Special Report Gulf Region Market ReportGCC, while compulsory third-party motor represents the majority of premiums. Property risks also have been a key class of business, and unsurprisingly,

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2010 Special Report

Gulf Region —Market Review

BEST’S SPECIAL REPORTOur Insight, Your Advantage.

Copyright © 2010 by A.M. Best Company, Inc.All rights reserved. No part of this report may be reproduced, stored in a retrieval system or transmitted in any form or by any means; electronic, mechanical, photocopying, recording or otherwise.

BEST’S SPECIAL REPORTOur Insight, Your Advantage.

Gulf Region

Market Review

May 3, 2010

SectorLife & Non-Life

Related Reports

Criteria:Takaful (Shari’a Compliant) Insurance Companies

Analyst Yvette Essen, Head of Market AnalysisTel: +44 20 7397 [email protected]

GCC: Rich in Potential, But Hurdles RemainThe insurance markets of the Gulf Cooperation Council (GCC) – Unit-ed Arab Emirates (UAE), Bahrain, Saudi Arabia, Oman, Qatar and Kuwait – did not fully escape the effects of the economic downturn and stock market volatility, but they are well placed to ride out the ongoing global uncertainties. The companies in the region, in gener-al, are well capitalised – A.M. Best downgraded just one GCC insurer in 2009. The region’s insurance growth rate has moderated since the downturn, but no absolute drop in business has been noted.

While the regional economy has slowed – reflecting, in part, reduced spending on infrastructure – opportunities remain for insurance market growth. However, the scale of that growth is limited by the relatively low population sizes in GCC countries. Market participants need to focus on improving underwriting practices, realigning investment portfolios and raising retentions to become true risk carriers.

• An increase in personal lines business is expected from the introduction of compulsory motor and health cover. Takaful busi-ness is also poised for further development, perhaps beyond the steady growth of the past few years.

• Diversification of product lines – particularly through life and fam-ily products – could help improve profitability.

• Overseas insurers and reinsurers are expected to continue to seek opportunities to build a presence in the GCC as the region offers diversification from more mature markets.

• As more foreign insurers and reinsurers consider entering this region, takeover and joint-venture activities are expected to follow. Regional insurers and reinsurers may also seek mergers. Competition will intensify, challenging smaller, local companies, in particular.

BestWeek subscribers have full access to all statistical studies and special reports at www.ambest.com/research. Some special reports are offered to the general public at no cost.

GCC – Insurance Premium Volume (2007-2008)

Country

Total Premium Volume (USD Millions)

2008 2007Bahrain 497 373UAE 4,976 3,973Qatar 1,009 701Oman 542 430Saudi Arabia 2,912 2,290Kuwait 670 584Total 10,606 8,351

Source: Swiss Re, Sigma No. 3/09, updated December 2009

0

20

40

60

80

100Life PremiumsNon-Life Premiums

WesternEurope

UnitedArab

Emirates

SaudiArabia

QatarOmanKuwaitBahrain

GCC – Life/Non-Life Insurance Market Share by% Premium Volume (2008)

Source: Swiss Re, Sigma No 3/09, updated December 2009

Special Report May 3, 2010

2

Insurance markets around the world have struggled in light of the recent economic downturn, although those in the Gulf Coop-eration Council (GCC) have demonstrated a degree of resilience and are well placed to continue to grow. The United Arab Emir-ates (UAE), Bahrain, Saudi Arabia, Oman, Qatar and Kuwait have seen the take-up of insurance rise significantly over the past few years.

Notwithstanding the well-publicised eco-nomic downturn in Dubai, the region has been much less affected than the world’s more developed insurance markets; A.M. Best believes that, in general, the compa-nies in this region are well capitalised and able to resist further shocks. A.M. Best has downgraded just one company in the GCC in 2009.

The GCC has not suffered from as deep a downturn, and future economic prospects are deemed to be better for this part of the world than for many developed markets. Although the region is seeing a degree of slowdown in its economy – reflecting, among other things, reduced spending on infrastructure developments – in A.M. Best’s opinion, there still are opportunities for insurance markets to grow.

In particular, there is the prospect of an increase in personal lines business, flowing in part from the introduction of compulsory motor and health cover. Changing regula-tory requirements are expected to drive pre-mium volumes, and tougher rules will alter the insurance landscape. Local insurance regulation shows early signs of adopting

global standards, and regulators are intro-ducing higher capital requirements.

More foreign insurers and reinsurers are considering entering this region, which could lead to some takeover activity or the creation of joint ventures. The GCC insur-ance markets are potentially among the world’s most dynamic, considering the low insurance penetration and high potential in each of these countries. However, as an increasing number of international compa-nies move into this territory, competition will intensify, creating challenges par-ticularly for the smaller, local companies. Market participants need to focus increas-ingly on improving underwriting practices, realigning investment portfolios and rais-ing retentions to become true risk carriers.

