               – 7%                                         environment, economies will start to grow.”
                                      Re/insurance opportunities in emerging
                                      markets – 38%
                                      Desire to be closer to cedants – 29%        “The most turbulence was in Libya, but from
                                      Other* – 6%                                  a commercial point of view there’s more
                          *Energy and energy-related construction projects         opportunity there... not that I’m advocating
                          *Infrastructure investment – mainly in the GCC
                          *Desire to be closer to brokers and broker networks      a wholesale revolution as a way of increasing
After the Arab Spring
The wave of social unrest which spread across MENA over the                       “The Arab Spring is a minor blip currently
past 12 months has had an impact on how insurers and reinsurers                    and the reinsurance market has done what
view the region. However, two-thirds of respondents (67%) said
they were just as confident in the market’s prospects now as they
                                                                                   the reinsurance market does very well,
were before the Arab Spring began, or even more confident.                         which is to be reactive.”
     Most felt the unrest was only a short to medium-term concern,
that the longer-term insurance growth forecasts remain positive.
“Generally it’s made us more cautious in certain countries while
                                                                                  “I would imagine it has created some fear.
they settle down again,” said the director of a Lloyd’s insurer.                  There is increased political risk and one of
“But the Middle East is such a wide range of countries with very                   the things we like to see is stability in the
different strengths, political development and legal frameworks so
we don’t tar them all with the same brush.”
                                                                                   political environment in the country we’re
     Others even suggested there could now be more re/insurance                    operating in.”
opportunity in countries where revolution has resulted in a new
democratic government. “We did a lot of business in places like
                                                                                  “We probably need to focus on those
 How has the Arab Spring affected your confidence in the                           countries that continue to be stable. The
 prospects of the Middle East insurance market going forward?                      UAE, Saudi Arabia, Qatar and Kuwait
                                                                                   continue to be a main focus for us.”
                                       I am just as confident now as I was
                                       before the crisis – 52.4%
           Middle East                 It has increased my confidence in the       Tunisia, Libya and Egypt before the Arab Spring,” said the MENA
             market                    region – 14.3%                              region chairman of a London-based broking firm. “This is a very
           confidence                  I am less confident the market will         good time to be talking because we’ve just gone through a big
                                       achieve its pre-Arab Spring premium         renewal season and we have more business coming from those
                                       growth targets – 33.3%
                                                                                   three countries than we have ever had.”
                                                                                       While the Arab Spring was only felt in a handful of countries
                                                                                   – most notably Tunisia, Egypt, Libya, Syria, Yemen – the rapid

6                                                       Reactions Insurance Market Study: Middle East 2012               
                                                                                                                  Middle east su rv ey

contagion did take people by surprise and made them more wary
of future unrest. From the perspective of the region’s leading
insurance centres, political upheaval in Bahrain had clearly affected
respondents’ feelings towards this financial services centre.
    Bahrain – which has successfully carved out a niche as
a centre for Islamic banking and insurance – has reduced in
popularity as a result of the increased political risk associated with
the country. “Bahrain has had a setback over the last 12 months
with the unrest there, which has made travelling in and out of
the country more difficult for some people and has made some
companies think again,” said the managing director of a global
reinsurance broker.

Recovering global economy
The vast majority of respondents (85.5%) said they have
maintained the same level of interest or even increased their
interest in the Middle East insurance market since the global
economic downturn. Only five percent said it had dampened their                “We continue to look at the Middle East
enthusiasm for emerging markets like the Middle East.
     While most of the MENA region – including the oil-rich
                                                                                from a long-term perspective and what we
countries of the GCC – was shielded from the worst of the                       see following the financial crisis is a short
financial crisis, there was an inevitable impact on growth here                 interruption.”
as in other developing economies. Many of the region’s large
infrastructures were beset by delays and in Dubai in particular,
construction slowed dramatically. The city’s $10bn bail-out by Abu             “In the short term it’s probably more difficult
Dhabi in 2009 seems to have permanently shifted the balance of                  to achieve targets but it’s just as interesting
power to its sister city.
     “The financial crisis put a damper on the growth of the
                                                                                as before because the prospects for the
economy,” said the CEO of a Dubai-based reinsurer. “So that has                 future look so strong.”
an impact and it translates through in a secondary effect in the
underlying portfolios. You have less goods being imported and
exported so marine premiums are down, you have less people
                                                                               “Logically the Middle East seems the more
in the region so motor premiums are down and you have less                      attractive of other more mature economies.”
construction so that translates through in a lower income.”
     Growth forecasts are today more muted than they were
ahead of the crisis, however there are signs that investment and               “They did suffer – Dubai in particular in 2008
construction activity is picking up again. “It’s clearly a crisis that          and 2009 – and one did just take a step back
has impacted different parts of the Middle East in different ways,”             and see where it was going to lead.”
said one broker. “There are the poorer parts where it hasn’t
affected it at all, then places like Dubai where it had a tremendous
impact and that is still being felt. But for places like Qatar and Abu          Immature market
Dhabi it isn’t affecting them at all because they’re cash-rich.”                The majority of respondents felt the local primary insurance market
     For some, stagnating Western economies have driven even                    still had a long way to go to achieve a level of maturity that would
more interest in the rapidly developing economies of the Middle                 put it on a par with more developed insurance markets. While the
East. “Many of these countries are having double digit growth in                introduction of compulsory covers has made a difference, con-
a world today where even low single digit growth is a fairly good               sumer awareness of insurance products remains low. However, it
achievement,” noted the chief underwriting officer for MENA of a                is a large region many point out with centres of excellence.
major European reinsurer.                                                             “The perception is that it’s reasonably mature in the Gulf States
                                                                                and emerging in most other countries – most notably in Saudi Arabia
 How has the financial crisis affected your perception of                       where it was only a decade ago that insurance stopped being
 opportunities in the Middle East and other emerging markets?                   seen as an immoral activity, literally,” says the head of business
                                                                                development at one international broker. “So by definition that’s going
                                   I have an increased interest in emerging     to be a fairly immature market. There is relative maturity in the more
                                   markets like the Middle East – 28.6%         developed financial centres and some of the older economies are
                                   II have a decreased interest in emerging     mature in one regard but not by comparison to ‘Western’ standards.”
          Middle East              markets like the Middle East – 4.8%                The primary market remains highly competitive, with a
            market                 I have maintained the same level of          disproportionate number of carriers in each country. Moreover,
          confidence               interest – 57.1%
                                                                                insurers typically cede the majority of the risk they take on to the
                                   I have maintained the same level of
                                   interest but my company’s appetite for       reinsurance market, surviving off the commission they receive for
                                   expansion has reduced – 9.5%                 this business, rather than by charging risk-appropriate rates for
                                                                                the business.
                                                                                      “There is still a low level of maturity even compared with other                                 Reactions Insurance Market Study: Middle East 2012                                              7
Mi dd l e e a st surve y

                                                                                Room for improvement
                                                                                We asked respondents for their main concerns about the market,
                                                                                the kind of issues that would make them hesitate before opening
                                                                                an office or subsidiary in the region. Forty-one percent said
                                                                                underlying market conditions would make them pause before
                                                                                making further commitment to the region.
                                                                                     “The concern is you have a continuing deterioration in the
                                                                                market and a market that is relatively small but strongly saturated,”
                                                                                said the CEO of a Gulf-based reinsurer. “That means that more
                                                                                and more people are trying to get a slice of the cake that is not
                                                                                growing as strongly as some might believe.”
                                                                                     Following these concerns surrounding technical profitability,
                                                                                the next three biggest worries were: access to talent, the current
                                                                                political uncertainty and whether a company would see its return
                                                                                on investment. Different markets come with different concerns,
                                                                                pointed out one survey participant.
                                                                                     In Dubai the issue is cost – the high cost of office space
                                                                                and housing etc – although this seems to have become more
“One is always impressed with the technical                                     affordable since the economic downturn. In Saudi Arabia the
                                                                                access to local qualified staff is an issue, while Qatar “punches
 quality of the people there... the base of                                     above its weight,” he noted.
 local talent is better than perhaps people                                          Although the pool of local re/insurance talent is growing
 would appreciate.”                                                             steadily, finding the right people is a challenge. Moreover, the
                                                                                ability to attract professionals from mature markets such as
                                                                                London is also more difficult than in the past, reflected the MENA
“Most of the markets are not consolidated                                       chairman of a major broker.
 and there are many, many companies, so the                                          “The single biggest issue one has is people. It’s getting people
                                                                                who understand how the main group of the company works – and
 total volume of the market is spread among                                     people are very reluctant to go overseas, particularly to the Middle
 a large number of players.”                                                    East where old views of safety have become more of a focus
                                                                                since the Arab Spring. I think the rewards in London have become
                                                                                so great – particularly on the broking side – that the market for
“There are markets like Turkey that are more                                    people has become very tight.”
 mature and closer to what you can see in
 mature countries.”
                                                                                 If you have any concerns about setting up an office/subsidiary
                                                                                 in the Middle East at present what are they?
“Now the local insurers are beginning to
 retain more risk and build themselves up,
 both capital and expertise-wise. That is
                                                                                                                    Return on investment – 17.6%
 particularly the case within the UAE.”                                                         Main                Market conditions – 40.9%
                                                                                              ME market             People and talent – 17.6%
                                                                                              concerns              Political uncertainty – 23.9%
“It’s got a long way to go – pricing is more
 ad hoc than risk-based and the regulators
 are relatively new and act in rather an ad
 hoc manner compared to mature market
 regulators.”                                                                   Joint venture attractions
                                                                                Given these uncertainties, a high number of survey participants
                                                                                (58%) said they would consider entering the region through
emerging markets,” says the head of MENA at a major European                    a joint venture. The attractions of a joint venture is the ability
reinsurance company. “The challenge we face in the Middle East in               to partner with a company that already has access to the
general is the retention level of local insurers is very low. They hardly       market, understands the local business culture and has a
retain any risk and cede the vast majority to the reinsurance world.”           recognised brand.
     Despite improving regulation, consolidation in many of these                    “You have to have a strong local partner,” said one broker.
markets is not happening fast enough. Reinsurers say they                       “Going in as an Anglo Saxon and trying to do business without the
are concerned about the quality of the underlying risk and the                  introductions and local partnerships would be massively flawed.”
rating environment. Yet paradoxically, the influx of investors and                   Respondents were also clear about how they could add value
new re/insurance capacity into newly-opened markets has only                    to such a partnership. “If you’re going somewhere with as much
exacerbated competition and put downward pressure on rates.                     variety as the Middle East I think it’s really important that you have

8                                                    Reactions Insurance Market Study: Middle East 2012                  
                                                                                                             Middle east su rv ey

 Is a joint venture partnership an attractive option for your

                Is joint              Yes – 58%
                                      No – 42%

on your side somebody with a vested interest in helping you work
your way through the political morass, which indeed it can be.
That’s also very important to proving you’re committed to the area.
It’s not just about building a business for yourself, but a business        “We would consider a joint venture if it
that can grow and employ people in the indigenous area.”
                                                                             made sense. It does reduce the amount of
Sophisticated financial centres                                              investment in a territory and you get easy
The emergence of financial centres in the Middle East – in                   access to local expertise.”
particular the Dubai International Financial Centre (DIFC), Qatar
Financial Centre (QFC) and Bahrain – has significantly reduced the
barriers to entry. These centres boast a business and regulatory            “If you need to learn the business culture
environment that is conducive to the successful set-up and                   and integrate while bringing something
operation of international re/insurance businesses.
     There is still a lot of debate surrounding which financial centre
                                                                             different into the market – a joint venture is
is leading the charge and will ultimately become a hub for the               a good option.”
region. Survey respondents recognised the value of each including
the long history of Bahrain as a financial services centre and its
ability to access Saudi business, the DIFC’s critical mass in terms
                                                                            “We look for strong local partners in the
of the number of insurers, reinsurers and brokers licensed there             emerging insurance economies and spend
and lastly, the QFC’s appetite and access to the Qatari economy.             significant time finding out who has the best
      “If Qatar hadn’t been investing in the financial sector and
Bahrain hadn’t seen some disruption it would be a more level-
                                                                             reputation, entering into relationships and
playing field,” said the MD of a major reinsurance broker. “For a lot       joint ventures in those areas.”
of companies Dubai is seen as the obvious choice at the moment,
but that will continue to change.”
     The current lack of an obvious hub is proving an issue for
                                                                            “There is the ability to 100% own the
some, with suggestions that even Lloyd’s is sitting back and                 company within the trade centres
waiting to see how things play out before committing to any one             (QFC Authority and DIFC) therefore most
platform. “It’s the punt that is a concern,” said one London-based
broker. “Which financial centre is going to become the Middle
                                                                             companies would prefer to have ownership
East hub? The way around that is by opening up in two or three               as oppose to JV. In Saudi you have to have
centres, but that’s not the route we would take.”                            a joint venture. That can be incredibly
     A number of respondents compared the situation to South
                                                                             difficult and would be a barrier to entry
East Asia, where Singapore has won the race against Hong Kong
to become the region’s main reinsurance centre. “One could say               in Saudi.”
you’ve got a choice with having a few, but we’ve seen this with
Hong Kong and Singapore over the years,” said the director of
a Lloyd’s insurer. “Singapore has become the stronger regional
centre over Hong Kong in recent years and I think it makes it a              to set up in. The regulatory and legal system was a key concern
more difficult choice. Once you’ve made that choice it’s very hard           for 44%.
to change it.”                                                                   “The DFSA is very much based on the FSA so if you are an
                                                                             FSA-regulated company, which anyone based in Britain is, then the
Choosing the right centre                                                    fact that you’ve got a regulatory authority that is almost a mirror
While the choice of more than one financial centre is clearly                image of the FSA really helps,” said the MENA chairman of a
a welcome one, the need to do due diligence on two or three                  London-based broker. “Speed of set-up is important because our
different options does prolong the process. We asked respondents             cycles get tighter and tighter.”
what their key criteria were when sizing up which financial centre               Once again, the issue of finding the right people to run an                              Reactions Insurance Market Study: Middle East 2012                                          9
Mi dd l e e a st surve y

