The Middle East insurance industry has a lot of catching up to do.
Governments are finding it increasingly hard to provide social insurance and health cover to their fast-growing populations, and the awareness of the need for individual responsibility in this area is only just starting to seep into Middle East society.
However, change is in the air. Consumer spending patterns have evolved with the emergence of an urban middle class, requiring a much wider range of financial services products. Demographic patterns are also changing as a slow-down in the net birth rate and much increased life expectancy means that the population as a whole is ageing.
Gross insurance premiums in the Arab world are only just over 1 per cent of gross domestic product (GDP), well below rates in most middle-income developing countries.
A significant increase in total premiums cannot be achieved until the insurance system is reformed to allow more involvement by leading international companies and to set up an adequate regulatory framework.
With 65 million people, a rising middle class and a policy commitment to free market reforms, Egypt has been viewed as one of the key target markets by international insurance firms. The terms of the country’s World Trade Organisation (WTO) membership oblige it to liberalise the insurance market fully by 2003, and with this in mind, the government passed a law in 1998 removing the restrictions on foreign ownership.
However, privatisation of the insurance sector is taking a long time to build up momentum.
One of the most significant developments of the past two years has been the establishment of Commercial International Life Insurance Company (CIL) by Legal & General of the UK and Commercial International Bank (Egypt), with other partners. However, as CIL managing director Ian Viney notes (see page 28), the government appears to be hesitating in moving forward and encouraging more players to come in.
The only other dedicated life insurance company is Alico, a joint venture between AIG of the US and the local Pharaonic Insurance. AIG’s efforts to obtain a general insurance licence have yet to bear fruit, and a move by Allianz of Germany to build up a presence in the country is making slow progress. Allianz has acquired 80 per cent of Arab International Insurance Company, a free zone company, and at the start of 2000 applied for a licence to set up operations in Egypt proper. The sale of another free zone-registered company – Egyptian American Insurance – is also taking a long time to come to fruition. The leading bidder is ACE of the US in partnership with Commercial International Investment Company (CIIC).
The other side of opening up the Egyptian insurance sector is privatisation.
Economy & Foreign Trade Minister Youssef Boutros Ghali has made clear his view that selling the public sector insurance companies is politically easier to handle than the privatisation of state-owned banks. The process started in 1998, with the invitation to international investment banks to bid to evaluate the four state-owned insurance companies, which account for more than 80 per cent of the market. The selection of two banks was made in October that year, but the finalisation of their contracts hit complications. One of the banks – Morgan Stanley – was dropped, and its role was taken over by Fleming CIIC, which is due to evaluate El-Chark for Insurance and Egypt Reinsurance. Merrill Lynch is working on Misr Insurance and National Insurance.
AM Best, the US ratings agency, says the government is right to take a gradual approach. ‘While some have criticised the slow pace of reform, AM Best. . . believes the government is following an appropriately prudent course, ‘ the company says in a recent briefing paper. The valuation of the four companies will be complicated by the fact that their considerable real estate portfolios are shown in the accounts at cost, whereas its real value is much higher, AM Best notes. Another issue to be dealt with in the evaluation will be the high level of reserves held by the companies.
The banks’ evaluation reports are expected to be complete by the end of 2000, paving the way for the first privatisation deals to go ahead next year.