The Dubai International Financial Centre (DIFC) was officially launched in September 2004 with grand aspirations of becoming Dubai's very own Wall Street. A world-class financial centre that would attract financial institutions from around the globe to service the entire Gulf Cooperation Council (GCC) countries - comprising Saudi Arabia, Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates (UAE) - and beyond.

With its foundations firmly based on oil, Dubai is a city known for its innovation, rapid growth and business success. Over 60 % of its population is made up of expatriates and 17% of the world's cranes are currently being used on the multiple business projects. Hence, the DIFC was never going to be a half-hearted affair. The colossal building project alone covers 1.8 million square metres - an area twice the size of Canary Wharf in London - with its focal point the Gate Building, headquarters of the DIFC and now an icon of Dubai's prosperity. With insurance and reinsurance as one of its main pillars, the objective from the start was to create an autonomous hub with its own regulatory and legal system. DIFC is intended to plug the gap between the major markets in Europe and those in the Far/Middle East. So a year and a half down the line, is it proving a success?


While insurance in the GCC region has traditionally lagged behind developed or other developing markets, economic growth, industrialisation and improved regulation have served to drive the growth of the insurance sector. However, it is still a very young industry and retention levels are limited. "The market is deluged by some 40 insurance companies and 200 brokers, which increases competition to unrealistic levels and consequently, the market rates are some of the lowest anywhere," says Antoine Khattar, general manager, Aon Middle East. "Despite this the loss ratios of underwriters remain good." The onus now, he says, is on reinsurance.

Dubai suffers from a lack of reinsurance capacity; something the DIFC is keen to remedy by attracting high calibre reinsurers from around the world. "One thing that is incredibly important within the region is that we want a really good reinsurance capacity - but what is more important is that we want a good reinsurance capacity with adequate ratings," explains David Keen vice president of the Middle East region for Aon Re Middle East. "There are very few companies within the region that carry a Standard & Poor's "A" rating."

DIFC has taken on the challenge of filling this capacity and, whilst it is early days, the signs are looking good. "DIFC is very young of course, but I think it has already attracted some major players," says Alec Emmerson head of dispute resolution in Clyde & Co's Dubai office. Among these major players are American Life Insurance Company (Alico), Zurich Financial Services and brokers Jardine Lloyd Thompson and RFIB. "We have set the right foundations," says Marwan Lutfi, DIFC's acting head of insurance and reinsurance. "We have more than six international players that are currently operating from the DIFC in the insurance sector."

While Lutfi points to the many others in the pipeline, he concedes there is still a long way to go. "We are in contact with 80% of the global reinsurers - it is not that we have been neglecting them. But of course it takes time to see the opportunities. Reinsurers are very conservative players in the financial services industry - banking institutions are a bit quicker at jumping on opportunities," he explains. He points to the fact that most Middle Eastern reinsurance business is done by reinsurers located in Europe. And DIFC must convince these reinsurers of the advantages of being closer to the action. "Knowing the culture, players in the insurance industry like face to face business done locally," Lutfi explains. Antoine Khattar says, "A localised operation can allow the reinsurers to capitalise on the additional time that they can liase and negotiate with local insurers/clients and the comfort factor that is allowed by this to the local market is significant."

And it is not just reinsurers the DIFC aims to attract. Brokers, captives and other service providers - such as law firms and information service providers - are also within its scope. "We are talking to leading firms in the insurance back office service sector - similar to what you find in the Lloyd's market," says Lutfi. "We're talking with companies to develop the captive industry, which has huge potential that has been untapped." The DIFC is also hoping to promote the growth and development of the Islamic insurance industry in accordance with Shari'ah law, and Takaful Re, Arig's new reinsurer, announced in January that it had been licensed to operate from the DIFC. "The past two to three years have seen a huge boom in the Islamic insurance industry. And that is the business that everyone is trying to catch," says Lutfi. And of course a big part of the DIFC service offering is the location.

Dubai has developed into a city offering excellent communication and transport links, infrastructure to rival other developed cities, and a lavish lifestyle.

The overall development plan, which includes a media city, internet city, humanitarian city amongst other projects, is part of a 25-year strategy.

And much of that vision is already apparent. "It is deemed to be a nice place to live," says Aon's John O'Flaherty, Marine Development Manager, Aon Re Middle East. "Why put yourself in Ulan Bator when you can be in Dubai - business opportunities aside?" The glossy business district that was built to host DIFC licensees is due to be fully completed by 2010.

"It's a nice new business centre," says Emmerson. "There are a nice set of new buildings that are intended to be the Wall Street area of Dubai."