                                                                                Regulation and talent top the list of criteria when choosing a
                                                                                financial centre

                                                                                                                 Favourable regulatory framework – 27.1%
                                                                                                                 Western legal system – 17.1%
                                                                                                                 High speed and low cost of set-up – 4.6%
                                                                                                                 Service providers on the ground – 1.7%
                                                                                           Financial             Access to local talent – 18.1%
                                                                                         centre choice           Access to high-quality cedants – 9.1%
                                                                                            criteria             Other insurers and reinsurers already
                                                                                                                 operating successfully there – 12.7%
                                                                                                                 Commitment to creating a successful
                                                                                                                 insurance market and a hub for the
                                                                                                                 market – 7.1%
                                                                                                                 Ability to enjoy an expat lifestyle – 2.5%

“When we considered setting up we were                                         schools here so it’s not just having a wonderful car and being at
                                                                               the beach, it’s about making sure your family is happy when you
 approached by all of the financial centres                                    bring someone over here.”
 and they all made quite compelling offers.”
                                                                               Lloyd’s in the Middle East?
                                                                               With a lot of talk in recent years about the possibility of a Lloyd’s
“Bahrain was perceived as the Switzerland in                                   platform in the Middle East, we asked participants if this would be
 the Middle East, whereas Dubai was the new                                    a welcome development. Fifty-nine percent said yes it would, citing
 money and distrusted by Saudi.”                                               the favourable impact that would bring in terms of underwriting
                                                                               expertise and reputation.
                                                                                    “The arrival of more credible players will help in pushing better
“Every financial centre has a different                                        practices and market maturity but this will not change underlying
 proposition... there is no reason why                                         factors, which need to be favourable as well, such as profitability,
                                                                               volume and accessibility,” said the general manager of the Dubai-
 companies should not consider each                                            based branch of a Lloyd’s insurer.
 individually and on its own merits.”                                               Some cited the Lloyd’s Asia platform in Singapore, which has
                                                                               seen a great deal of success. “Lloyd’s is not the entire insurance
                                                                               or reinsurance world but it’s certainly going to make a difference
“I don’t think it matters whether there’s one                                  where it plants its flag, as it is in Singapore,” added the MD of a
 or five or six centres as long as a product                                   Lloyd’s broker. “It’s not all down to Lloyd’s but I find it interesting
 can be delivered to the consumer in an                                        the speed at which Singapore consolidated as a regional
                                                                               reinsurance hub by huge coincidence when Lloyd’s Asia really
 efficient way and there’s sensible levels of                                  got going.”
 regulation.”                                                                       Others questioned whether there was currently enough
                                                                               business remaining in the market to justify a Lloyd’s presence.
                                                                               Even in Asia, some respondents question whether some of
“There’s always arbitrage across different                                     the business being written in Singapore has come at London’s
 territories. At the moment people                                             expense, with the same risks that once flowed to London
 considering would look at Qatar with the                                      being underwritten at lower rates. Of course, others argue
                                                                               that a large proportion of this business would never get seen
 appetite and Dubai with the experience.”                                      in London.
                                                                                    With fewer and larger syndicates today than in the past, many
                                                                               Lloyd’s businesses have their own capability to set up in other
                                                                               markets and indeed, a handful are already present on the ground
office or subsidiary in the Middle East was underlined. After                  in the Middle East. “I’m not sure the Lloyd’s central functions
regulation, access to talent was the most important criteria in                are as important as they once were,” says the MENA chairman
choosing a financial centre. While the “ability to enjoy an expat              of a major broker. “And as a Name I object to that element of
lifestyle” did not score highly, a number of respondents draw                  the cost that goes there because I know they don’t really add
attention to this softer factor, while not actually including it in their      any value.”
top list of criteria.                                                               Beyond a Lloyd’s platform, a couple of respondents said
     “If you want to bring people in from the US or Europe it’s much           the existence of insurance and reinsurance brokers was more
easier to bring people into Dubai than to Bahrain, because they                important for the market’s ongoing development. One credited
can continue to more or less live the life they had before,” said              the rapid rise of the Singapore reinsurance market with critical
the CEO of a Dubai-based reinsurer. “You have all the international            investment there by all the major brokers.

10                                                  Reactions Insurance Market Study: Middle East 2012                     
positive change
i n terv i e w

Spotlight on Qatar
with a real GdP growth of 18.7%, Qatar is bucking the trend as
elsewhere in the world, mature economies stagnate and growth slows
down. with infrastructure and energy projects worth hundreds of billions
of dollars in the pipeline and impressive growth stats for the rest of the
Gulf region, financial institutions are finding the country and its financial
centre a compelling proposition. shashank srivastava, acting CeO of the
Qatar Financial Centre authority, explains more.

It’s clearly an exciting time for Qatar. Tell me how this                  is a source of capital for investment and infrastructure spending,
translates into re/insurance opportunities in the market?                  which in turn drives the need for financial services in the region.
GDP growth remains the primary growth driver in Qatar and the                  Similarly Qatar boasts one of the world’s most dynamic and
region for financial services including insurance and reinsurance          fastest growing economies. The latest IMF World Economic
and in this respect, Qatar and the GCC region offer superior               Outlook Report published in September 2011 is projecting real
economic fundamentals driven by their exceptional hydrocarbon              GDP of 18.7% for 2011 and 6% for 2012. As with elsewhere in the
wealth. The economy of the GCC – Bahrain, Kuwait, Oman, Qatar,             region, hydrocarbons are the main propellant of Qatar’s economic
Saudi Arabia and the United Arab Emirates – has increased four-            expansion. The country has the world’s third largest reserves
fold since 1980 to about $1trn, placing it among the world’s top 20        of natural gas with an estimated $16.7trn in monetisable oil and
economies. The region has 39% of the world’s proven oil reserves           gas reserves.
and 23% of proven gas reserves and enjoyed a positive balance                  A consequence of the fast economic growth rate in Qatar
of payments of $173bn on exports of $473bn in 2010. This surplus           and the region has been enormous capital spending. The Middle

12                                              Reactions Insurance Market Study: Middle East 2012               
                                                                                                                              interv iew

East Economic Digest estimates that the value of GCC current
and planned capital projects is in excess of $1.6trn between 2010
and 2013. In Qatar, sustainable infrastructure projects worth some
$200bn are due to be completed in the next ten years as part of
Qatar’s National Vision 2030 development plan – $80bn worth are
already underway and more than $100bn worth are expected to be
started in the next three years.
     The FIFA World Cup 2022 will also give rise to considerable
additional investment. About $3bn will be committed to building
nine new stadiums and renovating another three, while the event
will act as a catalyst to accelerate many of the $200bn of projects
that will be carried out to realise the Qatar National Vision 2030
development plan.
     These huge public and private infrastructure and industrial
investment programmes are leading to a rapid growth in insurable
corporate assets and driving the need for insurance and
reinsurance solutions for these capital projects. As a result, the
QFC Authority believes the insurance sector across the Middle
East is set for significant growth in the next few years.

How is the local insurance market developing and are we
seeing signs of greater maturity there? What will ultimately
drive that?
Between 2005 and 2009 the insurance market in Qatar grew by
an annual compound rate of 25%, the fastest growth rate in the
world – while the rate in the GCC was 20%. A recent BMI report
forecast that insurance premiums in Qatar will treble between 2010
and 2015. However, insurance penetration rates (premiums as a %
of GDP) remain low at 0.9% in 2010, up from 0.71% in 2000. This
is well below the world average of about 7.5%. Similarly, insurance
density (premiums in cash per head of population) in Qatar is             “A key element of the QFC Authority’s focus
a little above the world average of $600 but well below mature
                                                                           is to establish Qatar as a major regional hub
economy levels. The UK for example is around $9,000. It is clear,
therefore, that the scope for insurance and reinsurance in Qatar is        for reinsurance.”
considerable.                                                              Shashank Srivastava, acting CEO, Qatar Financial Centre
     Demand for insurance services in Qatar is being driven                Authority
by factors such as the favourable macroeconomic conditions,
growing consumer wealth and sophistication and, in particular,
Qatar’s massive infrastructure growth. Additionally, businesses            Authority (QFCRA) provide all participants, domestic and
are increasingly recognising the merits of Qatar’s stability, world-       international, with a springboard into the region, the Middle East,
class regulatory regime, onshore legal environment and attractive          Africa and the Indian subcontinent. In particular, the QFC offers a
tax environment. A key element of the QFC Authority’s focus is to          legal and regulatory environment modelled on best global practice.
establish Qatar as a major regional hub for reinsurance.                       Since its inception, the QFC Authority has been refining the
     At present, GCC insurance markets rely heavily on international       legal and regulatory environment and developing the infrastructure
reinsurance. The amount of ceded premiums is a very large                  needed to realise the investment potential of Qatar and the wider
percentage of premiums, while Qatar has the highest cession rate           region. Whilst continuing to welcome all types of financial services
in the GCC at 57%. Most of this business goes to international             firms, in 2010 the QFC Authority further refined its strategy to focus
reinsurers. However, the establishment of Q-Re, Qatar’s first              on creating a uniquely sustainable platform for regional growth in
reinsurance company, is beginning to address that and the QFC              reinsurance, captive insurance and asset management.
Authority is keen to encourage more reinsurers to set up within the            The QFC Authority’s legal structure is supported by a robust
Qatar Financial Centre (QFC).                                              and internationally-recognised legislative framework, including
                                                                           the Civil and Commercial Court and the Regulatory Tribunal.
The QFC has made a big push to attract international                       In addition, foreigners may fully own companies in Qatar and
insurance businesses. Tell me a bit about the work you’ve                  profits can be repatriated. Over the past two years the regulatory
been doing.                                                                environment at the QFC Authority has further evolved to include a
Without a doubt, taking advantage of the opportunities Qatar and           new tax regime and new rules for captives.
the region present in insurance, including reinsurance and captive
insurance, requires being on the ground. The QFC was established           What are some of the successes you have had to date?
in 2005 with a mandate to build a world-class financial services           The rising number of QFC-licensed companies is compelling
marketplace in line with the government’s 2030 National Vision.            evidence that financial services providers around the world see
The QFC’s commercial and strategic arm, the Qatar Financial                Qatar as a springboard to regional opportunities. These include
Centre Authority (QFC Authority), together with QFC Regulatory             some of the world’s leading (re)insurance firms such as AIG/Alico,                            Reactions Insurance Market Study: Middle East 2012                                           13
i n terv i e w

                                                                           Qatar as a financial centre and how globally, understanding of its
                                                                           attractions is growing.
                                                                               The QFC won international recognition in 2011 with the
                                                                           award of Best Financial Centre in the Middle East from Global
                                                                           Investor, a leading financial publication, while in the Z/Yen Global
                                                                           Financial Centre Index published in September 2011, QFC ranked
                                                                           30th in world and was the highest-ranked financial centre in the
                                                                           Middle East.
                                                                               In addition, Standard & Poor’s has given Qatar a stable
                                                                           sovereign rating of AA/A-1+ and Moody’s has given the country a
                                                                           stable sovereign rating of AA2. The most recent World Economic
                                                                           Forum Global Competitiveness Report ranked Qatar as the world’s
                                                                           14th most business-friendly country in 2011-12, up three places
                                                                           from the previous year and the highest ranking in the Middle East
                                                                           and North Africa (MENA) region. All in all, Qatar is a powerful

 Qatar: A compelling proposition                                           proposition to which an increasing number of financial firms from
                                                                           around the world are paying close attention.
 l   The pipeline of landmark Qatari projects includes the New
     Doha International Airport, a new Doha Port, expansion of             How do you see the Middle East captive market developing
     the Education City, Msheireb (regeneration of downtown                and what will be the key drivers for growth?
     Doha), the Qatar Foundation Aerospace City, Doha Metro as             Today the captive insurance industry is a multinational business,
     well as gas developments in Ras Laffan.                               worth tens of billions of dollars with more than 5,600 captive
 l   Qatar alone plans to spend a massive $150bn on infrastruc-            insurance firms globally. More than 65% of all Fortune 500
     ture development over the next five years, according to the           companies have captive subsidiaries while, in Europe, according to
     Minister of Economy and Finance, HE Yousef Hussein Kamal.             Marsh, over 80% of FTSE 100 constituent companies use captives.
 l   Reinsurance is a key plank of the QFC Authority’s three               Recent industry estimates show the captive insurance market
     hub strategy, introduced in 2010 and focused on creating a            globally is worth more than $30bn in annual premiums and has
     uniquely sustainable platform for regional growth in reinsur-         more than $130bn in assets.
     ance, captive insurance and asset management.                             Despite this significant growth in the developed world, the
 l   Two-thirds of interviewees expect that growth in reinsurance          captive insurance concept has only experienced limited take up in
     will outpace the rate of expansion of regional GDP, already           the Middle East, with only a handful of firms establishing their own
     one of the fastest growing in the world, according to the             captives over the last decade. Lack of awareness of the captive
     last GCC Reinsurance Barometer (sponsored by the QFC                  concept is arguably the biggest single impediment to captive
     Authority and published on September 12 2011).                        growth. It is the QFC Authority’s belief that as the GCC continues
 l   Firms in the QFC benefit from one of the most business-               to show strong economic growth, there will be a growing
     friendly tax environments, a legal system based on English            momentum for the creation of captives.
     common law, efficient administration and a robust regula-                 Several factors are encouraging companies in the region
     tory regime.                                                          to consider establishing captive insurance companies as an
 l   Qatar now has one of the friendliest tax regimes in the               alternative way of transferring risk: infrastructure spending is
     world. This low rate of tax is attractive for local firms with        increasing in the region; previously state-owned assets are
     international ambitions and multinational firms thinking of           being privatised; transparency and governance requirements are
     establishing a presence in the region.                                growing and company managers and directors are becoming more
 l   The Gulf region is increasingly close to developing into a            sophisticated in their approach to risk management.
     captive insurance centre capable of competing with markets
     elsewhere in the world, according to a report published by            One of the bigger headlines to come out of Qatar surrounds
     MEED Insight in association with the QFC Authority.                   the development of the electronic trading platform Qatarlyst.
 l   Foreign captive insurers are now allowed to redomicile to             Tell me a bit about this.
     the QFC environment if appropriate standards and require-             Qatarlyst was launched in 2009 and is a trading service for the
     ments are successfully met.                                           global insurance and reinsurance industry. It was established
 l   Qatar’s banking sector remains profitable, well-capitalised           to support Qatar’s commitment to become the region’s leading
     and liquid especially because Qatar has outpaced all the              insurance and reinsurance hub. In November 2010 Qatar Insurance
     other GCC countries in terms of banking assets’ growth of             Services LLC, the owner of Qatarlyst SPC, acquired RI3K, the
     23% between 2007 and 2011.                                            London-based company. This was a transformational deal for
                                                                           Qatarlyst, expanding its international reach and enhancing its
Axa, Allianz, Mitsui Sumitomo, Zurich FS and Q-Re domestically,            service offering to London and beyond.
while the QFC has already licensed one captive manager, Kane                   Qatarlyst provides buyers, brokers and carriers with a complete
LLC, and is working with several other companies which are                 set of screens, processes and workflow to support quotation,
exploring the opportunities.                                               signing and endorsements for all types and classes of commercial
    A number of significant Memoranda of Understanding (MOUs)              insurance and facultative and treaty reinsurance business.
were signed by the QFC Authority and QFCRA in 2011 with                    Qatarlyst is web-based so it can accessed via a web browser from
overseas counterparts in China, India, Japan, Turkey and the UK.           anywhere in the world, making it both cost-effective and ideal for
This is all evidence of the growing international recognition of           multi-national transactions.

