The buzz surrounding the Middle East has been growing in recent years. While premiums in the region are just a drop in the ocean from a global perspective, low penetration, double-digit growth, massive investments and large industrial risks have seen many international insurers and reinsurers flock to centres such as Dubai, Qatar, Saudi Arabia and Bahrain. The excitement peaked two years ago, when the traditionally Bermuda-hosted World Insurance Forum picked Dubai as its first international venue. Since then, the global financial crisis has slowed economies and seen Dubai’s dramatic bailout. So has the Middle East and North Africa (MENA) region lost its shine, or do the opportunities now and in the future remain compelling for the international re/insurance community?
Chair: Helen Yates, moderator, Bermuda Re/insurance
Ahmed Rajab, regional director, Middle East and North Africa, Willis Re
Christopher Pleasant, managing director, Guy Carpenter
Nick Charteris-Black, director, global financial services, A.M. Best Company
Matthew Chandler, head of market development, International Markets, Lloyd’s
Stephen May, chief executive officer, Kane Group
Tim Griffin, head of business development, Hardy
Trevor Oates, property and engineering underwriter, Canopius
Helen Yates: Thank you all for being here today in the Lloyd’s Special Dining Room to discuss the Middle East re/insurance market. I’d like to start by asking you whether you feel the opportunities in the Middle East are real or imagined, particularly in light of the global financial crisis.
Stephen May: My view is based simply on the economic environment— the things that were attractive about the Middle East back then, and continue to be now. At the simplest level, these are the fact that the main resource is oil and that it continues to trade well above the forecast numbers that were made two or three years ago. In addition to that, most people felt insurance expenditure was going to increase on an increasing asset base. So those two things made it look very attractive, and everything you read suggests those things have continued to prevail.
Trevor Oates: If you were to compare what’s been happening in the Middle East with what’s been happening in Asia, the Arab financial culture is possibly in a position to learn from some of the mistakes that have been made in the investment strategy in Asia, so that the way they’ve been investing their money is in a way that’s attempting to create longevity with the economies they’re building. The opportunities are very real because the Gulf region is now linked to the financial centres in London, the US and Singapore in a way that it wasn’t 10 years ago.
Ahmed Rajab: Insurance continues to grow in the Middle East; it grew by about 18 percent in 2009 and is expected to grow by about 12 percent in 2010—this is two, three or even four times GDP growth. So clearly, both people and markets are becoming more aware of the need for insurance in the Middle East.
Tim Griffin: There are the high-profile difficulties in Dubai, which are probably more localised than representative of the whole area. From our perspective, we’ve been looking at the opportunities in construction, and I think there has been some slowing, but overall, the indications are that the very big infrastructure projects in many of the areas—Saudi, Qatar, Abu Dhabi and further afield in places such as Libya—are going to be ploughing ahead, and the resources are there to do that.
Christopher Pleasant: I see Dubai in a slightly different position to the rest of the Gulf region. Obviously, it didn’t have very much in terms of energy resource in the first place, and it diversified very rapidly through leverage and was hit harder by the setback that came from the banking sector. But there are still phenomenal prospects for the whole region, both in terms of countries that have got energy supplies and their neighbours. The growth prospects are fantastic and penetration is so low, we’re going to see significant growth over the next five to 10 years.
Nick Charteris-Black: Generally, there remains a positive outlook for the region, but we need to put it into some sort of context. The market will have to grow substantially to be of any size in global terms. The Gulf market is around $10 billion—around $19 billion if you include Turkey—which means it’s about the same size as the Belgium market or the Portuguese market, and with respect, we’re not getting that excited about Portugal, are we? The other thing for me is that big insurance markets are generally based on people and large populations; the problem in the Gulf, with the exception of Saudi, is that the populations are very low. It’s important for the Middle East/Gulf market to access the large Asian economies to get the demographics right.