Diversification of product lines – particular-ly through life and family products – could enable companies to improve profitability. These classes of business are expected to represent opportunities for insurers and takaful operators.

Weathering the DownturnThe insurance markets of the GCC may have weathered the global financial down-turn better than many other mature mar-kets, but they have not completely escaped the challenging conditions of the past two years.

The pace of insurance take-up has been strong in recent years, with the total pre-mium volume for all GCC countries growing 27% year on year in 2008 to USD 10.6 billion (see Exhibit 1). Although the GCC offers exciting opportunities for development, put-ting this into perspective, the GCC’s total 2008 insurance premium volume was slight-ly more than two-thirds Singapore’s total premium volume (USD 15 billion in 2008). Complete data are not yet available for 2009, although the increase in business is likely to have moderated for most companies in the region because of economic challenges.

Although growth may have levelled off in the past year, GCC insurance markets are still well placed to experience an increase in business, as penetration is low by international standards. Total insurance

2

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penetration in 2008 was less than one percentage point for Qatar, Oman, Saudi Arabia and Kuwait (see Exhibit 1). Even in the more developed insurance markets of Bahrain (2.3%) and the UAE (2%), insur-ance penetration was considerably less than for other countries where insurance centres are developing. Total insurance penetration in China, for instance, was 3.3% in 2008.

Life business makes up a fraction of the total gross premiums written (GPW) in the GCC, while compulsory third-party motor represents the majority of premiums. Property risks also have been a key class of business, and unsurprisingly, the cancel-lation or delay of numerous construction and infrastructure projects over the past two years has been a major concern for the insurance industry.

The downturn in Dubai has had an impact on most insurers and reinsurers in the region, as the emirate has been a rich source of property and engineering risks. Furthermore, GCC insurers and reinsurers tend to invest predominately in local markets rather than having a global spread of investments. It is common to have between 30% and 40% of investments in local equities. GCC (re)insurers therefore have been negatively impacted by stock-market volatility in recent years.

A smaller pool of construction and engi-neering risks is expected as a consequence of the economic downturn in the region, but opportunities remain for insurers and reinsurers. For example, state investment in construction projects in Saudi Arabia is set to continue as the government attempts to manage the country’s heavy dependence on oil and petroleum-related industries. Key infrastructure projects simi-larly are expected to continue in Oman, including a new terminal at Muscat Airport and a USD 1 billion water and power plant project. Meanwhile, Qatar, the world’s larg-est exporter of liquefied natural gas (LNG) and home to the world’s third-largest gas reserves, is pressing ahead with expan-sion projects such as in its North Field, the world’s largest pure gas reserve.

Although GCC insurers have experienced volatility in their investment portfolios and face the prospect of competing for less

business in some countries, in A.M. Best’s experience, rated entities in the region are generally well capitalised to absorb shocks. Their balance sheets have displayed some resilience for their respective rating levels when compared with the ratings of compa-nies in other parts of the world.

Exhibit 2 displays the rating changes for GCC companies rated by A.M. Best throughout 2009. With regard to the Finan-cial Strength Rating (FSR), which is an opinion of a company’s financial strength and ability to meet its ongoing insurance policy and contract obligations, there was one downgrade. A.M. Best’s Issuer Credit Rating (ICR), which examines the ability to meet ongoing senior financial obligations, also saw mainly affirmations and a single downgrade. A.M. Best rates start-up com-panies, which make up roughly a third of the ratings shown in Exhibit 2. Start-ups often tend to be well funded in early years in anticipation that portfolios will take time to build up.

The outlook for the majority of A.M. Best-rated entities in the GCC is stable for both FSRs and ICRs. Currently, all of the com-panies have “secure” FSRs (B+ or higher) and “investment grade” ICRs (bbb- or higher).

The vast majority of the companies that A.M. Best rates in the GCC posted rises in GPW for 2008. Excluding recent start-ups ACR ReTakaful, ACR ReTakaful Holdings, Al Fajer Retakaful and Gulf Reinsurance, total GPW climbed 21%. Like-for-like data posted by six of the companies listed in Exhibit 2 show that total GPW for these companies increased 6.5% in 2009.

3

Exhibit 1GCC – Insurance Penetration and Premium Volume (2007-2008)

Country

2008 Premiums as Percentage of GDPTotal Premium Volume

(USD Millions)

Life Business Non-Life Business

Total Business 2008 2007

Bahrain 0.63 1.64 2.27 497 373UAE 0.28 1.67 1.96 4,976 3,973Qatar na 0.99 0.99 1,009 701Oman 0.18 0.73 0.90 542 430Saudi Arabia 0.03 0.59 0.62 2,912 2,290Kuwait 0.09 0.36 0.45 670 584Total 10,606 8,351

Source: Swiss Re, Sigma No. 3/09, updated December 2009


�

In general, profits were negatively affected in 2008 as a result of the credit crisis, with four of the companies listed in Exhibit 2 moving to losses in 2008 from pretax profits in 2007. Again excluding the four start-up companies, total pretax profits tumbled 63% in 2008.