14                                              Reactions Insurance Market Study: Middle East 2012                
                                                                                                                               interv iew

Inevitably, when people look at where to locate an office in
the GCC they will look at Dubai and Bahrain as well as Qatar                  Recent regulatory developments
and perhaps some of the other centres. Is the market big
enough to justify all these centres?                                          New tax regime
Yes the market is big enough. All the expectations are that the               The new tax regime has the following key features:
demand for financial services and products is likely to strengthen            l 10% corporation tax on locally sourced profits
across the GCC and MENA in the mid to long term as the result of              l Self-assessment regime and advance transaction ruling
strong economic growth and huge infrastructure spending. From                     scheme
another perspective, unlike some other financial centres in the               l Tax incentives for the reinsurance, captive insurance and
region, the QFC Authority is focused on three core hubs, creating                 asset management industries
platforms for reinsurance, captive insurance and asset management.            l Zero personal income tax
                                                                              l QFC is included in Qatar tax treaties negotiated with other
Qatar seems to have shrugged off the financial crisis. Has it                     countries
affected the wider region?                                                    l No restrictions on dealing in any currency.
As we have seen Qatar and the GCC offer very strong economic                  Under the regime, which took effect from January 1 2011, all
growth fundamentals and the region’s economies are proving                    QFC registered companies are subject to 10% corporation tax
extremely resilient to volatile global markets and the debt crisis.           to be charged on locally-sourced profits. This compares very
Although it is likely that the growth rate will moderate in the next          favourably with many other financial centres.
few years, Qatar’s performance will almost certainly continue to be               In addition, QFC-registered firms can benefit from the
strong by international standards.                                            extensive network of double taxation treaties which exist
    Qatar National Bank, a leading commercial banking group,                  between Qatar and more than 35 other countries including
has forecast that the Qatari economy will grow by another 10% in              France, India, Malaysia, Russia, Singapore, Switzerland and the
2012 to reach $197bn. Recent figures also show that credit growth             UK. They can also benefit from inclusion in any future taxation
in Qatar has far outpaced its other GCC peers with total loans                treaties to be negotiated by the Government of Qatar. In its
growing by 18% year-on-year to August 2011 and, unlike a year                 2010 review, the Organisation for Economic Cooperation and
ago, loan growth is no longer driven solely by the public sector as           Development (OECD) found that Qatar fully met OECD standards
corporate and consumer loan growth has picked up too.                         on transparency and exchange of information for tax purposes.
    At the Qatar Projects 2022 Conference held in Doha in February
delegates heard how the Eurozone financial crisis will only have              New rules for captives
a limited impact on Qatar, mainly because of the country’s large              Following extensive consultation with global captive insurance
budget surplus. Any decrease in funding from European banks as                managers, a new legal framework was introduced in July 2011.
a result of the crisis will have only a limited impact because the            It comprises the Captive Insurance Business Rules 2011 (CAPI)
majority of projects are funded from the government’s budget.                 and Insurance Mediation Business Rules 2011 (IMEB), applying to
                                                                              captive insurers, captive managers and insurance intermediaries.
How about the Arab Spring? Some of Qatar’s neighbours have                    In particular a new “class 4” captive was introduced to allow
seen political unrest... how will this play out?                              innovative or unique structures to be developed which do not
Qatar and the GCC continue to be largely unaffected by the regional           meet the strict definitions of captive classes 1 to 3. The minimum
political unrest and uncertainty elsewhere in the MENA region. Qatar          capital requirements are now focused on a risk-based model,
continues to benefit from a stable political situation while offering         letters of credit (LOCs) are permitted as eligible capital and
one of the world’s most dynamic and fast growing economies.                   broader categories of captive insurers are allowed to establish
    The Institute of International Finance found in its October               protected cell companies (PCCs).
2011 report that political reform in the Middle East has produced
“divergent outcomes” between oil-exporting and oil-importing
countries. Bank of America Merrill Lynch estimated in an October            of available capacity was set to improve as terms and conditions
2011 report that the GCC had pledged $157bn (13.4% of 2011 GDP)             tightened, while a small minority of interviewees even expected
in additional spending in response to the Arab unrest, of which             that this improvement, all other things being equal, could be strong
$62bn (5.3% of 2011 GDP) was to have taken place in 2011, with              enough to result in an increase in available capacity.
expenditure pledges expected to have added 1-2 percentage
points to real GDP growth in 2011.                                          To what does the QFC owe its success?
    The possible effects of the Arab Spring on the reinsurance              Businesses are increasingly recognising the merits of Qatar’s
industry were assessed in the last GCC Reinsurance Barometer                stability coupled with the world class regulatory regime, onshore
and were found to be limited. Fifty-eight percent of interviewees           legal environment and attractive tax environment offered by the
expected that the amount of reinsurance capacity available in the           QFC. This has already attracted many leading international and
GCC markets would not be affected. The established players were             local firms to obtain QFC licenses.
widely expected to remain committed to the region, attracted by                 As we have seen, across the GCC region there are huge
the growth potential and diversification benefit on offer, although         opportunities for local, regional and global insurance, reinsurance
some newcomers may take a more cautious stance given the                    and captive insurance firms in the years to come driven by the
perception of increased political risk.                                     region’s vast hydrocarbon wealth, rapid economic growth and the
    A specific effect of the heightened awareness of political risk         sheer scale of infrastructure spending. The QFC is ideally located
was observed on reinsurance terms and conditions where 88%                  to provide all participants, domestic and international, with a direct
of interviewees expected terms and conditions to tighten, up from           springboard into this region, as well as the Middle East, Africa and
18% six months earlier. The broad consensus was that the quality            the Indian subcontinent.                             Reactions Insurance Market Study: Middle East 2012                                           15
rei n s u r a nC e rate s

Re-evaluating rates
with intense competition and plenty of capacity, insurance and
reinsurance prices have remained very soft in the Middle east. now,
with the market turning internationally and a growing sophistication
in the region, there are signs prices are becoming more risk adequate.
Helen yates reports.

With signs that the international reinsurance market is beginning            true. The Gulf – frequently described as a non-catastrophe market
to turn after the second costliest year on record for catastrophes           – has seen growing claims from floods, hail storms, industrial fires
(with insured losses in excess of $100bn), rates in the Middle East          and even cyclones over the past few years. The Arab Spring is
have also shown signs of firming. While prices in the region have            also having an influence.
not increased to the same extent as other markets, the change in                  “We have seen various floods in Saudi Arabia which is
direction will be seen as a welcome development by those active              unusual, we have seen cyclones three times in a row in Oman and
in the market.                                                               of course we also have seen a couple of other major losses that
     “The reinsurance terms and conditions have remained stable              are property/fire-related,” says Mueller. “The challenge we have
or slightly gone up,” says Lukas Mueller, director of the MENA               – particularly in some Gulf States – is that the original business is
region at Swiss Re. “The reasons are manifold. There are the                 highly competitive and not sustainable. Therefore, if you’re facing a
losses on the nat cat side, some of the reinsurers who have been             major loss, it could take you years to recuperate that and be back
very active in the Middle East have become more restrictive.”                in the black.”
     According to Willis Re in its January 1 renewals report prices in            With the recent claims from extreme weather events and
the Middle East have risen by up to 5% for non loss-hit accounts             losses related to the Arab Spring, there has also been a
and by up to 30% for catastrophe loss-hit accounts. Reinsurers               re-evaluation of the scope of cover, particularly on the primary
have started introducing loss corridors in some pro rata treaties            side. “Companies have never really charged an appropriate price
due to the frequency of large losses. In addition, sanctions clauses         for natural catastrophe exposure and now suddenly, with the most
and leading reinsurers’ fees are now a market standard, while                recent events, companies start realising they need to charge for
most treaties now have event and cession limits for losses from              the risk on the nat cat or the civil commotion side,” says Mueller.
natural perils and strikes, riots and civil commotion.                       “So what we’re seeing more often is sub-limits under that policy
                                                                             and separate rates being charged. It’s no longer just given for free
Growing claims culture                                                       or as an add-on to a property policy.”
It is a common argument that while re/insurance rates in the                      The level of claims is something that grows naturally as the
Middle East market have remained very soft there are next to no              market develops. The problem for many of the region’s primary
claims, so it remains profitable business. This is no longer strictly        insurers is that margins are becoming tighter and tighter, and with

16                                                Reactions Insurance Market Study: Middle East 2012                
                                                                                                               r einsur anCe rat es

little respite in the form of investment income, a sizable loss can
wipe out several years’ profits.
      “It hasn’t been a terribly litigious society with any inherent
claims culture but gradually as business on the ground develops
and with the contractual framework they’re operating through,
you’ll start to see more claims,” says Wayne Jones, partner of
Clyde & Co’s Middle East regional office. “You are starting to see
more educated claims. People are relying on their rights a bit more
and buying covers that will respond to proper claims, for example
business interruption insurance.”
      There will be some challenging years ahead, he thinks, as the
local courts and jurisdiction grapple with issues they have not had
to deal with before. “For example, in the area of financial lines
business things like white collar fraud and directors’ duties and
corporate governance really hasn’t been something that’s been on
the agenda here,” says Jones.
      The recent claims are also likely to push many cedants to
rethink their breadth of cover and policy wordings. One issue
at the moment is the denial of claims emanating from the Arab
Spring, largely because many of the political risk events that took
place were excluded from original policies.

Risk traders become risk takers
With the global financial downturn, the old model of ceding the
majority of the risk onto international reinsurers has begun to
change. Rather than behaving as risk traders, companies are
slowly becoming risk carriers and that will be a key ingredient in
bringing about risk-appropriate pricing, thinks Swiss Re’s Mueller.               “The Gulf – frequently described as a non-
     “Something we discuss actively with our partners in the region
and with regulators is that companies are properly regulated, that
                                                                                   catastrophe market – has seen growing
they retain a decent amount of the risk, because once they start                   claims from floods, hail storms, industrial
to participate in the risk they think twice about what type of risk                fires and even cyclones over the past few
they can take on board,” he explains. “So it’s absolutely key that
companies in the Middle East become risk carriers.”
                                                                                   years. The Arab Spring is also having an
     Growing regulation, consolidation and the influence of                        influence.”
international reinsurers is also encouraging a change in approach
to underwriting. With a growing regional reinsurance community,              With continued economic development, the complexity and
there is now a closer relationship between reinsurers and their              comprehensiveness of risks will also increase, requiring a more
clients. For their part, reinsurers are showing a keen interest in the       professional approach to underwriting.
underlying risk.                                                                  While there has been some impact from the financial crisis in
     “I don’t think the emerging DIFC reinsurance market will tolerate       the region, most notably in Dubai – which received a $10bn bailout
those practices for too long,” says Jones. “And they’re close enough         from sister city Abu Dhabi – and saw the rapid rate of construction
to cedants to force a change and bring about a new way of doing              slow considerably, the impact has been muted compared to more
things. Whereas if you are an international underwriter in London            mature economies.
writing an international book you’re not really close enough to the               “There’s been a definite upturn in Dubai’s economy and that’s
ground or to the clients to make any difference.”                            evidenced by construction projects going ahead and projects being
     Consolidation, driven in large part by growing regulation in the        finished,” says Jones. “It’s not quite as brash a confidence as before
region, should also boost the level of sophistication in the primary         and everyone knows who is in charge here and where the capital is
insurance market. With capital requirements expected to increase             now. But Dubai is back to doing what Dubai does best.”
for insurers, many of the small family-run businesses may be                      The huge investment in infrastructure in countries such as the
driven to consider mergers and acquisitions. This should see the             UAE, Qatar, Saudi Arabia and Kuwait continues to gain momentum
market become more concentrated and local insurers become                    – with roads, bridges, airports, high-speed railways, huge property
bigger and more professional.                                                developments and energy and water projects demanding re/
     “The insurance rates on average are not healthy and they’re             insurance capacity and expertise. Where capacity is available, these
not risk adequate according to our opinion in most areas,” says              projects are increasingly being underwritten locally within the GCC.
Andreas Pollmann, Munich Re’s client management executive                         At the same time, the growing middle class, increasing levels
for the MENA region. “I predict this is eventually going to change           of comfort with insurance as a concept among the devote Muslim
and the driving factor will be the consolidation which is going to           population (helped along by the growth of takaful insurance)
take place.”                                                                 and introduction of compulsory covers is all helping to boost
     As well as enhanced supervision, he thinks consolidation                penetration and demand. While competition remains fierce, the
will also be driven by the economic development taking place in              double-digit insurance growth should prevent rates from dipping
the region, which introduces uncertainty and demand for capital.             too low, providing the growth forecasts can be met.                              Reactions Insurance Market Study: Middle East 2012                                           17
ri s k M a na Ge M e nt

Changing risk culture
risk management awareness is growing across the Middle east,
with progress in numerous industry sectors, but there is a still a
long way to go. Helen yates reports.