Matthew Chandler: The slowdown has certainly taken the edge off the strong economic growth, but it’s not gone away—it’s a timing issue. A lot of the growth is pegged to oil, and the oil price has recovered. Dubai is a particular issue that’s playing through at the moment, and that’s a drag on the UAE. From a Lloyd’s perspective, at a macro level, we get about $300 million as a market out of the four countries—Saudi, Qatar, Bahrain, the UAE—and looking at 2010, it looks like it’s going to be around the same kind of levels. So there has not been an immediate tailing off of use of Lloyd’s as a reinsurance market for the region, although a number of the bigger projects will have slowed down.
Helen Yates: Can we talk a bit about the fact that many of the governments in the region are pledging billions of dollars to developing their economies over the next few years? What does this mean in terms of opportunities for insurers and reinsurers?
Christopher Pleasant: They know they have to differentiate themselves and to diversify away from the energy sector. There’s a lot of construction going on, whether that’s infrastructure projects or diversifying into tourism. That will start with the import of goods— because nearly everything is imported for the construction industry, and that’s a major area that’s taken a hit in Dubai recently—then develop through the construction phase and obviously on to the operational risk. So that’s a lot of non-marine revenue that’s there for the insurance market going forward, and they are investing their oil revenues into other sectors.
Tim Griffin: The development in many of the MENA economies is going to lead to construction business and this is one area where Hardy sees prospects. That type of business tends to be more complicated than standard risks, and the larger placements would tend to come to London anyway. Time will tell, and it depends how complex the risks are and how big the individual projects are, but in lots of areas, the markets prefer to place their business locally if they can.
Trevor Oates: The fiscal stimulus packages in a number of countries are different from the way the Middle East is approaching the same problem, because they are being driven by the sovereign wealth funds. So there’s been a higher government involvement from the very beginning. The scale of the projects are often multi-year and, as Tim said, very complex, so the international market needs to be there. But at the same time, you’ll get a number of office blocks, apartment blocks and plenty of speculative building that comes off the back of that initial drive. And the needs of these smaller projects can be catered for within the capacity that’s available locally.
Christopher Pleasant: And the larger projects would be looking for well-rated paper.
Tim Griffin: On the security rating, it depends on where the money is coming from. For government-led projects, there’s a greater chance that business will stay in the local markets than if they’re heavily financed by the banking sector. Private finance will tend to be more focused on minimum security ratings, typically ‘A’ rated paper, and that’s probably the big distinction. But a lot of the projects will be government-backed, and so again, it will be interesting to see how that plays out.
Matthew Chandler: Obviously, there is going to be the desire to localise some of the risk, but the security remains a big factor in that buying decision.
Ahmed Rajab: Security is a big factor, which is looked at by the project managers and the risk carrier; however, we shouldn’t forget that in the Middle East and even in North Africa, there are a lot of companies that are rated and have a very good rating. Today, just by having 25 to 30 regional reinsurers, most of which are rated between ‘BBB+’ and ‘A-’, you have a lot of capacity on the facultative side in the region of $1.5 to $2 billion that can be put together on a single risk. On the treaty side, they could mobilise $300 million. So there’s plenty of capacity there.
Stephen May: Three or four years ago, the rating wasn’t a big issue at all. It has definitely become a lot more high profile in a short space of time. It’s not just being driven by the buyer. A lot of the local insurance companies, which are legally protected to write local business, are not only driving towards strengthening their balance sheet by making sure they buy from as highly rated paper as they can afford, but also the original buyers now are showing more interest in the whole supply chain, which is why you guys are getting a lot more work in the region.
Nick Charteris-Black: It’s slightly self-perpetuating because if a primary company seeks a rating for whatever reason, it will then be looking for secure paper from reinsurers, because of the capital charge it will incur for counterparty risk based on the ratings of its reinsurers.
Helen Yates: Are there any signs that the local insurance market in the region is becoming more sophisticated?
Christopher Pleasant: It’s definitely becoming more sophisticated. With the tightening of the banking sector, we’ve seen many insurance companies that are a lot more dependent upon the return on their investment portfolio than their technical insurance profit. With the system being tested in some instances and increasing awareness about insurance in the security chain, as Stephen said, we’re seeing more people now looking at ratings, who before weren’t worried.
