Gulf economies are showing resilience to the global downturn, but insurers are yet to be impacted by several challenges, reveals Dominic Ellis.

The region which created the term ‘seven star’ still enjoys jaw-dropping wealth on an unparalleled scale. Yet across all sectors of industry, business people have been embracing a new lexicon as the global downturn bites.

‘Consolidation’, ‘retraction’ and ‘redundancies’ were not often heard before the start of 2009, but such words are a cruel reminder that the Middle East is no different to any other crunch-affected region around the world.

The question of how the insurance industry is handling itself in this economic climate varies from one part of the GCC to another. While Dubai’s development has been seriously compromised, Saudi Arabia, Abu Dhabi and Qatar are storming ahead with infrastructure plans

giving the GCC region a continuing level of growth. However, the pace of such plans is largely dependent on oil and gas prices.

Analysts at AM Best say two key factors have impacted insurers and reinsurers, particularly in Dubai: the fall in regional stock markets and pressure on the real estate sector.

Anandi Nangy-Kotecha, a senior financial analyst at AM Best says the general slowdown of infrastructure, property and construction projects, due to lower oil prices, could also have an impact.

“It is evident that some of the GCC insurance companies have experienced a loss of income and/or capital in 2008 and this trend may continue through 2009,” she says.

Multiple effects

There are several immediate impacts that can be expected in GCC insurance and reinsurance, she adds: increased competition as more companies chase fewer projects; pressure to expand regionally in order to grow portfolios; and the threat of increasing participation from foreign companies as their home markets produce lower returns.

Nangy-Kotecha expects a busy time for ratings analysts as insurers and reinsurers will need to be assessed for any potential impact throughout 2009, but she adds this will not necessarily lead to downgrades. Companies could well demonstrate resilience and overcome current deficiencies in the market.

Francois David, president of Coface, confirms that the oil-producing countries of the GCC have remained relatively stable. Is this resilience or a delayed reaction to the global downturn?

David asserts that the region’s country ratings remain unchanged. The GCC countries, “having entered the crisis from a position of enhanced financial strength, due to the oil boom of 2003-2008”. This is despite a global increase in the number of notifications of overdue payments.

A study from the Chartered Insurance Institute says the GCC’s winning combination of fast growth and high income has allowed governments to set aside funds during the boom years that could now be used for counter-recessionary measures, despite a downturn in the performance of sovereign wealth funds. Mark Greenwood, head of Middle East business for the CII, “When recovery does come, the region will be well positioned globally, and investment in the sector including training of young local professionals will quickly follow,” she adds.

Positive growth

Kevin Willis, credit analyst at Standard & Poors, said the UAE was still set to post positive GDP growth in 2009. “The roads may not be so busy, but wealth is still being generated,” he says. “Generally we expect growth to continue in the Gulf markets.”

The changing nature of the markets is prompting a shift from high value business to ‘lower value, higher volume’ business, adds Willis.

“The majority of companies we are talking to are expecting insurance premium to grow in 2009,” he said.

However, he believes that with economies performing poorly, the incidence of claims is likely to rise, opening up greater potential for claims fraud.

Mohammed Iqbal Mankani, CEO of Dubai Islamic Insurance & Reinsurance (Aman), said some of the major insurance incidents in the last four years have taken place on Fridays – “which can’t be a coincidence”.

Meanwhile, personal lines business which has been growing faster than commercial lines across the Gulf is less likely to suffer, as AM Best’s financial analyst Mahesh Mistry reveals.

“It is difficult to predict the full extent of the slowdown on personal lines and it may take some time to see the impact, if any. Developments in personal lines may even be enhanced by changes in regulation that have already happened or may happen on compulsory lines,” Mistry says.

Reinsurers force a change

The level of investment losses among some GCC insurers could force a change in reinsurance contracts, according to Ian Sangster, CEO of Qatar Insurance Company.

Sangster who has long been arguing that premium levels across the GCC are too low, says it will be up to the reinsurers to force GCC insurers to take on increased retention in engineering or property.

“Some companies will be relying on their treaties at such a time, but when I was a reinsurer, I would ask, ‘What’s this money for? How are you going to give us a return on the money?’

“It’s for reinsurers to say that insurers must share in the falls and the fortunes. We will support you but you must be a sound insurance company in the first place. They should be looking at better risk management across the board.”

The challenge of the global downturn is an added complication for GCC insurance regulators, who are already face a challenge in keeping pace with the demands of the industry.

At regional seminar for insurance supervisors in Bahrain, Nader Al Mandeel, Director, Insurance Supervision, at the CBB, said supervisors are being increasingly challenged by the ever-increasing complexities of the financial world.”

The Middle East and Africa region contains 334m people and $1.5trn GDP, yet insurance penetration is around 1%.

Circling the wagons

Insurers who erred on the side of caution, such as Qatar Insurance Company CEO Ian Sangster, are now reaping the rewards.
There has been a significant concentration of
investments in equities and real estate, which has affected many companies in the region. Prospectively, companies are reevaluating their investment strategy with cash and bank deposits becoming a preferred alternative.
Ian Sangster was one CEO who acted early to avoid volatile investment markets.
He says: “We have circled the wagons, we are cash rich, we have the money in solvent banks and we will have a moral return on capital, which is tremendous.
“Since 2005 I started to come out of pension funds, because I took advice from people well above the normal channels such as Joseph Stiglitz, who said we were going to find ourselves in a situation where the road disappears from under our feet.”
He says such views encouraged him to realise that investment bankers had “morphed into alchemists” and that the returns they promised “simply did not exist”.
“Based on this advice, we did a U-turn and brought our money back to Qatar,” he concludes.