The DIFC route is not the only option open to international insurers and reinsurers, as there is now also the opportunity to obtain an onshore UAE license, although Emmerson believes this is the more onerous route to take. "Until last year it wasn't possible to get a license in the UAE - they had closed the market," he explains. "Although the DIFC is highly regulated, it's actually a more user-friendly process to get a DIFC license than it would be to try and set up onshore, even though that's now allowed again." DIFC offers what Lutfi calls a "one-stop-shop service" whereby a dedicated team will meet all your business requirements, including set-up and operations, work permits and drivers' licenses. But this service does not come cheaply warns Keen.

DIFC has a remarkable degree of sovereignty in terms of its legal and regulatory framework due to the Federal Decree, a constitutional innovation ratified by the Supreme Court of the Federation. Known as the free zone model, it is consequently deemed to be offshore and hence the reason why it is described as a state within a state. And it has allowed the DIFC to create a legal and regulatory system from scratch, while working closely with the Dubai Financial Services Authority. "By statute it has been able to create its own legal and regulatory system and have its own court, so it gives people some comfort that they've got a court and regulatory system which is unique," explains Emmerson. The system, he explains, is based on international standards that global players are familiar with, while eliminating the concern that local courts would not be able to deal with complex insurance or reinsurance disputes. It also allows for fast-track compliance for those that are already compliant in jurisdictions with a similar set of regulatory standards.

Another reason to go to the DIFC above the local route is that onshore limited liability companies must be majority owned locally. Dubai does however have a requirement which stipulates that a certain proportion of Emiratis must be employed by the company, which can create some problems for DIFC-based companies in that seeking to source high calibre staff from the local market can make it difficult to find individuals with experience in specific sectors, such as reinsurance.

The flip side though is that by obtaining a DIFC license as opposed to a UAE license, insurers are not able to write direct retail business in Dubai, leaving reinsurance as the only option. "At the moment in most of the GCC countries local risks have to be insured locally," explains Emmerson. "So a lot of projects are fronted by a local insurer and then reinsured off into London or the European reinsurance market." Aon's O'Flaherty says these laws exist to protect UAE insurance companies but that this is not necessarily a bad thing given the level of local competition. "The retail market in Dubai is highly developed and it's highly competitive and it wouldn't make economic sense for large reinsurers to be out on the streets retailing. It is much better to sit back and form relationships with the direct insurers."


Growth for both the insurance and reinsurance sectors is expected over the coming years - driven by the energy market, continued population growth, the tourism boom, increased awareness of personal lines and soon to be compulsory medical cover, not to mention the increased retail and property development. While intense competition between insurers has kept retention levels low, the thriving stock market means they are currently enjoying enormous investment gains despite making little underwriting profit. DIFC licensees may not be able to write retail business, but they are in direct proximity to this highly active market and its good loss ratios. But proximity to Dubai's primary insurance market is not the only advantage.

The DIFC acts as a hub to a vast surrounding region, encompassing the GCC, the Indian subcontinent, the Northern Gulf, the Caspian states, the Levant and north and east Africa - something Alico (American Life Insurance Company), a subsidiary of AIG, has taken full advantage of. Having been present in the region since 1952, it recently moved its Middle East, Africa and South Asia (MEASA) office to the DIFC. And it's not just Alico; Royal & Sun Alliance, which is not part of the DIFC having set up before it was in existence, also services a vast area. "Previously they had a Middle Eastern regional office here and now they have a 'half the world' office here because they moved what was administered and run from Singapore to Dubai," says Emmerson.

The big attraction for insurers and reinsurers is, unsurprisingly, offshore energy, although there are also massive onshore developments - such as in Saudi Arabia - that are producing a lot of business. Marine and shipping is another big area for the industry with Dubai's trading port background and major investments in infrastructure and development taking place to service the import/export sector. One burgeoning sector is aviation, which has grown quickly to support the development of Middle East carriers such as Gulf and Qatar airlines. Life reinsurance also holds great future potential with premium growth currently at 17% compared to 5% for non-life.

There is little doubt that Dubai's insurance and reinsurance industry will continue to grow and prosper, and the DIFC is offering one way of getting in on the action. Despite acknowledging some teething problems, the message from the DIFC is incredibly upbeat and it is difficult not to get carried away on the wave of enthusiasm. "You see the headlines that Dubai is making in all business sectors," says Lutfi. "The sky is the limit. Failure here is not an option." Aon's Keen takes a more cautious view. "They've been enormously successful. I think they have been less successful on the reinsurance side and we want to see how it develops," he says. "But quite seriously I don't think we're attracting the Munich Res and the Swiss Res of this world." The jury is out.

- Helen Yates is deputy editor of Global Reinsurance.