Tim Griffin: My feeling is that there will be more risk retained in the local markets. At the moment, it’s traditionally seen that the local insurance and reinsurance companies will take their slice of the risk and pass it on, and make money through commissions. Where thereis the capacity to make good money out of the actual insurance risk, I would expect to see local markets looking to retain more.
Stephen May: There are going to be several things driving that, and one of them is going to be the demand of the original buyer. And once they’ve started looking through to who writes what, they will also be interested in who gets paid what. That should eventually create a situation where prices start to firm, because prices have been extremely cheap in the region. But if people start to move towards higher-grade paper and not make their money out of commissions, then logically it’s going to have to go back to return on capital, which is where everybody else is.
Ahmed Rajab: The local markets have found a business model that is basically giving the right return on equity that their shareholders are asking for. And this business model takes care of the fact that their portfolio is highly unbalanced. You have a lot of mega risks. These bring years when the loss ratio on the property side for a single company can be in the region of 20 to 25 percent and other years when it would hit 300 percent, just because they do not have enough small and medium-sized risks. So they have found a business model where they pass most of these large risks to reinsurers, which helps them find the right balance. And if there are no small and medium-sized risks to compensate large losses, then the business model they have created, I believe, will continue, whether they are taking 25 percent, 35 percent or 45 percent commission.
Trevor Oates: Historically, local insurance companies had limited capital so used pro rata reinsurance as a substitute for capital. From a pro rata reinsurance perspective, one needs to get as much spread and volume across the region as possible to tackle the hourglass shape of most of the profiles. There’s almost been too much emphasis from reinsurers on keeping the business volume rather than dealing with the individual specifics within those treaties. The end result is very low local retentions and a very high amount ceded to international carriers with a relatively high amount of commission. But because of a low loss ratio, reinsurers flatten the spike out of the big hit when it comes with that premium volume. In truth, there is no incentive for the local companies if they can continue to get the product on that basis.
Nick Charteris-Black: We will ‘penalise’ them for their dependence on reinsurers on both a quantitative and qualitative basis. So if they seek a better rating, it might be a factor that would drive more local retention.
Tim Griffin: Most people say the rates are cheap, but then most people seem to be making money out of it. I’d be interested to know what the loss ratio is on the $300 million worth of business written from the region into Lloyd’s. Is it cheap if you compare it to the exact same wording on a London risk in a different region? It’s only cheap if the claims end up outstripping the premium. Maybe there’s a different claims culture, so it doesn’t have to be so expensive.
Helen Yates: Does it affect pricing that the Middle East generally has very low catastrophe exposures?
Christopher Pleasant: I’m sure that does hold pricing down. It’s because so many of these companies have unbalanced accounts that they can take the security from the major European reinsurers and Lloyd’s on a proportional basis and can guarantee a profit. It is almost impossible for them to make a loss other than in exceptional years. But we’ve seen the first company take a deliberate step away from that and to move towards excess of loss (XL), but it still only works for the largest companies, and that’s to do with the size of the portfolios and the spread of risk.
Nick Charteris-Black: Presumably, it makes it attractive to all the international reinsurers who are desperate to diversify away from their US business. And anything that is non-cat and non-US becomes very attractive.
Christopher Pleasant: Certainly, there are almost monthly enquiries from companies thinking about going into the Middle East. Some of that is the grass is always greener in territories where you are not currently trading, but I think they see the development prospects in the Middle East, the fact that it’s diversifying within their portfolio and the fact that there is low litigiousness with liability risks.
Helen Yates: How important is it to have a presence on the ground, and does it matter which centre you choose?
Ahmed Rajab: For the underwriters, it is very important to be near the risks they are underwriting and to have a better assessment of the market, and for the broking side, it is equally important because the market is there and reinsurers are being set up. We are placing less and less business in London and Bermuda, and are using the local markets more and more.