Traditionally, the approach to risk management in the Middle East           closer attention to risk management practices, including health and
has been sporadic – with centres of excellence in some compa-               safety and business continuity. Some large fires in recent years
nies and industry sectors – while elsewhere the standards have              have been particularly destructive and costly. This includes a mas-
remained relatively low. More recently, driven by increasing aware-         sive explosion in Dubai’s Al Quoz industrial area in 2008 in March
ness and education, greater international involvement and tighter           2008, which began in an illegal fireworks warehouse and quickly
regulation, the corporate approach to risk management and insur-            spread to several others. In September 2008, another fire gutted a
ance purchasing has become altogether more sophisticated.                   large part of an edible-oil plant in Sharjah’s Port Khalid, while a fire
     One sign of this is the sharp increase in the number of mem-           in Dubai’s Fortune Tower in 2007 led to four deaths.
bers enrolling in the Institute of Risk Management (IRM) from the                As the market grows and develops, the assets at risk are
region. “The Middle East is one of our fastest growing markets,”            also growing and the potential for loss when a disaster happens
says Carolyn Williams, head of thought leadership at the IRM. “It’s         becomes greater. “Ten years ago you didn’t have these fires in
growing much faster than the UK and Europe, and that reflects the           Dubai,” says James Portelli, Middle East network coordination for
growing economic activity in the region and the investment that             the IRM. “Had the Al Quoz fire happened five years earlier there
companies in the region are making in training and professional             were probably half the number of warehouses at risk.”
qualifications and in using risk management.”                                    Just as the Gulf Airlines crash in 2000 has inspired much better
     The past two years since the financial crisis have seen a              aviation risk management, so too these fire losses are leading
broader emphasis on transparency and corporate governance,                  companies to instil better health and safety controls, he thinks.
with more stringent oversight and new rules in certain sectors.             But it isn’t happening fast enough. “The major problem is that
There is more awareness of directors and officers liability and on          risk management still appears very much in silos here – it’s very
legal requirements. “We see that it’s particularly financial ser-           fragmented,” says Portelli. “If you go to risk managers in industry
vices that are taking this very seriously as new regulation comes           and commerce in all probability none of them would be handling
through,” says Williams. “But it’s also on the construction and             insurance.”
energy side – people in all those sectors are interested in risk                 “The main problem throughout the region is there isn’t really
management.”                                                                ownership and accountability,” he continues. “In the UAE less than
     The rapid economic development of the region, in particular            five percent of locals work for the private sector and in Qatar it’s
the Gulf States, is another reason why companies are becoming               probably less than two percent. Unless the culture and education
more familiar with modern risk management practices. The grow-              really kicks in and you see more locals in higher positions assum-
ing involvement of international companies in construction, engi-           ing certain decisions, we will probably keep on with this mercenary
neering and energy projects have brought best practices to these            risk management culture of only buying insurance when you can
sectors, while indigenous companies themselves are growing and              buy insurance and offloading the risk in that manner.”
becoming more international in their outlook.                                    With insurance prices still very low, there has been little
     Some of this is reflected in the re/insurance purchasing taking        compulsion for companies to seek to improve their risk profile.
place. “We’re beginning to see a few more multinational insur-              The crucial risks are transferred to insurers and others are simply
ance programmes being put together,” says Ron Whyte, managing               uninsured. Insurance is only purchased where absolutely neces-
principal international insurance and reinsurance division at Integro       sary, where it is compulsory or needed to complete a contract.
Insurance Brokers. “We are involved with one company there                  Many of the small and mid-sized businesses in the region do not
that’s got assets in various Middle Eastern countries and Western           buy insurance at all, says Portelli.
Europe as well.”                                                                 “They are retaining risk in the sense of not buying insurance,
     “I know people who have put together schemes out there for             or having structured risk management like a captive,” he explains.
title insurance and extended warranties,” he adds. “A lot of the            “Because there isn’t a sophisticated alternative risk mechanism for
coverages that we would take as normal but until five years ago             small to medium sized companies. If they don’t have to buy insur-
were still largely unheard of in the Middle East. We’re seeing more         ance then they won’t buy it, but it’s purely out of ignorance. Not
and more requests for people to introduce new products. We had              because they have a plan B in place. The larger corporations buy
a recent enquiry out of Bahrain – a company that is quite cash              insurance because they have to.”
rich that wants to offer their employees a super employee benefit                These attitudes are beginning to change, particularly in the
scheme. It’s in these areas where we’re getting more enquiries.”            larger organisations, but progress can be slow. One issue is the
     High-profile losses are also driving many organisations to pay         influence of the big business families in the Gulf. As well as own-

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                                                                                                                 r isk M anaG eMen t

ing many of the major companies they also have shares in banks                   “High-profile losses are driving many
and insurance companies. This can make it tough to get buy-in for
concepts such as captive insurance, says Portelli.
                                                                                  organisations to play closer attention to
     “They will tell you, ‘I already own an insurance company in my               risk management practices.”
group so why do I need a captive?’ They don’t have captives, they
have an investment in an open-market retail insurance company.
But they use that as their captive and they probably have an in-
house team handling their insurance buying.”
     While captive insurance is a relatively new development in the             Reinsurers want to better understand the underlying risk they
region, with Bahrain, Dubai and Qatar introducing captive legisla-          are taking on, he explains. “What will start to change things is
tion in recent years, this market is expected to gain momentum              reinsurer appetite to select the better quality risks. In other words,
once the first of the new generation of captive insurers have been          corporates are beginning to recognise the value of risk manage-
formed. In 2012 a number of protected cell companies are being              ment. They will begin to demand more favourable terms, a better
set up, while some of the bigger family businesses and energy               and wider scope of cover, they’ll be able to negotiate more on
companies are expected to set up captive insurers. But the market           a facultative basis than a treaty basis and that’s what’s going to
will take time to develop. “I think we’ve got to be realistic and say       dictate the change – the corporates themselves. If all they’re inter-
that the next three years are going to be defining,” says Shaun             ested in is buying the cover at the cheapest rate and the market is
Brook, head of Europe and the Middle East at Kane. “It’s not all            prepared to offer it, then what’s going to change?”
going to happen in year one.”                                                   He also sees the next generation of business owners as being
     As long as insurance prices remain soft, claims activity               a crucial factor in the risk management equation. “You’re beginning
remains relatively low compared to other markets and the local              to see in the various family businesses members coming through
insurance companies continue to operate as risk traders rather              who have been educated in the West and who are beginning
than risk takers, it is unlikely to drive much change in the approach       to instil different values within their organisations as they take
to risk and insurance. However, two things are slowly helping to            control. We are seeing many firms now who are introducing the
bring about progress, thinks Brook. The first is that international         successors to their business who have a better understanding of
reinsurance firms are looking to develop closer relationships with          the complexity of the business and risk, and the value that better
the big corporate accounts and the second is growing education.             practices can bring.”                             Reactions Insurance Market Study: Middle East 2012                                           19
P O li t i C a l r i sk

Unpicking the
Arab Spring
the unprecedented wave of political unrest that swept through the
Mena region in 2011 has mixed implications for the reinsurance industry.
Helen yates reports.
From Tunisia, Egypt, Libya, Syria, Yemen and even Bahrain – the                   “There is a direct correlation between a growing economy
contagion of political unrest that swept through North Africa and           and the penetration of insurance and this is basically what is
the Middle East has led to great change across the region. That             happening in some of these countries,” says Enrico Bertagna,
the actions of one fruit seller in Tunisia would spark a wave of            Lloyd’s head of Southern, Eastern Europe and Africa. “If the Arab
protests throughout MENA, deposing long-standing leaders in the             Spring leads to more democracy and stronger economies I think
process, could not have been anticipated 18 months ago, even by             one of the direct consequences would be increased insurance
the most informed political risk advisors.                                  penetration – even from the point of view of compulsory classes.”
     So what does this mean from a re/insurance perspective? The                  “When you have economies becoming more sophisticated
unrest has exposed the insurance market to $500m in losses but              they also need a better insurance framework and personally I think
these claims are now being more than offset by growth in demand             in a matter of five and ten years the whole region will improve
for political risk cover, even from countries that enjoy a high level       dramatically from this point of view,” he continues. “The political
of political stability. Beyond this specialist class of business, the       scenario is the key driver there and we can only hope for the better.
development of new democracies and reconstruction taking place              If it does get better there will be a substantial improvement in the
all spell longer-term opportunity.                                          economic environment as well as the insurance environment.”

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                                                                                                                       POlit iC al risk

    “The unrest has exposed the                                              some cases civil war – so they are now buying wider cover to deal
                                                                             with the current situation in that territory.”
     insurance market to $500m in losses but                                      Also driving demand is the withdrawal of SRCC [strikes, riots
     these claims are now being more than                                    and civil commotion] cover from treaties by many of the reinsurers
     offset by growth in demand for political                                operating in the region. “The conventional European reinsurers
                                                                             used to offer SRCC for free under their treaties,” says Gammoh.
     risk cover.”
                                                                             “Since the incident in Tunisia these reinsurers have either
                                                                             limited cover to a loss limit of 20-25% of the sum insured or are
     For now though, some of the region’s growth has been muted              eliminating this entirely, making it an additional cover that has to
by these events. According to a report from AM Best in November              be bought.”
2011 – which quotes an IMF report on the region – 11 of the 16                    This spells opportunity for specialist markets such as Lloyd’s,
MENA countries expect to experience lower premium growth than                with demand for broader political violence covers. With 20 to 30
they otherwise would have before the protests, while five others             syndicates writing everything from SRCC to terrorism and civil war,
are projected to experience modest increases. However, premiums              there is still plenty of healthy competition and this is preventing
for the region, as a whole, are projected to be only 0.7% lower in           rates on line from rising too steeply.
2015 than they would have been otherwise.                                         “There is a big healthy market out there and we are seeing
     “The normal growth will still continue to be there but there will       competition between local carriers writing this class and the
be no abnormal growth, similar to what was witnessed due to the              Lloyd’s market as well,” says Stephen Bessant, divisional director
legislative changes that took place in relation to privatisation of          at RK Harrison Group Ltd. “The key here is your jurisdiction.
medical expenses insurance as compulsory insurance in a number               You’re supporting local cedants that are behaving under local law
of Arab counties,” thinks Sameer Gammoh, partner and vice                    and you need to make sure they’re getting the right reinsurance
president at Cogent. “I would expect to see slowdown in future               protection if they’re buying from the international markets.”
legislative changes making other insurance classes compulsory.
But the people will have more money and they will have more                  Devil in the definition
assets and then they will seek to protect these assets. But this is          There is an increasingly blurry line between the definition of
normal growth rather than a revolution in the insurance industry.”           political events, with difficulty determining at which point the
     In the mid-term there could be more growth for takaful and              situation develops from being individuals acting on their own
retakaful covers in the markets affected by the Arab Spring. Along           accord (malicious damage) to an un-coordinated commotion (riots/
with other factors, the success of the Muslim Brotherhood in                 civil commotion) to a more politically-motivated and coordinated
Egypt and other political parties with strong ties to Islam would            event (rebellion/insurrection). This is one of the reasons driving
further contribute to this growth. However, the rise of these political      demand for broader coverage.
parties may also stifle insurance growth to some extent.                          The Insurance Federations in Tunisia and Egypt classified
     “In Islam the conventional type of insurance that we do is              the uprising in their countries as “civil commotion” and are
unacceptable in this form – something that is forbidden by Islamic           recommending insurers pay for all claims incurred. However, there
sharia. However the acceptable form of insurance in Islamic                  have been complications. “We’re seeing lots of claims excluded
societies is the takaful concept,” explains Gammoh. “As the                  and covers denied on the grounds that these events are excluded
Arab Spring has so far produced strict Muslim governments, the               from the policies and there is no cover,” says Wayne Jones, partner
insurance issues are not on their agendas for at least the coming            of Clyde & Co’s Middle East regional office.
five to six years, until the public elect more liberal Muslims. For               “I expect to see some more specific Gulf-based wordings
now, I do not see a level of growth that we are anticipating from            coming through,” says Jones. “At the moment we seem to cut and
this insurance market as it contradicts their religious beliefs.”            paste from all the international markets and I think particularly in
                                                                             areas like financial lines we’re discovering at the claims stage that
Political risk demand                                                        those policies simply don’t work, and the wording isn’t appropriate.
At present, the opportunity lies in the spike in demand for political        So hopefully we’ll start seeing some more policy wordings
risk cover. While some countries have traditionally purchased this           emerging that are tailored more to the market out here.”
type of cover, there is now demand for broader coverage while                     He adds: “Full political violence is the acronym now and
cedants in new markets are looking at political violence protection          certainly there’s going to be more demand for that. Particularly as
for the first time.                                                          people discover that the cover they thought they had isn’t what
     “The civil unrest that took place in a number of countries,             they’ve actually got.”
starting in Tunisia and moving all the way to Syria as we are                     How political unrest is defined by the local jurisdiction can
witnessing currently, has created a new demand for political                 make a big difference to which covers are triggered and how
violence insurance associated with static or mobile assets and               claims are handled. In the Bangkok riots in 2010 there was a great
even personnel,” says Gammoh. “We’ve witnessed an amazing                    deal of confusion when the government described the protests
increase in demand, even from property under construction that               as an act of terrorism as opposed to civil unrest. Cedants that
had been stopped due to the financial crisis. They needed to                 had taken out full terrorism cover were able to claim under these
protect what had been completed.”                                            policies, whereas others were unable to claim under their standard
     Demand is coming from Tunisia, Yemen and Syria, markets                 property covers.
that did not typically purchase political risk re/insurance. “If you              “In Thailand the underwriters had a real eye opener as to what
take Egypt,” says Gammoh. “It traditionally bought this cover but it         kind of jurisdictions they mandate in their policies, where the court
was only really taken out by the large corporates and generally just         decided it was an act of terrorism although it was civil unrest,”
sabotage and terrorism. They are now looking to widen that cover             says Gammoh. “All the policies had to respond, especially where
to include riot, strike, civil commotion, revolution, rebellion and in       they had the jurisdiction stated as local Thai law jurisdiction.”                              Reactions Insurance Market Study: Middle East 2012                                          21
i n F ra st r u C tu re PrO j e C ts