The results of the six companies that have been posted so far for 2009 have shown a rise of 21% in pretax profits. However, this figure was boosted by two companies returning to profitability, while the other four companies witnessed drops in pretax profits.

A.M. Best expects that ongoing eco-nomic uncertainties could create some strain on insurance companies. Market

participants are anticipating a rise in “moral hazard” in terms of fraudulent and “opportunistic” claims, as well as delayed premium payments.

Additional Growth DriversAlthough global financial pressures are likely to continue to impact businesses operating in the GCC, A.M. Best expects the insurance markets to remain well placed to expand. A number of macroeconomic factors should act as key drivers. For example, gross domestic product (GDP) is forecasted to grow at a faster rate in the GCC than in many other parts of the world (see Exhibit 3).

The global economy is estimated to have shrunk by 0.6% year on year in 2009. With the exception of Kuwait and the UAE, the GCC countries are thought to have outper-formed the world economy last year.

Qatar stands out, as it is estimated to have posted an 9% rise in GDP in 2009, boosted by its commitment to infrastructure investment and the energy sector. As such, it is expected to be the fastest developing GCC country, with strong, double-digit growth in GDP in 2010 and 2011 as a result of an anticipated increase in LNG production.

Exhibit 2GCC – A.M. Best Rating Actions (2009)

Ratings

Domicile Company FSRFSR Outlook ICR

ICR Outlook Type of Rating Action

Date of Last Rating Action

Bahrain Life Insurance Corporation (International) (B.S.C.)

B++ Stable bbb+ Stable Affirmed 08/07/09

Bahrain Arab Insurance Group (B.S.C.) B++ Stable bbb+ Stable Affirmed FSR: Upgraded ICR from bbb

15/12/09

Bahrain ACR ReTakaful MEA A- Stable a- Stable Affirmed 09/11/09Bahrain Trust International Insurance &

Reinsurance Co. (B.S.C.)A- Stable a- Stable Affirmed 15/06/09

Kuwait Al Fajer Retakaful Insurance Co. A- Negative implications

a- Negative Implications

Under Review 14/01/09

B++ Negative implications

bbb+ Negative Implications

Downgraded Under Review

18/06/09

B++ Stable bbb+ Stable Affirmed 01/12/09Oman National Life & General Insurance Co. B++ Negative bbb+ Negative Affirmed (outlook

revised from stable)17/04/09

Qatar Qatar General Insurance & Reinsurance Co.

B++ Positive bbb+ Positive Affirmed (outlook revised from stable)

24/11/09

United Arab Emirates International General Insurance Co. n/a n/a bbb- Stable Affirmed 29/07/09United Arab Emirates ACR ReTakaful Holdings Ltd. n/a n/a bbb- Stable Affirmed 09/11/09United Arab Emirates Oman Insurance Co. (PSC) A Stable a Stable Affirmed 15/06/09United Arab Emirates SALAMA Islamic Arab Insurance Co. (PSC) A- Stable a- Stable Affirmed 30/07/09United Arab Emirates Alliance Insurance (PSC) A- Stable a- Stable Affirmed 26/10/09United Arab Emirates Gulf Reinsurance Ltd. A- Stable a- Stable Affirmed 21/05/09

Source: A.M. Best Co.

Exhibit 3Real GDP Growth (2006-2011e)(% Change Year on Year)Country 2006 2007 2008 2009e 2010e 2011eWorld 5.1 5.2 3.0 -0.6 4.2 4.3Bahrain 6.7 8.1 6.1 2.9 3.5 4.0Kuwait 5.1 2.5 6.4* -2.7 3.1 4.8Oman 6.0 7.7 12.3 3.4 4.7 4.7Qatar 15.0 13.7 15.8 9.0 18.5 14.3Saudi Arabia 3.2 2.0 4.3 0.1 3.7 4.0United Arab Emirates 8.7 6.1 5.1 -0.7 1.3 3.1

*estimateSource: International Monetary Fund, World Economic Outlook Database, April 2010


5

Regulation has been changing in the GCC over the past few years and has encour-aged growth in premiums. In Abu Dhabi, companies are legally obliged to arrange medical expenses insurance for expatriate staff, and in Saudi Arabia, medical expens-es coverage is a precondition for obtain-ing or renewing a residence permit. It is expected that compulsory medical insur-ance will also be introduced in Bahrain in phases, starting with expatriate workers.

Third-party liability motor insurance is compulsory throughout the GCC, although the level of cover differs by country. In the UAE, insurance must provide unlimited liability for bodily injury and a maximum cover of AED 250,000 (USD 68,100) for material damage.

