After all the hype, the Middle East captive market has got off to a slow start. But as the global economy recovers, this could be the year it really takes off
The Middle East insurance market has been subject to a great deal of excitement in recent years, despite its small size compared with well-established insurance markets (less than 1% of global non-life premium). The wealth of the region, growing insurance penetration, expensive marketing campaigns and attention from the international insurance and reinsurance industries have catapulted the market onto the global insurance agenda. Now attention has shifted to captive insurance.
While three centres in the Gulf Cooperation Council (GCC) have introduced captive legislation – Bahrain, Dubai and Qatar – the market has been slow to develop.
This is just a timing issue, thinks Kane chief executive Stephen May. “We’re at very early stages in this process. There was a lot of hype when legislation was passed and now people are looking to see how fast the industry is growing, but it’s far too early to make a decision as to whether it has been effective or not. The combination of solvency requirements, rating agency activity and the financial crisis has resulted in many people postponing key business decisions.”
As the global economy emerges from recession, he thinks several captives will be formed. “We’re working on a lot of enquiries at the moment – both from regional companies to be located within the region and for companies outside of the region also to be located within the region.”
Of the 3,000 captive insurance companies around the world, so far just five of them have been located in the Middle East. The first, Tabreed Captive Insurance Company, was set up in Bahrain, which is now also home to Masheed, the captive insurer of Saudi Remix, a concrete company based in Saudi Arabia. Dubai is home to two captives and Qatar just on.
Yet of the three centres, Qatar is making captive insurance a top priority, according to AM Best in its report, Gulf Cooperation Council: rich in potential, but hurdles remain.
“The attraction of establishing itself as a captive domicile and offering opportunities to self-insure is not unique to Qatar. Nevertheless, there is still a lack of awareness and understanding surrounding captives, as they are a new offering. A common attraction of the captive structure is the ability to lower premiums, but with GCC insurance prices already being generally low, there is little incentive to self-insure,” says the report.
“Nevertheless, optimism surrounds the prospects for captives. The Dubai International Financial Centre recently reduced its application fee for captives from $15,000 to $5,500, and for protected cell companies from $40,000 to $8,000 for the core cell, plus $1,000 per additional cell.”
The case for Middle East captives
Despite the low cost of commercial insurance in the region, captives could be considered attractive for reasons other than price. Buyers can create a more bespoke product by setting up a captive tailored to their risk profile and avoiding any concern over future price volatility or available capacity. Self-insurance makes costs more predictable over the long term, with premiums budgeted for and more control over claims processing.
“There are 10 to 12 drivers most people consider when setting up a captive, and only two of them are current prevailing rates and tax,” May says.
The financial crisis has heightened buyers’ concern over counterparty credit risk, and this could be a driver of captive growth. Many insurers within the region pass on the majority of risks they underwrite and cedants are increasingly wary of where that risk ends up.
Stories in the media about financial institutions facing writedowns and rating downgrades have encouraged buyers to think more carefully about their insurance purchasing, May believes.
“It has heightened people’s awareness of the perils of buying without thinking about the supply chain behind the immediate product,” he says.
There is also the Middle East’s geography to consider. One of the reasons the region has attracted attention from international insurers is that it is ideally placed between the USA and Europe and the Asia Pacific markets.
With the world economy shifting ever eastwards, the region’s central timezone also makes it a convincing proposition for captive insurance. Multinational companies with offices around the world could see the value in locating their captive in the Gulf – particularly blue chips that have Middle Eastern shareholders.
“People get very caught up in Middle Eastern buyers, but the whole driver of the captive initiative in Bahrain, Dubai, Qatar and elsewhere is the fact that they’re not all driven by local demand but rather by international demand,” May explains.
“If you consider what’s happened on the international stage, with the major captive domiciles, such as Bermuda, Cayman, the USA, Dublin, Guernsey and Malta, it becomes apparent that the drivers for setting up captives in the East are going to be similar to those in the West.”
Full of possibilities
The potential for takaful captive structures could also excite Middle Eastern business owners and shareholders, who may prefer to opt for risk transfer arrangements in an environment they understand.
Takaful insurance is conducted in line with Sharia law, resembling a mutual insurance approach with investments strictly in line with Sharia principles. Kane produced a prototype takaful captive last year.
“With takaful insurance and reinsurance capacity now also available, this will definitely be an option that people will want to be able to take advantage of,” he says.
Press reports on insurance in the Middle East frequently focus on perceived competition between the three hubs of Bahrain, the Dubai International Financial Centre (DIFC) and Qatar Financial Centre Authority (QFCA).
While Bahrain was the first major insurance centre, the DIFC has so far licensed the greatest number of insurers, and both Dubai and Qatar have invested heavily in infrastructure in recent years.
May thinks there is room for several captive domiciles in the region. “If there’s already room for 60 world domiciles, then when you’re looking at three or four in the Middle East, in my opinion you don’t need to think about winners and losers.”
As a new captive jurisdiction, Qatar also has the benefit of learning from the 60-plus domiciles that have gone before it. “When QFCA was developing its strategy to focus on the development of three hubs, captive insurance, reinsurance and asset management, we did an extensive study of other regional and global domiciles,” QFCA chief executive Shashank Srivastava reveals.
“This approach embodied aspects from other domiciles that should be replicated and those that should be avoided. It was important for us to understand what makes certain jurisdictions strong, but also to grasp why other jurisdictions didn’t fulfil their potential.”
Backed by wealth
The wealth of the region, much of it based on natural resources, is bankrolling the development of a financial services sector.
A determination to develop post-energy economies means very little is being left to chance – and that says a lot about the region’s captive potential. Regulators will need to strike the right balance between a firm but fair approach to supervision, but if they get that right, pioneering companies will get the ball rolling.
“The QFCA is bullish on the captive growth in both Qatar and the wider region, and we definitely anticipate seeing a significant snowball effect,” Srivastava says. “The growth of captives will be driven by two factors: re-domiciliation of captives from other domiciles and the growth of enterprise risk management in GCC-based firms.”
Tightening regulation in other parts of the world could also work in the market’s favour. In a July 2009 report, European captives – a growth market during a challenging time, AM Best said: “The prospect of setting aside considerably more money and the inevitable need to spend more time on regulatory compliance will lead companies to consider setting up their insurance vehicles outside the EU.”
As Srivastava points out: “The state of the world markets is having a very real and pronounced effect on the financial centres around the world and has not excluded those here in the GCC.
“A strong public backlash has influenced policymakers in the US, UK and Europe to propose financial regulatory reforms such as Solvency II or drive the development of OECD’s tax haven list.
“Globally, financial institutions are watching the changing regulatory and tax landscape and are considering if they are located in the most appropriate jurisdiction.” GR