                                                                                                 “The countries of the GCC plan
                                                                                                  to invest $968bn in major
                                                                                                  projects over the next ten years”

Incredible infrastructure
a look at some of the more compelling infrastructure projects planned or
underway across the Middle east.
The figures are astounding. Hundreds of billions of dollars worth of         countries of the Gulf will continue to develop their energy projects,
investment is being directed towards massive infrastructure projects         renewable energy, education, tourism, health, water and food will also
over the coming years in the Middle East, with the Gulf countries            require significant development. Here are just a few of some of the
leading the way. The countries of the GCC plan to invest $968bn in           major projects underway or in the pipeline across the region:
major projects over the next ten years, with $97bn directed towards
railways, roads, bridges and subways. This includes a $30bn high-            Al Maktoum International Airport
speed railway that will connect all the countries of the GCC, whose          One of the more prominent projects is Al Maktoum International
construction is scheduled to begin in 2012.                                  Airport, currently under construction in Jebel Ali, Dubai and named
     “I think the focus overall now in the GCC is on infrastructure,”        after the city’s former leader. Phase one of the airport, with only
says Khalil Eid, general manager of QBE Dubai. “Sector-wise there            one runway and just handling cargo flights, opened in June
is a lot of planned projects for railways, power, airports, transport        2010. When completed, it will have five runways, four passenger
expansion, building of universities and community development in             terminals with capacity to handle 160 millions arrivals a year and
general. So while infrastructure is across all these areas, it is very       18 cargo terminals. Emirates has plans to relocate to the new
interesting for us because it tends to be high in value and high in          airport when it is finished. The latest estimates by the government
volume and is an area which requires both capacity and expertise             of Dubai put the price tag of this project at $82bn, $62bn more
– so it is very good news.”                                                  expensive than the world’s second most expensive airport: Hong
     The diversification away from the oil and energy sector will be         Kong’s Chek Lap Kok, which cost around $20bn.
a strong feature in future developments. While the resource-rich
                                                                             New Doha International Airport

“Al Maktoum International Airport is $62bn
 more expensive than the world’s second                                      The New Doha International Airport (NDIA) is due to open on
 most expensive airport”                                                     December 12 2012. Constructed five km east of the current airport,

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                                                                                                     inFr ast r uCtur e Pr O jeCts

it will cater to the Qatar’s rapid growth in passenger and cargo           Ras Laffan Industrial City
levels brought about by the boom in its economy. The airport is
built over 22 square km, half of which is on reclaimed land. Upon
completion the $5bn project will have a capacity of up to 93 million
passengers and will handle 320,000 aircraft movements and two
million tonnes of cargo annually.

Masdar City Project

                                                                           This industrial hub, located 80km north of Doha, is administrated
                                                                           by Qatar Petroleum and is Qatar’s main site for the production
                                                                           of liquefied natural gas and gas-to-liquid. Qatar has become the
                                                                           world leader in LNG with exports growing to more than $30bn in
                                                                           2011. A 2,730 MW power plant at the port of Ras Laffan came into
                                                                           operation in 2011, giving Qatar a total capacity of 9,000 MW.

                                                                           Qatar Bahrain Friendship Causeway

This $22bn project is designed by Norman Foster’s firm Foster
and Partners with phase one of completion anticipated for 2015.
Aspiring to be one of the most sustainable cities in the world, the
city – which takes up six square km and is situated 17km from
downtown Abu Dhabi – will rely entirely on solar energy and other
renewable energy sources. It will host the headquarters of the
International Renewable Energy Agency and is designed as a hub
for cleantech companies.

Abu Dhabi Islands
                                                                           This 40km road and rail bridge linking the Gulf states of Qatar and
                                                                           Bahrain has been subject to various delays but is currently due for
                                                                           completion in 2015 at a total cost of approximately $5bn.

                                                                           King Abdullah Economic City

Following the success of Dubai’s Palm Islands, sister city Abu
Dhabi is busy developing its own. Both Saadiyat and Yas Islands are
currently under development. Saadiyat, with a total cost of $26bn,         Construction is underway for this $93bn economic city, located
is expected to become the cultural capital of the city when it is          in Saudi Arabia between Jeddah and Rabigh. The city will
completed in 2020 and will be home to the Louvre Abu Dhabi and             include a seaport and industrial, financial, resorts, residential
Guggenheim Abu Dhabi. The $39bn Yas Island, just ten minutes               and educational zones. The megaproject, spread over 168 million
from Abu Dhabi International Airport, is home to the Yas Marina            square metres, will be home to two million residents upon
Circuit and a Ferrari theme park and is due for completion in 2018.        completion.                            Reactions Insurance Market Study: Middle East 2012                                        23
i n terv i e w

A regional focus
in 2008 when the world insurance Forum decided to hold its biannual
conference in dubai rather than Bermuda, it was big news for the
region. the market’s potential was further underlined when a new
start-up reinsurer to serve the Gulf alone was announced at the
conference. Gulf re, a unique joint venture between Gulf investment
Corporation and Bermuda reinsurer arch re, now has three years under
its belt. Michael Gertsch, Gulf re CeO, talks about the journey so far.

Tell me a bit about how and why Gulf Re was set up                          What was your initial focus and has that changed in the three
Gulf Re wasn’t the first reinsurance company out in the Middle              years Gulf Re has been in operation?
East but it was the first time there was actually a very focused            It has changed to some extent in that we have further expanded
and selective approach to the high quality projects in the region. It       our product offering – but the initial focus for Gulf Re was to
was Gulf Investment Corporation’s initiative to create a reinsurance        target mainly the energy and construction sector. We are a hybrid
company when they realised that all the insurance they were buy-            company. We are a specialty reinsurer on the facultative side,
ing for their projects in the region may have been fronted by local         where we are very technical and very selective but offer significant
companies, but the vast majority would have been reinsured out              capacity, and we are also a market reinsurer on the treaty side
into the traditional markets, like Europe and London. They realised         where we support the local insurance companies and help them
that if they had a reinsurance company and were able to access              further develop and grow. That focus has not changed.
the business and keep it here, it would serve the purpose of the                We have added lines of business. Last year we added marine
six Gulf States by supporting the growth of the local economy.              cargo and hull as well as offshore energy on the fac side. And
     They then joined up with Arch Re, one of the most professional         whereas we were a pure GCC-focused reinsurer, since January
reinsurance companies worldwide that gave the joint venture the             this year we have also been taking a broader Middle Eastern and
right pedigree. Together with the $200m paid-up capital it also             North Africa focus. That was always the idea.
ensured we were able to get an AM Best A- rating right from the                 Right from the beginning we wanted to grow the company
beginning, which we have been able to retain. So Gulf Re is the             slowly and thoughtfully. Too many people in the past have made
first time you have a Middle Eastern reinsurance company staffed            the mistake of going into too many lines of business and too many
mostly with professionals that come from the international markets.         areas without really understanding them and by that, risking the
It was backed by the government through GIC and supported by a              sustainability of a profitable organisation going forward. Expanding
very professional reinsurance company.                                      further with products and geography is something we knew we

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                                                                                                                                    interv iew

would do at some point, but now having three years behind us we
believe it’s the right time to do it.

How has the market changed in the three years that you’ve
been operating? Are there signs of growing maturity?
There are some signs of a growing maturity, to a large extent
because of the international companies that are out here on the rein-
surer, broker and insurer side. Unfortunately, the market has contin-
ued to soften because the growth that people were expecting when
they opened their offices out here was slowed down by the financial
crisis, and following that the Arab Spring. So it certainly has got more
competitive and we’ve seen a levelling out of some lines of business,
but the market overall continues to become more competitive.

Given how competitive the market currently is how do you
ensure prices are risk-adequate and how do you differentiate
It’s all about risk selection – not just the risks you want to partici-
pate on but also the partners you’re working with – the insurance
companies and the brokers. Where we are trying to differentiate
ourselves is by providing local cedants and brokers with the know-
how and expertise that previously they only found in the more
mature markets. We’re doing it locally and we are a local company.
     We believe that combination differentiates us from the rest.
We’re not an international company that may decide at some point
that the Middle East is no longer attractive for us and want to pull
out and go to Brazil for instance. We are here to stay because we
are a true local company.

How is the region developing as a whole and which countries/
markets are of most interest?                                                 “Too many people in the past have made
Certainly the UAE is the largest insurance market here in the
                                                                               the mistake of going into too many lines of
Middle East. Unfortunately it’s also one of the most competitive.
It then comes down to your underwriting and selecting the type                 business and too many areas without really
of business you want to support. Saudi Arabia has massive plans                understanding them.”
for infrastructure development going forward – there’s a lot of con-
                                                                               Michael Gertsch, CEO, Gulf Re
struction going on and a lot of more operational business coming
out of Saudi. Then you’ve got Qatar going forward with the football
World Cup and a lot of the related construction that is taking place           hard to argue they should buy a certain cover and pay for it if you
out there.                                                                     can’t really prove there are losses or there is an exposure.
                                                                                     But as with all the lines everywhere around the world, as soon
Tell me a bit about the culture of doing business in the market                as something does happen then the awareness is there and the
The culture of doing business is undergoing quite a change. In the             product will be sought after and clients will be prepared to pay for it.
past a lot of the insurance companies acted as brokers, where they             If I see what has happened in terms of flood and cyclones I think the
would accept business at the front end and reinsure out as much as             catastrophe element is there to a bigger extent than what many of the
they could and live off the commission, investing that in equity mar-          companies would like to believe, but it still hasn’t yet led to a change
kets. Since the financial crisis that changed because you don’t have           in perception whereby clients are prepared to pay for a certain type of
the investment returns anymore. So what we see is a much stronger              coverage. That will change going forward because the returns on the
focus on technical underwriting than used to be the case. It’s not as          main lines of business are smaller than they used to be and therefore
broad throughout the market as it would be in the more countries, but          the margins are not there to neglect those exposures.
there is certainly a drive towards a more technical view of the busi-
ness as companies realise they can’t rely on the investment returns            What for you are the most exciting of the infrastructure projects?
but have to make sure their underlying business is profitable.                 The most exciting infrastructure projects are coming out of water
                                                                               and power generation. To achieve the ideas and objectives that the
The GCC is often considered to be a non-catastrophe market –                   Middle Eastern States have over the next ten to 20 years, and to
is that strictly true?                                                         establish themselves as a hub between Asia and Europe, what the
There is some exposure to catastrophic perils out here. You have               region really needs is power and water. Water is rare out here and
the cyclone issue in Oman, floods in Saudi Arabia that are recur-              we need water desalination to support all the development taking
ring and there is also a bigger potential for earthquake incidents             place. Growing cities like Dubai, Abu Dhabi and Doha need to be
here than a lot of people would like to see. In the past it was just           supported by water and power for the industrial projects. If you
neglected. The issue in our industry is that as long as nothing hap-           want to manufacture anything you need power and water. That’s
pens people try to forget there is a potential exposure there. It’s            where we believe we will see the biggest opportunities.                                Reactions Insurance Market Study: Middle East 2012                                             25
Mi dd l e e a st r O und taBle

                                   Moderator: Helen Yates, Reactions
                                   Panellists (left to right):
                                   Stephen Bessant, divisional director, RK Harrison
                                   Andreas Pollmann, client management executive, Middle East North Africa, Munich Re
                                   Julian James, chief executive officer, Lockton Companies International
                                   Chris Pleasant, managing director, Guy Carpenter
                                   Enrico Bertagna, head of Southern, Eastern Europe and Africa, Lloyd’s
                                   Wayne Jones, partner, Clyde & Co
                                   Hedi Hachicha, chief underwriting officer, treaty P&C, Africa and Middle East, Scor
                                   Youssef Al Kareh, acting general manager, Solidarity General Takaful
                                   Akshay Randeva, director, strategic development, Qatar Financial Centre Authority
                                   Ron Whyte, managing principal, Integro Insurance Brokers

Market of the future
the buzz surrounding opportunities in the Middle east has continued to
grow in recent years. low insurance penetration, rapid economic growth
and massive infrastructure projects are propelling the market forward.
But has the financial crisis and Arab Spring dampened enthusiasm?
reactions in association with the Qatar Financial Centre authority
brought together a high-level panel to find out.