Tim Griffin: If you’re there and the local broker sees you, they’re going to think of you when they want to place a risk. We’ve not been very long in Bahrain, but that’s already starting to happen. From our perspective, it was probably more important to have a local partner— that’s going to be more beneficial than just having somebody on the ground. And you could have somebody sitting in an office in Bahrain, but it’s not going to do you a great deal of good unless you’re on the road quite a lot or on the plane going to Qatar, Abu Dhabi and Saudi Arabia, and travelling in the region to see the brokers, clients and different ceding companies.
Ahmed Rajab: Which centre you choose really depends on the size of the operation—whether you are trying to write medium andlarge risks or if you’re operating personal line products. The local legislation is also very important and, of course, so is the presence of a workforce.
Nick Charteris-Black: Or if it’s attractive enough to expats out there.
Ahmed Rajab: Companies operating in the Middle East are using fewer expats, or expats not necessarily from Europe.
Christopher Pleasant: All three of the main contenders have different aspects to offer. Dubai has been at it for longer, has more infrastructure and is still seen by quite a lot of people as being the main hub. But Qatar and Bahrain have their attractive features as well. Qatar is now developing this electronic trading platform, which means you won’t need to be there, which is slightly counter-intuitive.
Ahmed Rajab: In the DIFC today, you have about 32 insurance companies and brokers registered, and in Qatar about 16 and in Bahrain around 59—so people are already there.
Nick Charteris-Black: It’s fascinating to observe how those domiciles have been competing. Bahrain was historically the original centre for financial services, and then there was all the noise about Dubai and Qatar. It will be quite interesting to see whether one will end up being dominant.
Matthew Chandler: One of the factors that is going to lead people to make decisions is the proximity of brokers. If you’re a broker market, you’re probably going to be attracted to where the business is, but it’s a regional interest, so wherever you go, you’re going to have an interest in all of the countries.
Helen Yates: Could we see Lloyd’s setting up a platform in the Middle East in the same way as it did in Singapore?
Matthew Chandler: Well, in 2008, we did look at the Middle East. We asked managing agents where their interest was, and we were considering opening a promotional office in the region in 2008. But because of the global economic crisis, we decided to hold fire and let things settle down a bit. So we’ve still got a watching brief on the Middle East as a region, but we’ve been guided by the managing agents and whether they felt that was something beneficial to their business.
Tim Griffin: All the business tends to be placed electronically, so I would question whether you need an actual centre for people to be in the same place.
Stephen May: At the moment, we just trade so differently from how we did years ago that it’s not necessarily where people are, but it’s where the circumstances are most attractive. If you think about how, in 20 years, Bermuda has gone from where it was to where it is now. There are a whole load of places that could have ended up doing what Bermuda did, but that was the one that caught fire first. And in the Middle East, the reason why Dubai gets a lot of coverage is because it got its air links sorted out very quickly and it is very much a focal point for transport. Also, it has built an infrastructure that is attractive to expats. Whether they’re coming from the West or the East, most people, when they’re looking at the Middle East right now, find it easy to move their families to Dubai initially.
Whether or not you should have a presence on the ground depends on what you want to do. If you’re working with the locals in asupporting role, you’re probably better not being there because they feel like you’re invading their space. But if you want to broke your business locally, then you’ve got to be there.
Matthew Chandler: If Lloyd’s were to open an office, there’s no certainty that there would be a co-location of underwriters on the ground. It could be that there’s a promotional office because it’s important that people understand exactly what Lloyd’s is and how to access it. It’s about making sure that Lloyd’s is promoted effectively and well in the region.
Christopher Pleasant: Which domicile had Lloyd’s decided on?
Matthew Chandler: Lloyd’s asked its managing agents where they wanted to do things, and Dubai, Qatar and Bahrain all featured. Again, we made our decision that we just needed to take stock and see what happens once the global financial conditions settle down. We’ll ask the managing agents again, perhaps a little bit later in 2010, whether there is something Lloyd’s should be doing to support them in the region.
Christopher Pleasant: You can show commitment by moving into the region, but it is still very parochial. If you move into Dubai, you upset the people in Qatar because you didn’t choose Qatar.
Stephen May: Even being in Dubai, you irritate people in Abu Dhabi if you give them a Dubai card. And I’m not trying to be in any way patronising—I can quite understand it—but you have to be conscious of it and you can’t pretend it’s not the case as they’re very proud of their locality.