In addition to regulation making certain lines of business compulsory, there are other factors altering the GCC insurance landscape. Foreign insurers and reinsur-ers are aware of the opportunities the GCC offers in comparison with the West’s stag-nant insurance markets. Along with many developing countries, including Brazil, Rus-sia, India and China (the BRIC countries), the GCC offers diversification, and interna-tional companies entering this region theo-retically bring their best practices to the market and encourage more sophisticated underwriting and better standards.

Bancassurance has historically accounted for a fraction of insurance premium, although its use is beginning to change in

some GCC countries. In 2008, Qatar’s Doha Bank launched its own insurance subsid-iary, Doha Bank Assurance Co. Meanwhile, Bahraini insurer Solidarity Company has created distribution ties with banks such as Shamil Bank of Bahrain.

The Internet is becoming another distribu-tion channel, with the Middle East recog-nised as having the fastest growing Internet adoption in the world. Bancassurance and Internet channels are set to become more important distribution methods.

The GCC insurance markets are well posi-tioned to grow, although it is worth empha-sising that the population in each of the countries is relatively small. Saudi Arabia has the largest population with an estimat-ed 29 million people, but unlike in the BRIC countries or the United States, it does not have a large consumer market.

Overcoming ChallengesCompetition, particularly among local insurers, remains one of the biggest chal-lenges to companies operating within the GCC. As the potential for these insurance markets has become more evident, foreign insurers and reinsurers have built up a presence in the region. International rein-surers include Swiss Re, Munich Re, Scor, Hannover Re and General Insurance Corpo-ration of India, and overseas insurers com-peting against local market participants include Ace, Axa, Mitsui Sumitomo, New India Assurance and Arabia Insurance Co. (from Lebanon).

Strong oil prices have been a key economic driver in the Gulf region, and the ongoing demand for petro-chemicals ought to add continued support, although oil prices look set to remain below peak levels for the foreseeable future. Overreliance on oil production and the level of oil prices are among the factors A.M. Best takes into account in its country risk tiers, which are used to assess specific risks in each country that could compromise an insurer’s ability to meet its financial obligations.

Under A.M. Best’s country risk rating methodology, countries are placed into one of five tiers, ranging from Country Risk Tier 1 (CRT-1), denoting a stable environment with the least amount of risk, to Country

Risk Tier 5 (CRT-5), for countries that pose the most risk and, consequently, the greatest challenge to an insurer’s financial stability, strength and performance. CRTs are based on an evaluation of economic, politi-cal and financial-system risks.

All GCC countries have received an A.M. Best CRT-3, which is at the top end of the scale for emerging coun-tries. A CRT-3 country’s characteristics include a devel-oping political environment, legal system and business infrastructure with developing capital markets and developing insurance regulatory structure. In compari-son, tiers for countries with growing insurance markets in Southeast Asia (Indonesia, Malaysia, the Philippines, Thailand and Vietnam) range from CRT-3 to CRT-5.

Oil on the Agenda: Assessing GCC Country Risks


6

Pricing can be competitive in the GCC, as the markets generally consist of many par-ticipants. Exhibit 4 demonstrates that some GCC insurance markets can have a signifi-cant number of participants; for instance, in 2008 there were 56 registered insurers in the UAE. The total number of insurers in Bahrain was 89, although this figure is likely to have dropped over the past couple of years in light of rules by the Saudi Arabian Monetary Agency (SAMA) prohibiting insur-ers from operating in Saudi Arabia without authorisation from the regulator.

The dominance of the leading companies varies by GCC country. In Saudi Arabia, for instance, the top five insurers controlled 54% of the non-life insurance market in 2008, according to figures from the regula-tor. The State of Qatar Statistics Authority meanwhile shows only nine insurers in Qatar in 2008, of which five were national, three were Arab companies and one was foreign. The national companies controlled 78% of the market.

Competition from numerous insurers in some GCC markets – combined with fewer business opportunities for insurers in light of the reduced investment in real estate projects – means that large, corporate buyers have increased leverage and can apply pressure on premiums. Furthermore, the unstable equity markets of the past two years are a reminder that companies

cannot rely solely on investment income to shore up balance sheets. There is a height-ened need to focus on profitable underwrit-ing, although this will be a challenge as intense competition appears set to remain. Some underwriters are claiming to be reducing their lines of large and potentially unprofitable business and moving toward small to medium-sized risks.

A.M. Best believes that all market players, including insurers and takaful operators, would benefit from reassessing their busi-ness models. One way of protecting capital positions is for insurers and operators to overcome pressure from shareholders and curb generous dividend payouts.

As underwriting becomes increasingly chal-lenging, some companies are focusing more on future investment policies and are devel-oping their asset-liability management capa-bilities. Some companies have insufficient risk management and actuarial abilities, partly as a result of the lack of data due to the relative youth of the insurance markets. Generally, the shortage of expertise and tal-ent also is a considerable challenge facing the GCC insurance markets.