Moderator: Today we will be discussing whether the Middle                      territories, what’s going to happen and whether Egypt and Tunisia
East insurance market is the market of the present or the                      are going to recover? So, there are some question marks but those
future and, to start, I’d like to ask you for your thoughts on                 are isolated cases for the time being.
the growth potential in the region.
Hedi Hachicha, Scor: I think the growth potential is strong and it             Wayne Jones, Clyde & Co: Well, as a lawyer based in the region
outpaces by far what we are seeing in Western Europe and in most               all I can report on is what I see from clients. There still is a queue
advanced economies. Even after what happened in some countries                 of people looking to get into the market so that must indicate that
last year with the Arab Spring we are still very optimistic about that         in their view the business case is pretty strong. What we always
and that is reflected in the premiums that are written by the various          caution people is that it’s not necessarily a one-size-fits-all and
insurers and reinsurers. The Arab Spring had some effect, we saw               you need to be quite careful and have your eyes open as to how
that in Tunisia for instance where the growth that was expected for            you’re going to access a market. Although it has some great growth
2011 was close to 5% and now they are speaking about no growth,                potential and there’s a lot more insurance and risk to be sold and
stagnation. Egypt is very similar. So the question is for the other            managed in the region, it is a very competitive market and you need

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to be quite circumspect and have a realistic view of the business                                       “What we always caution
case for entering the market and how you’re going to do it.
                                                                                                         people is that it’s not
Andreas Pollmann, Munich Re: When I look at the development                                              necessarily a one-size-fits-
cycle of insurance, and that starts with the insurance of transport                                      all and you need to be quite
and infrastructure and building some fundamentals, then moves
                                                                                                         careful and have your eyes
onto the insurance through mortgage accounts and eventually into
personalised business prevailing in the markets at least in terms                                        open as to how you’re going
of size and volume, I see the region at rather the beginning of the                                      to access a market.”
cycle, maybe it’s the end of the beginning. It is hopefully moving
                                                                              Wayne Jones, partner, Clyde & Co
into mortgages and personal lines, and from there it becomes even
more interesting for reinsurers to provide value. I agree [the Arab
Spring] probably adds some uncertainty for the time being but I                     The Arab Spring definitely has had an impact and in Bahrain,
consider this temporary.                                                      where I am based now, we were one of the countries affected.
                                                                              It’s totally different than Tunisia, Egypt, Yemen and Syria, however
Hedi Hachicha, Scor: The IMF believes that in Tunisia and Egypt               still we have issues. The impact was more on the retail side rather
the recovery is going to be even sharper and stronger in the                  than on the corporate side. The corporate side of the business has
sense that those countries are going to have a stronger growth                been a bit more resilient.
with the liberalisation and the fact that it’s going to be easier to do
business in those countries. So, the Arab Spring is definitively a            Steve Bessant, RK Harrison: I think there’s definite growth in
great thing which will have very positive implications including on           the region. Whilst there’s certainly been a reduction in perhaps
the economies by freeing energies and offering new opportunities.             property and engineering-type classes because of what’s
                                                                              been happening with the recession, we’re certainly seeing
Chris Pleasant, Guy Carpenter: I think most of us see that                    increases where some markets are maturing locally. We’re
there are still very strong trends in the Middle East. Obviously              seeing an increase in things like Medex insurance, which is now
the Middle East is a quite diverse territory and we see the Arab              compulsory in some markets. I think certainly caution where
Spring and recession having more impact in some countries than                there’s overcapacity is advisable. Even in classes of business
in others, but underlying that is that it is a growth territory with          on the political risk side there is still a lot of competition in that
surplus capital, primarily from oil revenues, and insurance is a very         market. You’ve got over 30 syndicates in Lloyd’s and also people
underdeveloped class at the moment.                                           outside are now competing for that book of business. Insurers or
    At the moment we’re seeing a little bit of stagnation which is            reinsurers could get their fingers burnt in certain areas if they’re
caused by the recession globally and some reluctance from some                not watching what they’re doing.
of these countries to invest in the short term, and by uncertainty                 But there’s also an opportunity because in markets, such as
around Arab Spring. In the next five to ten years I think we’re               Egypt, where previously people were buying just terrorism only
looking at very good growth prospects across most of the region.              cover, now we’re looking for cover on a wider basis such as
                                                                              riots and strikes and civil commotion perils. This is providing a
Youssef Al Kareh, Solidarity General Takaful: The growth                      larger premium pot for the market. I think we’ll also see more of
potential is definitely there for anyone to see and this is based on          the Islamic Takaful type reinsurance market opening up providing
fundamentals: you’re looking at very encouraging demographics,                cover for the masses. And longer-term, as we move towards a
you’re looking at the price of oil, which is on the rise, so the              Muslim democracy going forward in some of these countries I
surplus capital is definitely there, there is a huge expenditure in           think that will open up insurance and reinsurance to more people
terms of the infrastructure across the board – Saudi Arabia, even             locally who perhaps haven’t bought them before.
Bahrain, Qatar – so the fundamentals are definitely there.
    However, I want to re-emphasise what Wayne said. People                   Akshay Randeva, QFC Authority: It’s difficult to comment about
need to approach the market though with caution: yes it is an                 all of MENA but at the QFC Authority we do have the opportunity
underpenetrated market, the insurance density and penetration                 to talk to a lot of the industry and ask them what they think is
are quite low vis a vis the emerging markets, not to mention the              happening in the region. I think the two facts we have are: one,
developed world however, I think where a lot of people are getting            the pipeline is very healthy, there are a lot of people looking to
it wrong is in terms of execution. The market is just flooded with            enter so obviously the market believes there is potential; and two,
additional capacity and all that is doing is really putting downward          the numbers speak for themselves, 2006 to 2010 we’re talking
pressure on pricing and terms rather than developing the market               21% growth levels. The most dismal prediction I have seen talks
or taking it in the right direction. Developing the retail lines is           about 9% to 10% growth over the next five years, and if you take
definitely an area that people should be looking at. We need to               that relative to what’s happening in the rest of the world, I can see
grow the cake, rather than bring in more people to eat the cake               why those growth numbers are very appealing. But I would tend to
that exists.                                                                  quite agree with Youssef, as the market matures what we need is
    My company is an Islamic insurance company so we are in                   a lot of support for the right products to be offered for that diversity
Takaful where, for the past at least five to eight years the growth           to come in and investments to be made on the ground by the
rate in that specific segment has outpaced the growth in the                  people who have the expertise.
conventional market. However it’s the same caveat. There is a
lot of capacity in the Takaful market but it does not mean that it            Julian James, Lockton Companies International: There are a
is profitable or that it is actually giving the market the additional         couple of points I would just like to reiterate. One is that the Middle
dimension we all hope for.                                                    East is a mixed bag, there’s a lot of variety in terms of different                               Reactions Insurance Market Study: Middle East 2012                                             27
Mi dd l e e a st r O und taBle

                         “In the next five to ten                            Moderator: Do you think that it’s necessary to have a
                                                                             presence on the ground in the region?
                          years I think we’re looking                        Julian James, Lockton Companies International: Can I answer
                          at very good growth                                that from the broking perspective, and I’ll let the underwriters
                          prospects across most of                           speak for the underwriters. Certainly we feel very strongly that you
                                                                             need to have a presence on the ground because our business
                          the region.”
                                                                             is primarily about advising clients and giving them support and
                          Chris Pleasant, managing director, Guy             understanding local dynamics, understanding local regulations,
                          Carpenter                                          understanding local insurance markets, and you can’t do that
                                                                             when you’re sitting 3,000 miles away.

stages of economic development but, saying that, it’s a pretty well-         Ron Whyte, Integro Insurance Brokers: I’d reiterate that
proven fact that growth in insurance market mirrors growth in GDP.           as well. Quite how you go about having a presence on the
Whichever way you look at the GDP in the region it is going to               ground, whether you own something, you partner with another
continue to grow. You’re seeing a lot of reinvestment back into the          independent local firm, that’s down to the execution strategy but
region by certain countries and the use predominantly of oil and             the old-fashioned way of sitting in London and saying, “We can
gas revenues. When I look at what’s happening in Qatar and the               give you all the answers,” I think that went out some time ago.
predictions for that economy you’re seeing a greater distribution of
that wealth, which fuels some of the longer-term trends in the need          Enrico Bertagna, Lloyd’s: For us the Middle East overall is worth
for medical cover, for private car insurance, starting businesses            more than $600m of premiums and Lloyd’s as a platform doesn’t
etc. So whichever scenario you look at it’s pretty clear to me               have local presence, and this is also thanks to the brokers, who
that you’re going to see continued growth in economies and in                have local presence as they bring business into Lloyd’s. In the
insurance markets. Notwithstanding that there is a lot of short-term         past there were discussions about whether Lloyd’s should set up
capacity there, there’s also a lot of support for that capacity from         a platform in one of the countries, whether it was Bahrain, Qatar or
markets outside of the Middle East from London, even Singapore               Dubai, but obviously it was a difficult conversation to have.
and other parts of the world.                                                    I think we’ve been able to grow in the region without a local
                                                                             presence and this is not historically the best time to do it. Not
Enrico Bertagna, Lloyd’s: I was looking at the report which                  so much because of the Arab Spring but because there are
expected substantial growth between now and 2015 in the GCC                  competing financial hubs being created. Turkey, for example, is
countries. Current premium volume in the GCC countries is $15bn              creating the Istanbul Financial Centre that is planning to be a
and they expect this to be over $30bn by 2015. If this is the case,          competitor of the financial centres in the Middle East. There is
I wouldn’t be too worried about extra capacity flowing into the              also a school of thought that over time Egypt could become a
region. However, most of the potential comes from personal                   good platform for doing business in the Arab countries. So for a
business and motor. But there is another interesting dynamic. In             player like Lloyd’s it’s probably not the right time to take a decision
most of the GCC countries they are trying to diversify away from             on where to establish, because there will be further developments.
oil and gas and that is an opportunity for the international players.        And in the meantime with the presence of the main brokers in the
                                                                             region we are still seeing a lot of business. That is why we don’t
Ron Whyte, Integro Insurance Brokers: If you have any form                   feel strongly about having a local presence at this time.
of international strategy then you have to have a strategy for the
MENA region. We’re in the process of a fundamental shift in the              Moderator: Are the broker networks key to distribution then?
wealth in the world to the Middle East and to Asia, but that may             Hedi Hachicha, Scor: I believe we should be very close to our
take 20 years to manifest itself and 20 years is way too long for            clients definitely, and close to the markets, understand their
most insurance people to think about. I think patience is probably           dynamics, their needs, their growth and challenges and provide
the key word right now. The North American premiums still                    services. Whether to establish locally or to service them through
dominate and will dominate for some time what goes on in the                 a hub or centre of excellence, the questions are at least for a
insurance world but rather than be blinded by that we will need to           reinsurer, “Will you get privileged access in being local? Will you
look to other areas that are going to grow.                                  attract the best talent? Will you get a competitive advantage of
     But just going in, whether you’re an insurer, broker or reinsurer,      being local in terms of cost price, in terms of regulation and capital
planting flags and all the rest is not the way forward. We need
to set the path now for what’s going to happen in 20 years’ time                                       “The market is just flooded
when I think the region will be on an equal footing with the greater                                    with additional capacity
insurance economies at the moment. It is an incredibly exciting
region but if people think they’re going to go there and get rich
                                                                                                        and all that is doing is really
quick I think they’re mistaken.                                                                         putting downward pressure
     Looking at the region as one is a convenient way of doing it                                       on pricing and terms rather
but there are so many different dynamics. Take the Arab Spring,
it’s caused problems in certain areas but it’s helped Dubai
                                                                                                        than developing the market
enormously because a lot of people are moving wealth out of                                             or taking it in the right
those countries into Dubai. I understand property prices are on                                         direction.”
the increase now, the hotels are completely full, and that’s almost
gone unnoticed as we’ve had our eyes on other things.                        Youssef Al Kareh, acting general manager, Solidarity General

