There is huge untapped potential for the captive industry in the Middle East. Global Reinsurance asks Stephen May about these uncharted waters.
The globalisation of Gulf sovereign funds and investment activity in the international markets is leading to a more sophisticated approach to risk management. Although a relatively new concept, companies are coming around to the idea of self-insurance. Tabreed, which set up a captive in Bahrain at the end of 2006, and energy giant Qatar Petroleum (with its captive Al-Koot) have started a trend. Stephen May, CEO of Heritage London & Middle East, wants a slice of the action.
How well developed is the Middle Eastern insurance market?
The insurance market in the GCC [Gulf Cooperation Council] makes up less than 1% of worldwide premiums. However, according to Standard & Poor’s, if the world average insurance premium of $550 per capita were achieved in the region, the market has a potential size of $20bn.
From 2001 to 2005 insurance premium in the region grew at an annual average rate of 17.5%, which accelerated to produce approximately $6.2bn in insurance premiums in 2006. This figure equates to around one third of the world average as a proportion of GDP. According to Swiss Re, in 2006 insurance spend in the US accounted for over 7% of GDP, while in Europe this figure was over 8%. In the GCC it represented only 1.37%.
Life insurance in the GCC is limited, accounting for only 12% to 15% of insurance spend, compared to a global average of 58%. Figures produced by Swiss Re Economic Research & Consulting put life insurance premiums for 2006 at $0.9bn, while non-life accounts for $5.6bn.
In terms of the split between foreign and local insurers, the amount of insurance currently retained by local operators is a fraction of the total, with the majority being reinsured into the international (re)insurance markets.
What are the market dynamics which are driving the expansion of the insurance sector?
The pace of economic growth in the region is quite extraordinary and is causing a huge increase in insurable corporate assets and liabilities. From the wealth created by the exploitation of oil and gas reserves, there has been enormous investment in infrastructure, with estimates putting the figure at approximately $1.5trn over the next ten years.
The knock-on effect on the insurance sector is that individuals are now seeking personal insurance as the wealth created by this growth is dispersed into the economy. Insurance expansion was initially slower than it might have been elsewhere in similar circumstances as traditional insurance products are not universally culturally acceptable in the GCC. Also the sheer level of economic growth meant that many organisations felt that their financial security enabled them to run risk against balance sheets or future profits.
Now, however, there is a drive for greater corporate accountability from investors and authorities. Risk management requirements are generating corporate insurance demand, while financial planning measures and regulation are pushing up demand for personal insurance.
“Risk management requirements are pushing corporate insurance demand, while financial planning is pushing up demand for personal insurance
To what extent are captives part of the insurance landscape in the Middle East?
During the last few years, the Central Bank of Bahrain, Dubai International Financial Centre and Qatar Financial Centre have all established legislation allowing for the formation of captive insurance companies in their respective regions. A small number of Middle Eastern companies have established captives in offshore domiciles outside of the Middle East, but with the availability of these new domiciles on their doorstep I expect interest and activity to increase significantly.
The first captive in the region, Al Koot, was established in Qatar in 2003. Since then only one other captive has been established. How willing are companies in the Middle East to take risk onto their balance sheets?
From the discussions we have had with many Middle Eastern companies over the last couple of years I am in no doubt that taking risk onto their balance sheets is something which these organisations are very willing to do. In many cases they already run very large amounts of uninsured risk.
Furthermore, they are becoming increasingly aware of the weaknesses of some of the traditional suppliers. These weaknesses come from their ability, or in some cases their willingness, to pay claims, through to the pricing uncertainty resulting from outside events such as natural or manmade catastrophes occurring elsewhere or the impact of financial market losses.
Are Middle Eastern companies aware of the potential benefits which the captive can provide?
Those organisations which already use captives (the majority of which were formed a number of years ago and are therefore domiciled outside the region) are of course fully conversant in the potential benefits of such structures. However, the vast majority of companies have been so busy growing and resourcing their enterprises that insurance has been fairly low on their agendas and consideration of retentions and possible captive insurance even lower. The introduction of legislation locally has been the first step in raising this awareness and I believe that the rapidly increasing sophistication of these expanding companies will lead to captives being much more widely considered.
What type of organisation should consider forming a captive in the Middle East?
Captives are most attractive to organisations which are financially robust, profitable and stable, can make long-term plans and have a better than average risk profile. Companies in the region will of course benefit from the convenience of a locally-domiciled captive for proximity and other issues such as Shari’ah-compliance and local preferred suppliers, such as lawyers and accountants.
Overseas companies may also consider using a Middle Eastern domicile in circumstances where other issues are relatively neutral, as it may provide an ideal meeting point between their Eastern and Western operations.
“A Middle Eastern domicile may provide an ideal meeting point between Eastern and Western operations
What industry sectors do you see as most likely to profit from using a captive?
I believe that there are a broad range of industries in the region which can profit from the captive. These sectors include: energy, property and construction. In addition, the tourism and travel sector can benefit from the structure, and in particular the airline industry, which includes aviation service provides, airports and air traffic control. Other sectors which could take advantage of the structure include: public mass transport; public utilities including telecoms; financial services; lawyers; high tech and value manufacturing; healthcare and medical. I would also add that the captive can play a beneficial role for any company which cannot find the product and/or price they seek in the traditional market
Why would a Middle Eastern company choose to establish its captive in the region when there are already a huge number of more experienced captive domiciles?
My experience in the more mature markets for captives shows that proximity to the captive domicile is a very important criterion. For example, the vast majority of US-owned companies domicile their captives in the Americas. Similarly, those in the UK favour the Channel Islands, while companies in Continental Europe also tend to establish in local domiciles. I am strongly recommending Middle Eastern companies to establish their captives locally to satisfy the general demand for control and convenience.
Is there sufficient expertise in the region to support the growth of the captive industry?
I have been very impressed by the resources and professionalism of the authorities in the three locations which have established in this sector. The rapid growth in insurance expertise in the region will lead to many “captive savvy” professionals being available. However, until now, captive management services have not generally been available.
How conducive is the regulatory environment to the establishment of captives?
The regulations that we have studied appear to be “state of the art” and world class. I cannot comment on the implementation of these until several captives are up and running and we have a track record against which to judge the practical issues which arise. The early signs, however, including the processing of our own applications, are very promising. The regulators have been very constructive in assisting us in understanding the processes and firm but fair in applying their standards. I expect captive owners to be fairly treated and to find local domiciles very attractive.
Do you expect to see companies in the region redomiciling their captives to Bahrain, Dubai or Qatar, or is growth in the sector more likely to come from new formations?
Most Middle Eastern companies with captives based outside the region will be managed by their broker. It remains to be seen whether those brokers will establish local management operations. Until they do, captive owners would have to consider changing manager. The opportunity is so much larger than that which has so far developed. Even if all the existing captives (for Middle East companies) move to the region, new formations will still form the majority.
Stephen May is CEO of Heritage London and Middle East.