Seeking new pastures
Prospects in the Gulf for the international market
As a recent A.M. Best report (May 2010) on the state of the Gulf insurance market aptly describes it, the Gulf Co-Operation Council (GCC) countries of Saudi Arabia, Oman, Qatar, Kuwait, Bahrain and the United Arab Emirates (UAE) are “rich in potential, but hurdles remain”.
The region’s mineral wealth is well known, and the seemingly unstoppable advance of city states such as Dubai and Abu Dhabi, served by five-star airlines, hotels and golfing resorts, has also been well documented. More recently, however, amid the world economic downturn, the plight of some of the brash, razzmatazz projects that epitomised this growth have cast the region in a different light. Yet this dynamic region appears tipped to rebound much faster than developed world economies and, due to its innate wealth, remains unsaddled by the burden of public debt and deficits.
A region of contrasts
It is, in many ways, a region of contrasts. On the one hand, conservative religious views and ancient legal systems are viewed as impediments to the development of a modern society; while on the other, having the biggest, boldest and best is the self-imposed standard of the region’s rulers.
The Gulf insurance market is in many ways very similar. In some areas, it is heavily overpopulated, with a range of dated insurance operators labouring under a creaking regulatory environment. In others, it boasts state-of-the-art financial centres seeking to compete with the world’s best. Civil law systems, underpinned by Sharia interpretations, operate alongside plush commercial courts staffed by the cream of the world’s elite common law jurists. A homogenous society it is not. While level playing fields may be the desire in years to come, until now, there have been wide variants in standards and regulations.
A place of opportunity
Yet, above all, it remains a region of opportunity. Financial services such as insurance have barely scratched the surface of what is possible. The development of regional economies ought to provide a fertile source of growth for many years to come. The scope for investment is great. With its improvement in regulation and increasing access being extended to international operators, the GCC is a market that simply cannot be ignored.
In 2008, the biennial World Insurance Forum, held in Dubai, had as its theme ‘East meets West’. As a logistical hub, Dubai, which is only a two-hour flight from India, is ideally located for a number of rapidly developing economies. Its relative political stability (in a region historically not well known for this), forward-thinking leadership, and state-of-the art logistics and facilities, make Dubai an attractive place in which to do business.
In recent years, a number of Bermuda interests have established a presence in the region: Flagstone Re, ACE, Lancashire and Arch (through Gulf Re) have all set up in the region. However, for the most part, it remains an area that is dominated by local companies, with a handful of typically European insurers.
This article discusses the prospects for Bermudan concerns looking to enter the GCC market and some of the issues that need to be considered.
One size does not fit all
Although the region is relatively small in terms of population and premium income (it achieved $10.6 billion of gross written premium [GWP] in 2008, according to Swiss Re’s Sigma Report 2009, which represents less than two-thirds of Singapore’s GWP), there is presently no one method for setting up in the Gulf that will give a foreign insurer access each domestic market. Financial centres such as the Dubai International Financial Centre (DIFC) and Qatar FinancialCentre (QFC), which are focused on being hubs for the region, typically allow limited direct access to domestic markets. A licence in one of the GCC states does not entitle the holder to write business in other jurisdictions, and ‘passporting’ is only available to entities that are wholly owned by GCC citizens.
Takaful (Islamic insurance) represents another possible method to enter the market. Many international insurers are establishing takaful operations, some of which are based in the GCC, as an alternative means of accessing new markets.
Accordingly, the first task for any potential new entrant is to consider what its aims and objectives are for entering the region, and to take a careful look at what suits best. As an example, ACE has set up a branch of the parent company in Bahrain, where it enjoys direct access to the relatively small Bahrain domestic market and presently focuses on reinsurance activities for the rest of the Gulf. Flagstone Re has registered with the DIFC as an intermediary underwriting agency, writing reinsurance from this central hub around the region. Arch’s vision was to invest in a local, Gulf-domiciled reinsurance company with local GCC investors, resulting in Gulf Re—a DIFC-domiciled reinsurer with $400 million in capital.