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management also? Will you also have a competitive advantage in                                         “I think we’ll also see more
term of expertise and benchmarks to be able to properly respond
to the sought knowledge support?”
                                                                                                        of the Islamic Takaful type
                                                                                                        reinsurance market opening
Wayne Jones, Clyde & Co: Our firm hosted a DIFC reinsurance                                             up providing cover for the
forum where we were really trying to bring the DIFC reinsurers
together to speak to each other and have the brokers and the
agents there and the insurers. It became very clear from one of                                         Stephen Bessant, divisional director,
the presentations given by one of the brokers that most risks can                                       RK Harrison
be placed locally now, there’s enough capacity there to cover
that. It’s only where there’s a massive PML on a project such as
a Kingdom Tower or a Burj Khalifa or some of the aviation risks              a team in London which has been writing a sizeable portfolio in
where they actually need to go outside the local market.                     that part of the world, and now suddenly they have a team sitting
     So the people based locally are seeing the benefit of being             there who needs to do their own budget. So they’re actually
there. Plus there is the framework and the structure in place                cannibalising their own business.
with the new financial centres. Qatar’s another example of that,                 And you sometimes end up confusing the markets. Let’s say
where you can be guaranteed a stable platform to do it, a good               on a particular placement I’m dealing with the local team and then
jurisdiction in which to have any disputes dealt with and all the            suddenly find out that somebody from London is also approaching
things that go around a financial centre.                                    us from the same organisation, we get a bit confused who is doing
                                                                             what? What we would like to see as a local cedant is if reinsurer
Andreas Pollmann, Munich Re: Being face to face with the                     X has set up a business there then they have the full capacity and
client is a must, particularly to add value and differentiate from           the decision-making to really do it all out of the region.
the commodity-type reinsurers. Of course clients need capacity
but they further need expertise. Having said that, there are some            Moderator: Does the increased involvement of international
practicalities to consider. When you are a reinsurer busy in 19              insurers, reinsurers and brokers in the region help increase
markets you have to decide on a hub, and as far as our non-life              the sophistication of the market?
operation is concerned we decided on the hub being Munich.                   Ron Whyte, Integro Insurance Brokers: As long as it’s done
There we have the expertise, we have the infrastructure and we               in the correct way with some local sensitivity importing the
aim to travel 40% of the time in the region and see clients regularly,       knowledge of a global marketplace is fundamental to the growth of
that’s how we manage. Where we see the necessity and where                   the region.
it adds value Munich Re has a local presence in Dubai or Saudi
Arabia for example.                                                          Wayne Jones, Clyde & Co: The expertise always came from
                                                                             outside in the past but obviously that’s changing very rapidly and
Steve Bessant, RK Harrison: Certainly at RK Harrison we are                  you can’t divorce the two. On the one hand if you want to be
a wholesale broker in the London market and our intention is                 handling certain classes of business, if you’re looking at insurance
not to grow into having a local office. We would more likely                 or facultative reinsurance, you have to be in the local market and
support local partners in each region and there’s a balance that             not just relying on expertise from outside. But you can’t divorce
has to be reached. The key is not to lose a lot of the expertise             that from the expertise that comes from the London markets and
that you generate from this marketplace or in the European                   from the Continental markets. I think a lot of clients appreciate a
marketplace where there are things going on elsewhere in the                 company that, particularly with a broker, that can work from both
world, particularly in developing markets in growth, that you could          the local base and bring expertise in from outside as well and
then export those ideas into local markets. There’s also a balance           where there’s no conflict of interest.
between having a hub that is working in its own environment and                   The fingerprint of the international market has always been
also having access to expertise elsewhere in the world being able            on the Middle East and people have found or are finding that
to filter through into those markets.                                        international expertise is absolutely necessary. But just importing
                                                                             it and trying to make it work in a local context doesn’t actually
Youssef Al Kareh, Solidarity General Takaful: Definitely a                   work, as we have seen with some of the recent events like the
presence on the ground can give you a different dimension, in                financial crisis and some of the financial claims which are based
particular in our business if you have the right people. But one             on wordings that have been pretty much imported from the States
thing people need to be careful about when they are planning                 and from the UK, as well as the Arab Spring with political risk
their local presence is the extent to which you want to have this            exclusions and things like that. So we’re seeing a number of
presence, what sort of cost base you want to create in that part of          clients, big international insurers, taking a lot of interest in actually
the world and whether or not you are going to generate the return            localising their wordings now to make sure they actually fit and if
on that investment. They need to understand the cultural aspects             you’re not on the ground that’ll never happen.
of doing business in that part of the world and you need to be very
careful about the size of the cost base you are going to be setting          Steve Bessant, RK Harrison: I totally agree. Two words: local
up there. I have seen a number of people who have suddenly sent              jurisdiction. A number of things we’ve been involved in before
a huge team of very senior underwriters to be in Dubai, and it’s             where reinsurers have tried to impose their own jurisdiction in
not the cheapest place in the world.                                         other countries: disaster.
    The other thing, which I know for a fact because I worked in
London for a few years, is you may create internal conflicts of              Andreas Pollmann, Munich Re: It’s important not to impose
interest. I’ll give you an example: broker X or reinsurer Y, they have       anything on anybody but rather provide value and advice.                              Reactions Insurance Market Study: Middle East 2012                                              29
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                         “As the market matures                              that’s going to be there on a five-year contract? Why risk your
                          what we need is a lot
                          of support for the right                           Hedi Hachicha, Scor: Yes, but when you look at the form of
                          products to be offered for                         reinsurance that is bought in the region, which is proportional
                                                                             essentially, proportional means having a trust and sharing of
                          that diversity to come in
                                                                             fortune and the implication of that is alignment of interest.
                          and investments to be made
                          on the ground by the people                        Julian James, Lockton Companies International: Markets in
                                                                             the Middle East are a mixed bag so it’s difficult to generalise but
                          who have the expertise.”
                                                                             I would put in a point about distribution. If you look at certain
Akshay Randeva, director, strategic development, Qatar                       markets there are some dominant primary carriers there and there
Financial Centre Authority                                                   isn’t an established distribution market. What tends to happen in
                                                                             those markets is that the primary carrier acts as a quasi-broker
Fundamental risk management practices like, for example,                     and until that changes you’re going to get the reinsurers looking to
installing a fire detector on the floor certainly helps to prevent a         those primary markets as the source of capacity.
fire – however where and how risk management practices are                        I agree with the point that alignment of interests is clearly very
executed needs to be customised locally. So, there is a learning             important and the more you can move towards being a risk taker
curve certainly. But there is also this element of time. The time that       and having skin in the game that is beneficial for everybody. But
the region has in order to catch up to global standards is limited.          I would not underestimate the importance or the value that the
                                                                             global reinsurance market brings to distribution and underwriting
Moderator: How do we see the local market developing? Are                    of risk. One of the great strengths of the global reinsurance market
we seeing signs that perhaps the local insurers are becoming                 is the ability to spread losses throughout the world. If you look
risk takers as opposed to risk traders?                                      at major catastrophes, whether they end up in Munich, Paris or
Youssef Al Kareh, Solidarity General Takaful: I can give the                 London it is a great strength of our world that risks are spread. So
viewpoint from where I’m standing. I’m a local insurance company,            let’s not lose sight of that and let’s not lose sight of the value that
I have $20m in capital and yesterday I was in London placing                 brings to the stability economically within the region.
over $700m. In two million years I wouldn’t be able to write that
trade, so from that perspective on a particular type of risk we will         Wayne Jones, Clyde & Co: I think the local regulators really could
never be able to be risk takers. However, we add tremendous                  help shape the market a bit, in particular ways. If they started
value in the process in terms of client education, advice, making            putting in place regulations that were accessible, understandable,
sure the cover responds to local needs, etc. So we are not driven            and could ensure the local market responded in a way that
by commission. It’s a strategic objective for us to be risk takers.          was encouraging greater responsibility, challenging the general
However, there are particular types of risk where we will never be           manager to put some skin in the game and that sort of thing, it
able to do it because simply we cannot generate the scale that is            would really help. Certainly the financial centres are doing that but
necessary to get the economics right.                                        the local regulators on the ground, who by and large govern most
    Having said that, around the region, though, are a number                of the local business that is written, aren’t staffed with people that
of local insurance companies who have substantial capital and                actually understand this and aren’t doing anything meaningful to
capacity and whether or not those people are going to take this              engage with that issue.
step forward I really don’t know. There will always be limitations
given the size of our capital and the fragmentation of the market            Ron Whyte, Integro Insurance Brokers: As in many other parts
at this point in time, so from that perspective let’s not beat around        of the world you are going to have the local insurers who are
the bush, a lot of the companies are always going to be working              serious and sensible and want to grow and over a period of time
as brokers and feeding off the commissions to survive. But on the            increase the retention as their capital base increases, and there’ll
retail lines we need to encourage people to be risk takers.                  be those that just want to be quasi-brokers. It’s up to the reinsurers
                                                                             to sort the good ones from the bad ones, if we can describe it that
Hedi Hachicha, Scor: Today, if we look at the level of premiums’             way. But that’s not happening. Why? Because largely the region is
net retention in the region it’s close to 0.5% of the net equity             non-catastrophic and whilst you may say the technical results are
position of the companies, which means that it’s very low. In                low they’re still more profitable than most parts of the world, which
Western Europe in most of the cases it’s close or even above 5%,             is why there is so much competition.
just to give the figure, so the question is why today the risk taking
proportion is so low? Probably there are historical reasons and
                                                                                                       “In most of the GCC
that today competition is so fierce that the technical profitability is
too low so probably it’s better to be a risk trader than a risk taker.                                  countries they are trying
And then comes the question of the alignment of interest between                                        to diversify away from
the insurer and the reinsurer and we can’t say today that there is a                                    oil and gas and that is
full alignment of interest.
                                                                                                        an opportunity for the
Chris Pleasant, Guy Carpenter: As long as there is abundant                                             international players.”
capacity available on a proportional basis with high levels of
                                                                                                       Enrico Bertagna, head of Southern,
commission they don’t see a need to change. Why expose your
                                                                                                       Eastern Europe and Africa, Lloyd’s
profitability and your capital base if you’re a general manager

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Akshay Randeva, QFC Authority: There are some markets where                                            “We need to set the path
you’ve got say the top five insurers have 70% to 85% of the market
and other markets where the top five insurers don’t even have 21%
                                                                                                        now for what’s going to
of the market. There are some markets which are so fragmented                                           happen in 20 years’ time
that it’s slightly more difficult to see this happening, although it’s                                  when I think the region
probably good for everybody. But there are other markets where
                                                                                                        will be on an equal footing
you are definitely seeing some firms where they’re going to start
becoming risk takers and supporting the growth, because all                                             with the greater insurance
the growth that’s going to come is going to come more on the                                            economies.”
personal lines side of it, or they’re going to decide to stick a little
                                                                             Ron Whyte, managing principal, Integro Insurance Brokers
bit more on the sidelines and remain a broker. And sooner or later,
whether it’s going to be because of the regulators or because the
market eventually does what the market does, there is going to be            least a year aggressively looking for acquisitions. We know there
a sorting out I guess. It’s probably long overdue.                           are some obvious targets, and we know that we can financially
    If we look at the broker share of the Emirates, Bahrain and              and operationally do the deal, it’s just you cannot get the other
even Saudi Arabia it’s more than 50%, the brokers control more               party to come and talk. It’s because of some vested interests or
than 50% of the market with the multinational brokers playing a              because the board members just cannot concede that they will not
key role in that. So it is quite normal that all the marine, aviation,       have a say in the new organisation.
energy, cat risks get placed all around the world, it’s a normal                 I am entirely convinced that without some sort of regulatory
dynamic. However, with personal line business growing, motor                 intervention this will never… it will happen but you will see one
business growing, players will need to find alternative means of             deal every four or five years whereas we need to see five or
distribution and they will start retaining more because that’s local         six deals in every market every single year. You cannot have 38
business and they understand it better and feel more comfortable             operating insurance companies in a country like Bahrain. That is
about retaining more of that.                                                just entirely unhealthy.

Hedi Hachicha, Scor: I think on personal lines the retention level           wayne jones, clyde & co: Our firm’s been involved in two of
is fairly high. On commercial lines, which is dominant in the region         the few deals that have happened in the last few years and one
today, the retention is very low, which is creating again another            of the big problems is that it’s just too difficult. The actual legal
imbalance which is that the most volatile part is ceded and it’s             infrastructure is way behind the times and it really does need to
also sometimes the less profitable part that it is ceded.                    be reformed if we’re going to see consolidation happen in any
                                                                             meaningful and structured way. It is going to need some kind of
Moderator: Is consolidation necessary in the market?                         regulatory enhancement and action, and it relies on reforming
Youssef Al Kareh, Solidarity General Takaful: Absolutely. The                some of the laws, and that’s a very difficult task.
question is how to get there? It’s just mindboggling why it’s not                 Quite apart from the problem that you don’t have willing sellers
happening and what Wayne has said is straight to the point. The              out there. Two banks in Abu Dhabi launched insurance companies
regulators need to play a more vital role in this aspect. A simple           last year and the rest are all looking to get their own insurance
decision by the regulator to raise the capital of local insurance            company going because they feel they’re losing out. That’s not
companies to a certain level would on its own drive that. Bahrain            terribly helpful to add to the 67 odd insurance companies that are
is probably the size of a small city in India, it has 38 insurance           in the UAE at the moment.
companies for close to 1m residents; India has almost 1.2 billion
people and it has 14 insurance companies, so it is very obvious.             Chris Pleasant, Guy Carpenter: Because of the difficulties
    If you look at Saudi Arabia at the quarterly results, because all        with the board of directors and not wanting to lose control of
the companies have at least 40% floated so they have to publish              their companies, M&As are going to come from three distinct
their results, you have a number of companies which have already             areas: 1) Initially hopefully the regulators are going to raise
eroded more than 50% of their capital in the last two to three               capital requirements, which will force some of the directors and
years. And they are still trading. Which begs the question what are          shareholders to decide whether they really want to put more
the regulators doing? At what point in time is somebody going to             money into a company which is losing. 2) The reinsurance market
scream, “That’s it for me.”                                                  will ultimately start withdrawing capital capacity from companies
    But what we’ve seen over the course of the past five to                  who are losing money every year, and 3) As ratings become more
eight years is the absolute reverse, contrary to what should have            important and people look at needing to be A-rated to get onto
happened. We are seeing additional capacity coming in, regulators            certain business, the rating agencies just won’t give adequate
issuing more and more new licences. What really is shocking                  ratings to companies who aren’t running their business properly.
to me sometimes is that the big players of the world, the big
insurance groups, the sophisticated people, they are making the              Andreas Pollmann, Munich Re: At the moment it’s an incentive
mistake of flooding the local markets with additional capacity while         for the current economies to have plenty of insurers and
at the same time doing reinsurance in those same markets.                    reinsurance capacity because what’s happening is that exposures
    How consolidation is going to happen, is the tricky part                 and volatility are exported to the international insurance world, so
because we are living in a part of the world which is not ruled by           there is hardly any reason to change that.
the classic law of economics. A lot of companies know they must
either merge or acquire or sell themselves to someone else, but it           Julian James, Lockton Companies International: The point of
doesn’t happen. A lot has to do with egos, with the psychology of            motivation is absolutely a crucial one because there is actually no
the board members. We at Solidarity for example have been for at             incentive to change the existing structure.                              Reactions Insurance Market Study: Middle East 2012                                          31
Mi dd l e e a st r O und taBle