To stand out from the crowd, insurers also need to differentiate and offer value, retain-ing clients through building partnerships, offering quality service and creating loyal-ties through branding.

Consolidation and Flotations for GCC CompaniesSome GCC countries have recently demon-strated reluctance to grant new licences. In December 2009, the UAE’s Insurance Supreme Authority (ISA) placed a mora-torium on new licences for insurers and brokers in response to the global economic crisis. In February, SAMA announced that it was prohibiting all foreign insurance com-panies operating in the kingdom through local agents from issuing and renewing insurance policies unless they obtain authorisation from SAMA.

These new licensing restrictions and capi-tal requirements, combined with the large numbers of insurers in some GCC countries, could fuel a degree of industry consolidation. Some M&A is taking place: Kuwait-based National Takaful Insurance Co. revealed

Exhibit 4GCC – Market Share of Top Five Non-Life Insurers (2008)

CountryTotal Number

of Insurers Top Five Non-Life Insurers

Market Share of Top 5 Non-Life Insurers in Non-Life Market (%)

Bahrain 89 Bahrain Kuwait, Bahrain National, Takaful International, Al Ahlia, Gulf Union

60

Kuwait 29 Gulf, Kuwait, Warba, Al-Ahleia, Bahrain Kuwait

62

Oman 23 Dhofar, Al Ahlia, Oman United, New India, RSA

68

Qatar 9 Qatar Insurance Co., Qatar General, Al-Kahleej, Doha, Qatar Islamic Insurance Co.

78

Saudi Arabia 24 Aggregate: Company statistics not published by regulator.

54

United Arab Emirates

56 Oman Insurance Co., Abu Dhabi National, Daman - National Health, Islamic Arab (Salama), Arab Orient

na

Sources: Axco Insurance Information Services Ltd, State of Qatar Statistics Authority and Saudi Arabian Monetary Agency (Insurance Supervision Department)


7

Although retention levels vary significantly by class, GCC insurers generally tend to act more like fronting companies as opposed to risk carriers, operating a business model of low retention and significant rein-surance purchasing. Proportional reinsurance is very high, and it is common for insurers to receive 30% commission on treaties in the region, increasing to 45% for profitable business.

Insurers tend to use treaty reinsurance for property, engineering and marine (hull and cargo) risks, usually through a combination of quota-share and surplus treaties. Facultative reinsurance is also widely used for major risks such as energy, aviation, engineering, commercial property and marine hull business. These large risks are offered through reinsurance brokers to regional markets, but also to international reinsurers, particularly in the London market, Europe and Ber-muda.

The majority of non-proportional business tends to be motor insurance. Owing to the competitive pricing for this risk, motor is usually loss-making for the majority of underwriters; therefore, reinsurers are reluctant to take it onto their books other than on an excess-of-loss basis.

Data from Saudi Arabia’s SAMA highlight that reten-tion ratios for personal lines (motor and heath) tend to be significantly higher than for commercial risks (see Exhibit 5). Broadly speaking, health business has been profitable, and insurers therefore retain it.

For major risks such as energy, aviation, engineering, marine and property (which tends to be largely com-mercial rather than residential), insurers retain little business. Insurers often do not have sufficient capital to keep such business on their balance sheets and therefore turn to international reinsurers to gain the security of ceding to highly rated partners.

The desire to trade with better rated reinsurers is driven in part by rating agencies and the recogni-tion that ceding to a highly rated reinsurer will lead to lower counterparty risk charges. Nevertheless, an overreliance on reinsurance can result in companies being penalised on both a quantitative and qualitative basis in A.M. Best’s rating analysis.

The competitive market to a large extent is fuelling low retentions, because carriers are reluctant to accept the low rates required to secure business. In some extreme cases, 90% of business is reinsured. A.M. Best notes that retention ratios could increase over time as the

market matures and underwriting expertise is gained. The appointment of in-house actuaries would also enable underwriters to have greater confidence in their risk analyses and to price them more appropriately. A harder market or lower commissions paid by reinsur-ers would theoretically prompt more realistic pricing from insurers, although despite the need to focus on technical underwriting, neither of these drivers is likely to be forthcoming in the immediate future.

Good relationships with international reinsurers may represent an obstacle to change as long as both par-ties are content to continue with large quota-share treaties. International reinsurers have long-estab-lished relationships in the region, and GCC reinsur-ance capacity is plentiful and not expected to be affected by the credit crisis. Overseas reinsurers are drawn to this region in part because they are seek-ing diversification away from U.S. catastrophe risks. Although flooding is receiving more attention as a perceived risk in the GCC, this region has not been viewed as a major catastrophe area.

