If conditions are right for captives in the Middle East, why has the market not taken off? Karen Attwood investigates.
Captive managers have seen dollar signs flash before their eyes every time they glance at the Arabian Gulf. So many large diversified companies; such a need for insurance expertise. Surely, it is a ready-made captive market waiting for anyone to come along and clean up … Or is it?
Unfortunately, it is all too easy to be beguiled by the apparently abundant opportunities. The truth is, several factors have been holding back the market, including perceptions of cost.
It is more difficult for a captive manager to offer a cost advantage when mainstream market prices remain stubbornly low, across virtually all commercial lines in the Middle East.
The second strong argument for captives – that they allow parent companies to tap straight into the reinsurance community – appears partly undermined by the already dominant presence of reinsurers in the Middle East market.
Until prices go up, captive managers will therefore promote their services as a tool for allowing companies to understand and mitigate their own unique group risks and gain more direct access to the international market.
SUSPICION AND FEAR
While captive regulation has become a key focus for Gulf territories such as Bahrain, the Dubai
International Financial Centre and Qatar Financial Centre, a lack of regulation in onshore markets in general is another potential barrier to investment.
However, captive managers believe the main factor behind the slow development has been a lack of awareness of the wealth that captives can bring, by both potential clients and the traditional insurance market.
“Suspicion and fear of the unknown by industry top dogs is probably the single largest hurdle,” says one insider.
Certainly, some regional insurers believe that the development of captives would take business away from the conventional market.
But captive managers say that this is far from the case. Dean Wickens, Senior Executive Officer at Kane Limited, says that under a captive arrangement “there is a greater alignment of interest” between the original insured and the rest of the market, such as insurers, reinsurers and brokers.
“If elements of the insurance market are not adding value, then under a captive structure these are easily identified and can be removed,” he says.
“It is this ability to remove inefficiencies that makes captives attractive.”
James Portelli, a chartered insurance practitioner in Dubai, agrees. “History strongly suggests that in markets where captive insurance grows, so does the conventional markets,” he says, citing the example of
Malta, a recent entrant into the captive arena, where the number of registered insurance companies has jumped from 15 to more than 40 in five years.
“Furthermore, with a top-heavy market, and a more than proportionate reliance on international reinsurance, the impact of captives on the conventional market within the GCC (Gulf Cooperation Council) region would be negligible.”
Portelli believes that captives actually create more opportunities. “They have created demand that did not previously exist and to which the conventional market later ‘warmed up’, providing additional capacity,” he says.
One captive manager explains that the main driver to establish a captive is to provide a tool to funnel an organisation’s worldwide risk exposures through one vehicle. This gives a better understanding of the risks and protects shareholders’ assets.
It also creates more transparency and gives more control by consolidating the group’s worldwide risk exposure.
Indeed, captives can never work without the co-operation of the regional insurance market, he adds.
OPPORTUNITIES FURTHER AFIELD
Dean Wickens says that there have been significant advancements in the approach to corporate governance and risk management in the Middle East as large organisations seek to reassess their cost and risk strategies.
“This is helping to create a marketplace where companies are considering the benefits of captives and self insurance,” he says.
Wickens believes that if a company has a premium level of $1m and a good claims history, a captive insurance company should be seriously considered.
“However, the development of protected cell company legislation in both the UAE and Qatar also creates opportunities for companies with less premium to benefit,” he says. “In these countries, minimum capital requirements for each cell can be as low as $50,000.”
He believes the fact that many large businesses in the region are quasi-governmental may have slowed the development of the captive market and perhaps led to a lack of competition, as well as curtail insurance innovation. However, he also admits that globalisation and international competition means that companies are increasingly willing to consider and adopt new techniques.
Wickens believes that as the Middle East develops as a captive insurance market, it will also offer opportunities to corporations based in neighbouring regions.
Karen Attwood is a business journalist based in Dubai