                “Our business is primarily                                   and providing the capacity and which part of the market they’re
                                                                             playing in. But yes, fundamentally what you are saying makes a lot
                 about advising clients                                      of sense, this legal regulatory environment which has been created
                 and giving them support                                     around these little pockets in various countries now needs to
                 and understanding local                                     spread out into the larger countries, and then that’s probably going
                                                                             to be one of the triggers for consolidation.
                 dynamics, understanding
                 local regulations,                                          Wayne Jones, Clyde & Co: The financial centres have raised the
                 understanding local                                         bar in terms of the local regulatory standards that existed before
                                                                             and certainly one would hope that’s contagious, so that it catches
                 insurance markets, and
                                                                             on with local regulators. I do not necessarily share your view that
you can’t do that when you’re sitting                                        the problem is with the financial centres allowing bums on seats
3,000 miles away.”                                                           and bringing people in because they’re much better balance at
                                                                             looking at financial and prudential concerns in accepting an entity
Julian James, chief executive officer, Lockton Companies
                                                                             coming in. To my mind the need for consolidation is very much at
                                                                             ground level, which usually fits under the local regulators.
                                                                                  It’s a very interesting thing that happened with the Dubai World
Hedi Hachicha, Scor: There is another thing. If we look at Saudi             breakdown when Dubai announced to the world that it couldn’t
Arabia and look at the valuation of the companies, in this stock             pay its debts. The way they dealt with reassuring the world was
market they are high, so the question is whether it makes sense              to set up an insolvency committee in Dubai, not in the DIFC but
buying those companies including the ones in difficulty. The ones            in Dubai to deal with Dubai World issues and they imported the
in difficulty, some of them have lost a substantial part of their            insolvency rules from the DIFC into this bespoke committee and
capital, so their net asset position is low, what kind of franchise do       appointed some judges from the DIFC to chair it. It wasn’t terribly
they have? What do they have really to sell?                                 well tested but it did reassure the world, so there is a precedent
                                                                             there for some kind of partnership and some using what is in
Youssef Al Kareh, Solidarity General Takaful: You have                       the financial centres to the benefit of the onshore regimes. If
to understand the regulators’ objective and where they are                   they could do something like that to overhaul the company laws
coming from to see why they are not taking active steps to                   or some of the things that are needed to allow consolidation to
force consolidation. We have the DIFC, QFC and now Bahrain in                happen, M&A activity to happen easily, that would be a vital boost
particular competing against each other as financial hubs and the            to the market.
way they are perceived to be succeeding is in terms of the number                 There are deals there that people want to do, we have clients
of licences they are issuing. Nowadays, especially given the Arab            queuing up to do deals, local clients, a lot of them are put off by
Spring, the last thing that the regulator wants to see is a reduction        just how difficult it is and the fact that you cannot guarantee that
in the number of companies or people losing their jobs as a result           a deal will go through in the next 12 to 18 months. In some cases
of consolidation.                                                            it can take years to do it, and that’s not going to spur on a healthy
                                                                             M&A environment.
Akshay Randeva, QFC Authority: The way I see the dynamic
playing out is that there are the financial centres, so there’s the          Chris Pleasant, Guy Carpenter: I think the problem is the people
QFC, there’s the DIFC and then there’s the local regulation, and I           who are queuing up are the people who want to acquire.
think most of this lies in the local regulation much more so than
it does in the financial centres. Step 1, the test tube experiment           Moderator: Can I just pick up on what you were saying earlier
of doing the financial centre has done well but across the region            about how there’s all this capacity and competition and the
the second phase, which was to have this international good                  cake needs to grow in size, rather than the share become
regulation filtered through to the rest of the economy that is               smaller and smaller. What is going to drive that?
probably the part which needs to happen.                                     Youssef Al Kareh, Solidarity General Takaful: The growth has
                                                                             to come on the retail side and in terms of promoting life insurance
Youssef Al Kareh, Solidarity General Takaful: We’ve been talking             in particular. If you look at the GCC the property versus life is
about this ever since the DIFC and QFC were created, why is it not           something like 90% versus 10%, or 85% versus 15%. If you look
happening? Granted, the new financial centres, especially in terms           at Malaysia it’s sort of the other way round. Developing the retail
of their legal and regulatory infrastructure, are much better than           lines of business is an entirely different ball game than developing
the local insurance regulations but what is the purpose of having            the property and casualty portfolio, and it requires a lot of support
two competing non-compatible regulatory systems? Granted,                    from the international community. At the moment we’re only
everything about the new financial centres is way ahead of what              concentrating on capacity but we need to look at issues like IT
the local system has been but you need that extra step, which is             platforms, product development, customer service, marketing,
not happening and as long as it doesn’t happen I don’t think it’s            those are the issues that we really need to build up on in order to
helping a lot except for making it easier for more people to set up          be able to make that growth happen on the retail side of things.
in that domicile.
                                                                             Hedi Hachicha, Scor: But how are you going to convince the
Akshay Randeva, QFC Authority: That’s a very fair point. I’d                 clients to buy insurance?
probably go down into another level of detail where I’d say that
some of these financial centres are onshore and some are                     Youssef Al Kareh, Solidarity General Takaful: Marketing,
offshore and that changes how these new entrants are coming in               education and perseverance and if you have a long-term objective

32                                                Reactions Insurance Market Study: Middle East 2012                 
                                                                                                        Middle east r Oun d taBl e

it is doable. But what I see is that we have boards with a very               got to go and buy D&O policies. You start reforming health sector
short-term investment horizon, especially if you look at the newer            funding and all of a sudden the free treatment dished out by
entrants, most of them are backed up by banks.                                the government hospitals dries up and people have compulsory
                                                                              health insurance to go and buy. So it’s just a question of time as
Steve Bessant, RK Harrison: Within the Middle East that’s what                economies begin to mature... and that’s across the Arab world as
the Arab Spring was about, it was about freedom of speech and                 well. The Arab Spring will bring in that as these regimes unfold
people being able to get their own freedom back in terms of                   and new principles apply and come into play, but it’s going to take
having their own property and their own assets. Okay it’s not a               a few years.
quick fix, it won’t happen tomorrow, it won’t happen in five years’
time but it will be a development of the market. Some of the things           Andreas Pollmann, Munich Re: Most of the MENA markets are
you’re talking about will happen because the client base, or your             at this stage, according to the World Economic Forum, where
client base as an insurer or reinsurer, will change because you’ll            the average GDP per head allows people to buy insurance and
be offering products to people who hadn’t even thought about                  benefit from this financial service protecting family from harm etc.
insurance. Right now they can’t even think about their life and their         When you look at your Allianz, AXA, Ace or Generali, they have the
civil rights, but the next steps will be that they’ll own property, own       infrastructure in place, they have the distribution means and tools,
cars, think about life insurance etc. The key is establishing those           they have the techniques, they have the IT, etc and the marketing
ideas now so when those markets are there we’re in a position to              products at hand to capitalise on this moment people start buying
support that.                                                                 insurance. But I wonder whether the local companies will be ready
                                                                              in time to capitalise on this opportunity?
Akshay Randeva, QFC Authority: It is like a shoe salesman
who goes to Africa and comes back and says, “Listen, nobody’s                 Moderator: Just playing devil’s advocate, does it matter that the
wearing shoes, I’m coming back home”. They send somebody                      level of technical pricing isn’t that great at the moment given
else and he says, “Send 17 more people, I need to get started                 the fact that there are also very low claims in the region?
working, nobody here has shoes”. I’ll tell you from the experience            Hedi Hachicha, Scor: Claims activity in MENA is not low at all.
of Qatar what numbers tell you. It’s a really small market but in the         We are seeing large claims. Last year in Saudi Arabia there was
past three to three-and-a-half years, ever since we got companies             a claim that was the historical largest claim in Saudi. We had also
offering retail products from the QFC, we’ve seen a 30% plus                  three floods in Saudi in three years, we had also the Arab Spring
growth in premiums, so it does look like the demand is there.                 events impact in Tunisia and Egypt and in Qatar also there was a
                                                                              huge aluminium factory loss. So when you say claims activity is
Hedi Hachicha, Scor: But is it out of mandatory lines or is it out            low, I can tell you the response definitively from a risk taker is no
of other lines?                                                               it isn’t.

Akshay Randeva, QFC Authority: No, I’m talking only about the                 Andreas Pollmann, Munich Re: Hedi is absolutely right. Please
life sector.                                                                  let’s not fool ourselves. The bare exposure we see in places like
                                                                              Qatar, Dubai, Abu Dhabi, Riyadh, Jeddah, you name it, compared
Wayne Jones, Clyde & Co: In a maturing economy the insurance                  to 30 years ago, has exponentially increased, the risk standards
market just picks up as a by-product of what’s actually happening             did not and so the exposure is there. Although nobody appreciates
in the rest of the commercial world. You start implementing proper            to hear it on the buying side, it is a fact, we cannot ignore. The
corporate governance in companies and all of a sudden they’ve                 premium exposure relation is currently going to deteriorate further.                               Reactions Insurance Market Study: Middle East 2012                                          33
Mi dd l e e a st r O und taBle

Prices are not risk commensurate as we speak, for various market                                      “Claims activity in MENA
reasons, but going forward they have to increase in order to come
back to a sustainable basis.
                                                                                                       is not low at all. We are
                                                                                                       seeing large claims.”
Moderator: Looking at the flood losses in Saudi, we’ve seen                                           Hedi Hachicha, chief underwriting
cyclones in Oman and there’s the earthquake exposure                                                  officer, treaty P&C, Africa and Middle
in Dubai, is it strictly true to say that the region is a non-                                        East, Scor
catastrophe region? Are there exposures there that should be
covered that aren’t?
Andreas Pollmann, Munich Re: I attended a symposium last
year in Riyadh and we had one specialist there from our geology
department. He showed a map of the MENA region and it was full              Steve Bessant, RK Harrison: In this country you’d think London
of dots where events took place in the past 60 years ranging from           was on fire last year. In Egypt, okay there are protests in squares
earthquakes to hurricanes, storms and floods. The only thing that           but the rest of the people carry on business as usual and I think,
was missing was volcanic eruption.                                          as you say, visits are very important.

Youssef Al Kareh, Solidarity General Takaful: Well, we had the              Hedi Hachicha, Scor: If I may say something on this which is
Arab Spring!                                                                a bit personal, being a Tunisian. I was in Tunisia at the end of
                                                                            December 2010 and it was completely quiet. We heard about this
Andreas Pollmann, Munich Re: So the answer is clearly yes,                  gentleman who burnt himself and it was quiet. Two weeks later
there is an exposure to natural catastrophes, but the awareness is          it was a completely different country. I mean, what happened in
very low. The reason for this low awareness probably is the short           Tunisia? There was a resignation of the government and the state
memory of people and the fact that the concentration of values              apparatus and that resignation completely left the country open to
in the past has been very low. Where a few sand dunes shake                 any type of crime.
nobody cares. If a quake hits, for example, Dubai these days                     So, first of all could you predict that? And the next question is:
everybody will care.                                                        is it insurable? And what is insurable? And which marketplace has
                                                                            the expertise to do that? For political violence of that nature, what
Moderator: Is there anything that we haven’t looked at and                  happened in Egypt and in Tunisia is something that in London
that people wanted to discuss?                                              there is a marketplace, there is an expertise and prices are evolv-
Wayne Jones, Clyde & Co: One of the areas we haven’t really                 ing every day. I think it’s better to go and to buy that rather than to
looked at is the whole political risk in the region. We’ve spoken           buy what is called SRCC.
about the Arab Spring just generally and that will no doubt carry                In Tunisia what happened is the state took the decision
on but we have military activity going on in the Straits of Hormuz at       to re-qualify what was a revolution, according to everyone, in
the moment and I’m not entirely sure what happens if that gets out          the press, everywhere, even by the Tunisian government they
of control and how that impacts on the region.                              speak about revolution, however the Ministry of Finance issued
                                                                            first an instruction to all companies to pay and then issued a
Youssef Al Kareh, Solidarity General Takaful: If God forbid                 decree having the force of law saying, “This is strike, riot, civil
anything happens I wouldn’t worry necessarily only about the                commotions, you have to pay.” Then as a reinsurer if you share
local insurance market. But it’s very true, the issue of political          the fortune of your cedant, which should be the case when you
risk as SRCC [strikes, riots and civil commotion] is very relevant          are proportional and you are working with the spirit of continuity
in particular nowadays. In Bahrain as local insurers this is one            and with a long-term view, then you face your obligations and you
of the biggest issues we’re facing in terms of our renewals. But            follow their fortune.
the other thing which I want to highlight is also it’s a bit unfair              Okay, that is fine, but that’s not the spirit under which the
sometimes how the real situation is viewed by somebody who                  original contracts were written. Events that are more qualified
is sitting in London or the US. I have seen this so many times              as insurrection or revolution cannot be covered with SRCC. Civil
that when people come down and they see the real situation, it’s            commotions not amounting to a popular uprising or an insurrection
entirely different from the sort of perception they have had from           can be covered but you have to cover it with certain deductible,
the media. Granted, last year for example there were issues. This           additional price, not automatically and not for free, especially in
year I am hoping that people take into account the changes that             view of the current social or political climate around the globe and
have happened and I think the element of surprise is not there any          in many MENA countries.
longer. The situation is much better on the ground, so hopefully
people will take this on board and make the differentiation.                Chris Pleasant, Guy Carpenter: My only comment is the
                                                                            question about whether political violence is insurable or not.
                        “Yes, there is an exposure                          Obviously there is a market for it so it is insurable but I think the
                         to natural catastrophes, but                       problem is that the insurance market and the reinsurance market
                                                                            as usual is reactive, we suffered losses that we didn’t expect, that
                         the awareness is very low.”                        we hadn’t priced for, but we know the insurance market hadn’t
                         Andreas Pollmann, client management                priced for either, and then we tend to react and try work out a
                         executive, Middle East North Africa,               route forward. That’s led to a different approach really by every
                         Munich Re                                          reinsurance leader operating in this market, everyone’s come up
                                                                            with a different answer how to shut that particular door after the
                                                                            horse has bolted.

34                                               Reactions Insurance Market Study: Middle East 2012                 
In Qatar, the QFC has created an unparalleled environment for business,
but what about the downtime? Why not choose a spot of golf on world
class greens, a day out on crystal blue seas or take your meeting out of
the office and onto the court. Decide at your leisure.

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