A dramatic change in reinsurance patterns is unlikely, although there are some early signs of reinsurance practices beginning to alter. In February, reinsurance broker Guy Carpenter created a new reinsurance struc-ture for Gulf Insurance Group, combining the reinsur-ance programmes of six of the group’s companies into a single programme. Under the new model, part of the reinsurance programme was moved from proportional treaty cover toward an excess-of-loss arrangement to “benefit from the size of its premium income and the very low loss ratios of the companies involved.”

Reinsurance Characteristics and Dynamics for Change

Exhibit 5Saudi Arabia – Retention Ratios (%) by Line (2007-2008)

0 20 40 60 80 10020082007

Energy

Aviation

Property

Engineering

Marine

Accidents &Liabilities

Health

Motor

Source: The Saudi Insurance Market Survey Report 2008, Saudi Arabian Monetary Agency – Insurance Supervision Department

22% Weighted averageexcluding motor andhealth insurance

67% Weighted averageincluding all linesof business


8

in March that it had received two merger approaches. However, the company decided against both of these advances, saying that while it was open to discussions when approached, it was not actively seeking to merge. As insurers in the GCC are often fam-ily-owned companies, reluctance to sell to a rival local business can be considerable.

While A.M. Best envisages some M&A activ-ity, this may be more likely to involve foreign bidders. For instance, in February, U.K.-based RSA purchased Oman’s third-largest insurer, Al Ahlia, for USD 49.35 million. Partnerships, again with foreign entities as opposed to domestic competitors, may be preferable for some local companies. Italy’s Generali also demonstrated this as an option in December 2009 when it signed a preliminary agreement with Qatar Islamic Bank and its partially owned insurer, Beema, to create a takaful joint venture.

Flotations are also becoming more of a trend in the GCC. In some GCC countries, it is compulsory to partially list. In Saudi Arabia, following new SAMA regulatory rules issued a few years ago, upon licensing, an insurance or reinsurance company must offer 40% of the company’s shares to the public in an initial public offering (IPO), unless the larg-est shareholder is a licensed Saudi bank, in which case 30% must be offered.

IPOs could also be motivated by compa-nies looking to fund the growth of their business, or seeking to achieve higher status. However, it is worth observing that while flotations are on the agenda for many GCC companies, the financial markets in this region have been exposed to uncer-tainties. Last year, total regional IPO deals in the Middle East were just one-sixth of the value of floats in 2008.

Changing Regulatory StandardsThe insurance industry in this region is still young and evolving in terms of regulation. Regulatory structures vary in the GCC; for example, the UAE and Qatar have two regimes in place. In the UAE, the ISA super-vises all aspects of the domestic insurance industry. Meanwhile, the Dubai Interna-tional Finance Centre (DIFC) offers a zero tax rate on profits, 100% foreign ownership and no restrictions on foreign exchange or repatriation of capital. The Dubai Financial

Services Authority (DFSA) is the sole regu-lator of all financial and ancillary services conducted through the DIFC.

Qatar’s original 1966 regulatory regime is administered by the Ministry of Business and Trade, and its principal laws relate to the insurance operations of domestic and foreign companies, marine insurance and compulsory third-party liability motor insurance. In 2005, the Qatar Financial Centre (QFC) was established. The Qatar Financial Centre Regulatory Authority (QFCRA) authorises and supervises com-panies and individuals operating within the QFC. However, the DIFC and QFC are still in early phases of development and are attempting to attract companies.

Regulatory structures differ, although com-petition is rife among countries and emir-ates (most notably Dubai, Qatar and Bah-rain) to create the leading GCC insurance hub. Each centre has taken steps recently to become a key insurance market in its own right. For instance, in February, the QFC unveiled intentions to become a cap-tive, reinsurance and asset management centre as part of a revised strategy.

The attraction of establishing itself as a captive domicile and offering oppor-tunities to self-insure is not unique to Qatar. Nevertheless, there is still a lack of awareness and understanding surround-ing captives, as they are a new offering. A common attraction of the captive struc-ture is the ability to lower premiums, but with GCC insurance prices already being generally low, there is little incentive to self-insure. Nevertheless, optimism sur-rounds the prospects for captives. The DIFC recently reduced its application fee for captives from USD 15,000 to USD 5,500, and for protected cell companies (PCCs) from USD 40,000 to USD 8,000 for the core cell, plus USD 1,000 per addi-tional cell.

Bahrain also has a legal framework for captives, and the Central Bank of Bah-rain (CBB) emphasises takaful as an area of particular focus. However, the CBB is also looking more closely at the solvency of takaful companies. Like the Islamic Financial Services Board (IFSB), the CBB believes the unique structure of operators


9

requires “tailor-made” solvency rules that address insurance risks, while at the same time providing a regulatory framework that allows for a different insurance model (see sidebar “Tackling Takaful”).