Access to foreign interests
For many years, the GCC territories were not open to new foreign entrants. International insurers were represented by historical interests that had been ‘grandfathered’ into the newly independent states in the 1960s and 1970s. Regulatory restrictions have been eased.
Bahrain, Oman and Qatar permit 100 percent foreign ownership, subject to varying conditions. The UAE currently has a moratorium on the registration of foreign branches and permits up to 25 percent foreign ownership in domestic insurers. Saudi also permits 25 percent (although up to 60 percent ownership in intermediaries has been known) and Kuwait’s foreign investment criteria permit up to 100 percent foreign ownership.
The financial centres of DIFC and QFC offer a regulatory framework that is based on the UK’s Financial Services Authority system and will be familiar to the Bermuda market. These financial centres are underpinned by common law legal systems and courts. Bahrain’s financial centre embraces a forward-thinking rulebook that links with the traditional economy within which it is based.
Alternative means of establishing a presence
Establishing in the region does not mean committing to setting up a full-blown, highly capitalised risk carrier in each territory. Examples of ways to access the markets are set out below:
• One-man representative office carrying no capital requirements in the DIFC
• Registration as an intermediary (e.g. broker or underwriting agency). Capital requirements range from a base of $10,000 in the DIFC, to BD50,000 ($132,000) for Bahrain brokers, to $250,000 in the QFC
• Registering a branch of a foreign insurer, often on the basis of a waiver of local capital requirements
• Locally domiciled insurance company requiring a base capital of $10 million in the DIFC, through to $100 million in the QFC. Jurisdictions such as Saudi Arabia and the UAE have introducedminimum capital requirements of $26.67 million for insurers and $53.3 million for reinsurers.
The rapidly changing landscape of the Gulf’s regulatory markets makes it imperative to check regularly what forms of establishment are available. For example, a 2004 law made it possible for foreign insurers to register branch offices in the UAE, ending a 20-year moratorium on registrations. However, in the wake of the AIG crisis, that window closed in December 2008, and a moratorium on foreign registrations (for brokers and insurers alike) was imposed and remains in place to date.
The future for fronting?
The historic practice of fronting arrangements, whereby a foreign insurer enters into an arrangement with a local insurance company to ‘front’ its local policies in exchange for a small commission, is still prevalent in the market. Fronting arrangements tend to flourish in areas such as health insurance, where a well-known international brand seeks to access the local market using a local front. However, through a combination of regulatory reforms and the increasing sophistication of the market, this practice is likely to decrease in the future. For example, regulations in Saudi Arabia permit a maximum of 40 percent foreign reinsurance of a cedant’s book of business. Other health regulators are also clamping down on the use of fronting in the local markets.
Notwithstanding the above, on the whole, the levels of retention in the Gulf insurance market remain very low. Many large project policies remain reinsurance-led, with reinsurers setting the rates and terms on which local risks are written.
On the horizon Going forward, what is predicted for the region’s insurance markets?
In no particular order, the following issues are likely to feature strongly in the region’s development:
• Regulatory reform: This is likely to continue apace as much of the region plays ‘catch-up’ to the rest of the developed world. The approaches taken by the region’s regulators differ considerably, and harmonisation remains some way off
• Consolidation: Overpopulated markets (the UAE has 56 insurers servicing a population of four million) and increasing regulation are likely to lead to consolidation and M&A activity in the market
• Growth: The increasing sophistication of the economies and the introduction of compulsory insurance products (e.g. health insurance) will result in continued strong growth in premium income
• New product lines: Continued economic development is likely to assist the growth of more sophisticated product lines in the Gulf states. Already the financial crisis has brought about hitherto unknown lines of claims in the directors’ and officers’ and financial lines businesses, and a growth in demand for these products is likely going forward.
For all its impediments, the Gulf remains an attractive region for the international insurance market. However, a careful examination of the market and a sound business plan are absolute prerequisites to a successful strategy for developing a footprint in the GCC.
Wayne Jones is a partner and leads the Middle East re/insurance team at Clyde & Co LLP, which has offices in Abu Dhabi, Dubai, Qatar and Riyadh. He is based in Clyde’s Dubai office and can be contacted at: email@example.com