Christopher Pleasant: It’s interesting that the big European reinsurers have decided not to locate out there generally. The guys doing the Middle East are still handling it by travelling, and it’s almost better to be outside the region, or if you’re one of the big brokers—Marsh, Guy Carpenter and Willis—you have to be everywhere.
Nick Charteris-Black: For international reinsurers, the trading relationships go back an awfully long time—that’s why the Europeans are so strong in the region. They’ve been dealing with the same people for 10 years and with the same company for 30 years.
Trevor Oates: It comes back to the whole concept of how Lloyd’s is viewed outside of London. There is still a certain mystique about Lloyd’s of London and, if you set up locally, you might slightly undermine that opinion. But also, if you set up locally, what is it you want to write? It’s the economics of the situation. If you set up a platform, you’ll have the expense of a platform, but you might not get the premium volume in order to make it worthwhile.
Christopher Pleasant: That’s interesting, because Lloyd’s would probably just be a promotional office, but would that drive more business being written in Lloyd’s or not? For some of the major reinsurers, you see them setting up in the Middle East and writing business that their counterparts in Europe would never write, because the rates look a bit thin. But if they set up somewhere such as Dubai or Bahrain, they write that business because having made the commitment, you have to write the revenue to support it.
Matthew Chandler: There are different options people have got in the Lloyd’s Market. The international brokers probably do a lot of the relationship-building through their offices on the ground, and the trips they make support the business in London. The important thing is that there is clarity as to what people want to achieve.
Stephen May: At this stage of the evolution, it’s not clear. Quite a lot of companies are setting up at the moment using their world brand name rather than the Lloyd’s name. So people such as Flagstone Re and QBE are setting up, and people say: “Don’t they have a syndicate in Lloyd’s, and aren’t they here and don’t they write similar business?” That’s one area where the Bermuda-based companies, if they have a Lloyd’s platform and an international presence, choose not to use a Lloyd’s platform as the local entity. And that is confusing. You are handling a potential conflict, because the local guy would rather the local business come to him, and the international guy would much prefer to remotely write a balanced portfolio sitting where he is. So there’s no question at all about it, they’re both saying: “Come to me.”
Helen Yates: Do the prospects for takaful [Sharia-compliant] insurance excite anyone?
Ahmed Rajab: It’s very important to demystify the word ‘takaful’. It is not an innovation but one of the oldest forms of insurance—it’s exactly the same as mutual insurance whereby profits are redistributed to policyholders. The only difference is the name. Takaful is geared towards personal lines rather than major industrial risks.
Christopher Pleasant: We’re seeing a lot of countries now introducing regulation about compulsory insurances and, obviously, those two will grow hand in hand. But it’s more private lines business than commercial risks, and therefore it’s a different type of distribution.
Tim Griffin: There’s probably also less pressure on the reinsurance side because there’s not much retakaful capacity.
Ahmed Rajab: It’s interesting that you say that because, on the treaty side, we are insuring some takaful operators, and they are asking for more and more of their business to be placed with retakaful reinsurers. And the international players are asking why we’re reducing their shares despite their security and strength, and the only answer we have is that they want to have their reinsurance placed with retakaful players. Scor, Munich Re and Hannover Re have all set up retakaful operations.
Tim Griffin: I think there have been moves in recent years to try and establish retakaful operations in Lloyd’s.
Matthew Chandler: In a Lloyd’s context, takaful is not something we’re looking at. Retakaful is something where there are possibilities, but it’s still at a very early stage of development.
Helen Yates: Stephen, are you seeing any requests for takaful captive structures?
Stephen May: Yes, but as Ahmed says, it’s simply one of a number of decisions that have to be made, so investment strategies, domiciles, structures and reinsurance purchasing—whether you want to be retakaful or not—is just one decision that’s made relatively early on.
Trevor Oates: I take a very simple view, which is that we’ve spent 400 years developing an insurance and reinsurance product here in London. This is what we do, and to try and reinvent ourselves as a takaful or retakaful operation seems unnecessary.