In general, GCC countries’ rules are chang-ing and becoming more stringent for both brokers and insurers. UAE brokers were given until Dec. 24, 2009 to put in place a statutory capital guarantee of between AED 500,000 and AED 1 million (USD 136,000 to USD 272,000 ), resulting in the closure of 74 brokers.

Many GCC regulators are also increas-ing capital requirements for insurers. For instance, at the beginning of the year, the UAE set the minimum subscribed or paid-up capital for insurers at AED 100 million (USD 27.2 million) – double its previous level – and for reinsurers at AED 250 mil-lion (USD 68 million). In addition, UAE or GCC national individuals or corporate bod-ies must own at least 75% of the insurance or reinsurance company’s capital.

The UAE also gave companies until 2012 to cease trading as composite insurers, at which time they can operate as either a general or a life insurer. It is too early to judge the full impact of the new rule, although as companies split their capital to support underwriting operations, they may need or seek to attract more capital.

Solvency II is a European standard, but as some other jurisdictions are seeking equivalency, it is attracting the attention of GCC regulators. There is recognition that following its planned introduction in 2012, Solvency II has the potential to become a global standard, and that the impact of the forthcoming legislation has already been felt outside the European Union. The GCC will not remain immune from Solvency II, but it is unlikely to imple-ment a similar regulatory framework in the short term.

GCC market participants claim to be increasingly focused on enterprise risk man-agement (ERM), particularly after the eco-nomic crisis. A.M. Best is aware that some companies are already looking at internal capital models and employing consultants to focus on evolving ERM practices, as well

as risk-based capital (RBC). RBC is becom-ing increasingly important, particularly for rated companies subject to rating agency models such as Best’s Capital Adequacy Ratio (BCAR). Rating agency scrutiny is also one driver for improving ERM practices.

Diversification is Two-ProngedGCC companies are attempting to diversify by underwriting specialist lines. While competition is intense, there still may be room for new entrants, depending in part upon their product offering. Certain lines of business such as motor may be competi-tively priced, but a range of different prod-ucts such as protection, savings, invest-ments and child education may offer more potential for growth.

Life insurance and family takaful have previ-ously been considered to be secondary to non-life cover, particularly in Qatar, where these products represented less than 1% of total premiums (see Exhibit 6). Socio-eco-nomic factors have contributed to the low take-up of life products, although as dispos-able income increases, it is anticipated that demand for such cover will increase. Life assurance is regarded as an opportunity for both conventional insurers and takaful operators, especially in light of the higher margins and stability life products can offer.

Regulators, such as the QFCRA, are increasingly promoting the take-up of life policies. Its consultation paper published in early 2010 discussed a proposal to permit general insurers to offer certain

0

20

40

60

80

100Life PremiumsNon-Life Premiums

WesternEurope

UnitedArab

Emirates

SaudiArabia

QatarOmanKuwaitBahrain

Exhibit 6GCC – Life/Non-Life Insurance Market Share by% Premium Volume (2008)

Source: Swiss Re, Sigma No 3/09, updated December 2009


10

Takaful is among the fastest growing segments of the GCC insurance market as certain lines of business become compulsory, and clients are starting to better understand its offerings. GCC governments appear to support the takaful concept, as it provides Shari’a compliant cover to people who may not otherwise have purchased conventional insurance.

Total GCC takaful premiums have been increasing strongly over the past few years, as data from Ernst & Young demonstrate (see Exhibit 7). Saudi Arabia, which operates a similar concept of “cooperative” insurance, remains the largest takaful market in the GCC with 2008 contributions of USD 2.9 billion, according to the accountancy firm. Saudi Arabia’s standing was driven in part by its compulsory medical insurance requirements. Meanwhile, the UAE was the fastest growing market in the world, with a compound annual growth rate of 135% from 2005 to 2008.

The takaful market is expected to continue to grow, in part because of the low insurance penetration in Islamic countries and owing to the increasing avail-ability of takaful products. However, some uncertain-ties surround takaful offerings. For instance, some takaful regulation has yet to be tested, such as the ring-fencing of assets within the takaful fund and the use of an interest-free loan (qard hassan) from opera-tors in the event of solvency difficulties.

In December, the Islamic Financial Services Board (IFSB), an international standard-setting organisation, issued an exposure draft for public consultation to help define the regulatory capital requirements for takaful insurers. Subsequent adoption by local regula-tors and takaful operators of the key principles set by the IFSB may provide some additional security and uniformity. IFSB’s guidelines include setting solvency requirements for both the takaful fund and the share-holders’ fund, a move that A.M. Best regards as par-ticularly important given the quasi-mutual status of these companies and the segregation of funds.

Although takaful premium volumes have increased sharply over the past few years, they do not appear to have met expectations, nor have they offset the strain of the credit crisis on operators. A.M. Best observed a slowdown in start-up activity, given the reduced avail-ability of capital as well as subdued investor confidence. Most companies that had overly optimistic growth tar-gets revised their business projections downward and faced increased volatility in their assets as a result of the sharp movements in both equity and property markets.

