Risky business

25 June 2004
However, there are signs that patterns are changing. Higher premiums have attracted fresh capacity and competition is beginning to bite. Rising stock markets and fewer major disasters have contributed to a softening in global markets since mid-2003.

'There is a lot of capacity around,' says a Gulf-based broker. 'This is largely because underwriters are pricing the risk better. But also, there have been a number of new players entering the market. At worst, renewal terms are increasing by about 5 per cent. It is possible they might even be falling. Either way, it is nothing like the huge increases that we have seen in recent years.'

The 11 September attacks proved a watershed for risk analysis. 'For underwriters the attack changed the philosophy for establishing their exposure,' the broker says. 'Prior to 9/11, the estimated maximum loss facing an insurer on buildings and installations was based on engineering assessments. For example, on a $2,000 million refinery the maximum loss would be estimated at about $300 million. After 9/11, underwriters started taking a closer look at their estimated maximum loss calculations and based them on total exposure. So the risk on the same $2,000 million refinery would now be $2,000 million.'

The rise in premiums led to a significant rise in revenues for insurers in the Arab markets. According to an Arab Insurance Market (AIM) report published in mid-May by Arab Insurance Group (Arig), gross written premiums in the Arab market in 2002 exceeded $6,221 million - a 14.6 per cent increase on revenues in 2001.

'The major contributing factor to this was the increase in insurance and reinsurance premium rates following the events of 11 September,' says Arig chief executive Udo Krueger in the report. 'New and additional demand for insurance products - ie, generic growth - constituted only a marginal impact on this development.'

Although there are signs of a softening in the global markets, Krueger anticipates it will be some time before customers in the Middle East will benefit from falling premiums. 'In the Middle East we are not yet seeing any visible signs of softening in the market,' he says. 'There tends to be a time lag of about a year between developments in US and European markets and their impact on our region.'

Insurance penetration in the region lags far behind the world average, but insurers expect this to improve rapidly as governments introduce new legislation to boost awareness of insurance products and to attract investors.

'The rapid population growth in the Middle East and North Africa requires substantial investments in infrastructure improvements,' Krueger says in the AIM report. 'This will lead to an increase in demand for insurance protection and related services. The growing trend to privatise state assets will further enhance the picture by introducing to the market previously uninsured risks requiring insurance cover for the first time.'

The strongest area of growth is in the provision of personal insurance cover. 'The introduction of compulsory health insurance for expatriates and motor third-party liability in Saudi Arabia is an important trend in the Gulf,' says Swiss Re economist Camille Codoni. 'From the point of view of the governments in the GCC, particularly in the biggest Gulf market, Saudi Arabia, there is an increasing need for private insurance. Traditionally, health costs have been covered by the government but, as has been seen in Western Europe, health costs are rising more quickly than government budgets. At the moment, mainstream commercial insurance accounts for about half of the business in the region. But this is changing. For the past 10 years we have seen in all markets in the region personal lines growing faster than commercial lines.'

Essential to the development of private insurance markets in the region is new legislation laying down a regulatory framework and creating supervisory bodies. Such reforms are needed to provide greater protection for policyholders and to create a transparent environment for foreign investors.

In Saudi Arabia, the government is introducing an insurance law that will establish minimum capital requirements for insurance companies, and introduce structured regulation and monitoring by insurance authorities. 'This is a very good move,' says Codoni. 'The new legislation is important because at present there are no clear rules and no supervisory body guaranteeing solvency. When the legislation is introduced, only a fraction of the current companies will get a licence. The draft laws need further clarification.'

At present, there are about 75 companies offering insurance in Saudi Arabia. Of these, only National Company for Co-operative Insurance (NCCI) is licensed to operate in the kingdom. The vast majority of the others are based offshore. Sources in Riyadh say the new regulations, being prepared by the Saudi Arabian Monetary Agency (SAMA - central bank) and the Commerce & Industry Ministry, will be brought into force by the end of the year, despite widespread criticism of ambiguities in the latest draft.

'The effect of these regulations will be tremendous, as it will be the first time that the biggest insurance market in the Arab World is regulated,' says Middle East Insurance Company (MEI) general manager Rajai Sweis. 'Under the regulations no insurers in Saudi Arabia other than NCCI will be allowed to write Saudi business except through newly established Saudi companies. I expect therefore that many new insurance companies will be established in the kingdom under the new regulations. Shareholders will probably be a mixture of international reinsurers and Saudi businessmen.' The kingdom's banking community is also expected to feature prominently among those applying for a licence to offer insurance products.

A significant factor in the development of personal insurance markets in the region is the rise in takaful products. 'Consumers are becoming increasingly aware that insurance does not have to mean contravening sharia law, as increasing numbers of Islamic insurance products are on offer,' says Khalid Rehman, director of insurance and reinsurance at Bahrain-based Gulf Banking Consultants. 'This is leading to growth in the takaful industry exceeding considerably growth in conventional insurance.'

Adds MEI's Sweis: 'The Islamic insurance market in the Middle East is still a small market compared with the other commercial market. It will probably continue to attract mainly individuals but not the corporates.'

Outside the GCC, insurers identify two countries, Egypt and Iran, as having enormous potential. In Egypt, insurance legislation was created some years ago, but insurers say the market has failed to take off because of a tough tax regime which requires insurers to pay tax of up to 20 per cent on premiums.

Although Iran's insurance industry is dominated by three state insurance companies, international insurers say the recent earthquake in Bam, which killed more than 25,000 people, demonstrated a massive need for insurance cover. In May, Iran's Housing & Urban Development Ministry estimated the cost of rebuilding the city at about $1,900 million. This figure contrasts with those produced by the country's central insurance company, Bimeh Markazi Iran, which estimated the insured loss from the earthquake at just $18.7 million.

'Iran is very interesting,' says Swiss Re's Codoni. 'Until a year ago there were only state-owned insurers, but now they have opened the market for domestic private insurance companies. The market is relatively well developed in industrial lines, but there is a big potential for personal insurance lines. The earthquake in Bam showed there was only minimal insurance cover. It is clear that there is a need for more earthquake insurance coverage.'

In Iraq, by contrast, the market has gone cold. A year ago, the country was perceived as having huge potential. Today most insurers have shelved their plans until there is greater political stability. In the meantime, reconstruction contractors are paying enormous premiums for sabotage and terrorism cover placed outside Iraq. 'Iraq will be a huge market for insurers provided stability is restored,' says Sweis. 'At present, insurers in the neighbouring countries issue policies covering transportation of cargo to Iraq. These policies may include war and strike, riot and civil commotion.'

Uncertainty surrounds the country's two state-owned insurance firms and its reinsurance company. Following the ousting of Saddam Hussein, the US-led Coalition Provisional Authority (CPA) appeared determined to push ahead with plans to break up the three companies and open up the market to international and local investors. Those plans were shelved in December leaving a clear policy void surrounding the companies.

The past four years have been a rollercoaster ride for insurers, but as markets start to stabilise, insurers are refocusing on the task of growing in the region. And spectacular growth is expected in the coming years, at least in personal insurance cover. The obstacles that remain - awareness of the products, confidence in the industry and, in Egypt's case, tax - can be removed only through the combined efforts of the insurance industry and the legislators.

Richard Thompson

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