Stephen May: With the greatest of respect, it’s just a mutual. You have mutuals and you have insurance right here in the centre of the universe, so there’s no reason why we shouldn’t offer the same wherever we go.
Christopher Pleasant: It’s a version of mutual insurance, but with some restrictions and some different ways of handling money, and obviously the guidance of a Sharia committee that decides what is right and what is not right. But it’s pretty similar and I don’t see why we shouldn’t follow the other major reinsurers that have gone that route and opened up a takaful facility.
Ahmed Rajab: If you look at Saudi Arabia, there’s not one company to my knowledge called a takaful insurance company—all companies are called co-operative—it’s just a matter of wording. They all operate under the same principles.
Helen Yates: How is business transacted in the GCC, and how big a role do the brokers play in placing the big risks?
Christopher Pleasant: There’s still a big influence by the large European reinsurers because the market is still a fairly proportional treaty market. On facultative risks, it’s somewhat different—but those come into Europe if they are large and complicated enough. But increasingly, we’re seeing business that is ceded to treaties and then passed around from one company to the next. Even quite large risks are being absorbed in the region. We’re starting to see a move away from dependence upon proportional treaty, and I think the brokers will play an ever-increasing role in that.
Ahmed Rajab: It’s a big broker market. For our side, Willis has been in the region for more than 30 years and we have almost 150 people there on the ground. A lot of the large mega risks are driven by brokers.
Stephen May: There are some relationships between the financial institutions and major corporations that will take some time to change. The brokers are often working in an environment where there are already clear stakes in the ground.
Helen Yates: How much business do you see being placed locally in years to come, and is it telling that a number of local reinsurers have been set up in the region in recent years?
Ahmed Rajab: We are definitely placing more and more business in the region. This is because underwriters and reinsurers are very close to the insurance companies and to their clients, and they have accessto more information and knowledge about the risks than they would if they were sitting here in Europe.
Stephen May: It does vary from place to place. The UAE, with its laws about local companies writing local business, creates one set of circumstances, and then a place like Qatar, where that is not prevalent, creates another set. It’s easier to pass a large Qatar risk into the world markets than it is with a large Abu Dhabi risk.
Nick Charteris-Black: Presumably, the market will evolve like any other market anywhere in the world. The market will over time evolve and there will be more local placements as capacity and expertise build up.
Christopher Pleasant: You’ve got companies there that were established purely to write the region—new reinsurers that were established with part local money and part international. And you’ve got European and London companies establishing locally and, again, the underwriter’s job is dependent on writing local business. This makes them keener to do business than somebody in London who can write business that comes in from anywhere in the world. I think that’s one of the driving factors in people establishing out there—they don’t want to miss out on what is becoming a regional centre.
Helen Yates: Are there any final thoughts on opportunities in the Middle East now and in the future?
Christopher Pleasant: The oversupply of capacity is a major concern, but as regulation comes in, we might see some mergers and acquisitions.
Tim Griffin: Picking up on the oversupply of capacity, I’m intrigued to see, as our development there picks up and we get to grips with the rating environment and the claims culture in the region, whether or not it is genuinely cheaper or whether we’re just operating in a different environment. We’re still seeing risks going out of the region that are extremely oversubscribed in London, so if it was all that bad it wouldn’t be happening—or would it?
Ahmed Rajab: We still have real opportunities in the Middle East, primarily because we will see more acquisitions and strategic alliances between the operators on the ground. We will see companies creating new lines of products and new distribution channels. One of our clients who had been operating with just one head office in one city has expanded and opened 29 different regional hubs to write business in Saudi Arabia in just six months. So there are opportunities for all players.
Helen Yates: So you haven’t missed the boat if you’re not already there?
Ahmed Rajab: No, you haven’t, but you have to innovate, and it’s harder than before.
Stephen May: And starting 30 years ago would have been better!
Trevor Oates: I think you need to spend time on the ground and to research what the opportunities are that are of interest to you as a reinsurer and, likewise, what you provide as a reinsurer that may be needed on the ground that isn’t necessarily available locally.