A.M. Best notes that companies are struggling to meet original and even revised business plans.

Takaful is still very young, but it is fair to say that early predictions of its potential growth have not been realised. Being compliant with Shari’a law alone has not been sufficient to win business, as customers are generally motivated principally by price. A.M. Best has noted characteristics of takaful operators that may constrict profitability. Compared with conventional insurance companies, takaful market participants face more restricted investment policies. Operators tend to have a high concentration of assets in investments, and as the supply of Sukuk (bond) products in the market is limited, investment in equities tends to be considerably higher than for conventional insurers.

There are many small companies in the takaful mar-ket. High overheads are especially prevalent for small start-ups, which are attempting to build scale.

The range of takaful products available is currently limited, given the youth of the market. As the demand for Shari’a-compliant cover grows, there will be an increasing need to ensure that all lines of business are available. Re-takaful is also needed to help support the growth of takaful. There have been a number of new entrants in the GCC offering this cover, including ACR ReTakaful and Al Fajer Retakaful.

Takaful is expected to continue to be among the fast-est growing GCC insurance segments. As volumes increase, expense ratios should reduce, and as Shari’a compliant cover becomes increasingly available, oper-ators may benefit from customer loyalty driven by a belief in takaful principles.

Tackling Takaful

0

1,000

2,000

3,000

4,000

2008e2007200620052004

Exhibit 7GCC – Gross Takaful Contributions(2004-2008e)

Source: Ernst & Young, The World Takaful Report 2010

(USD

Mill

ions

)


11

short-term life insurance policies. It stated that a number of insurers had been seek-ing approval to write group life policies providing death and ancillary disability benefits.

Some of the larger insurers are also seeking diversification by entering new geographi-cal territories, particularly in North Africa, where pricing often can be less competi-tive. Tunisia, Morocco, Egypt and Algeria have similar Arabic cultures and are viewed as a doorway to the rest of Africa, especially for retail property and casualty risks. There is additionally a move toward the eastern Mediterranean (notably Jordan, Syria and Lebanon).

GCC insurers and reinsurers are also attempting to expand their underwriting portfolios farther afield, and the proximity to the Asian markets represents an opportu-nity for some companies. A particular focus is Southeast Asia, where there are natural affinity relationships for takaful business, considering the large Islamic populations in Malaysia and Indonesia. Bahrain-based Trust Re has not only expanded into the Afro-Asian markets but also attracts Lloyd’s business through its wholly owned, London-based subsidiary, Trust Underwriting Ltd., which last year was permitted to insure up to GBP 27.8 million (USD 42.8 million) spread over 16 syndicates.

Challenges Ahead, But Opportunities ExistThe GCC insurance markets have not escaped the challenges posed by the world economic downturn, although A.M. Best believes they are well placed to ride out the ongoing global uncertainties. Although the rate of growth in GCC insurance has declined after the economic downturn, no absolute drop in business in the region has been noted, and the market is viewed as having strong potential for growth.

GCC companies rated by A.M. Best may have displayed some volatility on the asset side and reductions in the value of their investments, but premium growth rates have been an offsetting factor. Businesses

operating in this region (especially recent start-ups and takaful operators) tend to have ambitious plans, although if construc-tion and infrastructure projects are further delayed, premium volumes for some com-panies will be negatively affected.

Some insurers and reinsurers are attempt-ing to diversify by branching out into new product lines or insuring risks in different countries to avoid the fierce competition in the GCC. Life business and family taka-ful products are viewed as opportunities for growth, particularly because health care products are becoming compulsory in some GCC countries. Discipline must nev-ertheless be maintained, both at home and abroad, as core underwriting is becoming more important in light of volatile invest-ment portfolios.

A.M. Best believes takaful business is poised for further growth, perhaps beyond the steady growth of the past few years, albeit from a low base. It is being offered increasingly as an alternative to conven-tional insurance, although A.M. Best notes that growth in takaful volumes is driven in part by takaful products competing with conventional insurance on price.

GCC regulatory requirements are changing as regulators move toward international standards. Regulators, however, need to strike a balance, as a heavy-handed approach could deter some international companies from operating in the market, although this would potentially help alle-viate competitive pressures or push up prices.

It is no surprise that foreign (re)insurers are attracted to the market potential in the region and that more international companies in pursuit of diversification are considering establishing a presence in the GCC. A.M. Best considers the GCC insurance markets to be among the most exciting in the world, offering opportuni-ties for growth. However, in light of the recent credit crisis and a smaller pool of risks, appropriate pricing has never been so important.


12

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Documents

Special Report Gulf Region Market ReportGCC, while compulsory third-party motor represents the majority of premiums. Property risks also have been a key class of business, and unsurprisingly,