Insuring for the future

07 June 2002

The definition of risk in the Middle East was, apparently, changed on 11 September, if the spike in insurance premiums that followed is to be taken as an indicator. In the insurance and reinsurance industry, the difference between reality and perception is slight: what matters is the appetite for risk and the capacity of the market. What most major regional corporates have found - and premium trends confirm - is that international underwriters have grown shy of the region and seem to be capacity constrained for some markets.

'Depending on the sector - be it aviation, marine hull or major onshore oil and gas assets - premiums have increased by 300 per cent, 400 per cent, even 600 per cent in some cases,' says Mounir Kabban, chairman of London-based United Insurance Brokers (UIB), the largest broker bringing business from the Arab world to the London market. 'Some of our clients in the region have had some difficulties understanding why. There is a school of thought that says the underwriters are exploiting the situation and have raised premiums too high.' If they have, the business case for doing so is not difficult to discern. Due to the massive claims for 'business interruption', as well as the claims for physical damage, the 11 September attacks on the World Trade Centre have left the insurance industry facing a $60,000 million-70,000 million bill. It might be unfair, but against such a backdrop, the urge to raise premiums is, at least, understandable. But it has revived the old accusation that the first world generates the losses and the third world pays for them.

Whether the current high premium rates will be sustained for long - or what the implications will be if they are - remains to be seen. 'There are already signs that rates have been settling down - war risk surcharges are still higher than they were pre-11 September, but they have come down,' says Kabban.

The impact of the higher rates is likely to be widespread. Perhaps most important is the change they have had on attitudes towards insurance. 'If the market were to stay as it is, we could expect to see more regional companies walking away from the market and relying on self-insurance,' says Kabban. 'There are people in the Arab world who question why they should be forced to pay for someone else's risk in their premiums. There are already a handful of installations in North Africa that are operating on a self-insurance basis.' It is not just the higher rates that are encouraging this: the apparent lack of appetite in the global market and the softening of terms of coverage have contributed to the erosion of the old status quo.

The lack of access to international reinsurance markets at reasonable rates through the traditional London gateway is likely to bring more radical change to the regional market. With the partial exception of Bahrain-based Arab Insurance Group (Arig) there is no Arab underwriting capacity of any scale, but there are signs that the current pain might kick-start the development of the reinsurance sector. Negotiations have been launched at senior government levels for the establishment of a GCC-wide reinsurance company with sufficiently strong capitalisation to be able to handle the writing of medium-scale business. If these plans reach fruition, and a regional reinsurance industry was to develop, it would, ironically, provide insurance for the region against the vagaries of the international markets. And this would be a far more constructive and sustainable solution for the region's businesses than the path of self-insurance.

Tom Everett-Heath

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