While Dubai sets out its stall to attract leading financial institutions, Bahrain has already made significant progress Gordon Feller writes.
Addressing the International Institute of Finance (IIF) in 2003, General Sheikh Mohammed bin Rashid Al Maktoum, Dubai Crown Prince, UAE Defence Minister and president of the Dubai International Financial Centre (DIFC), said: "Dubai is destined to become the gateway for the flow of capital into and out of this vast region. We will remove the largest single obstacle to the development of this great region: namely the absence of an efficient international financial centre. DIFC will act as a catalyst to stimulate and fuel the region's economic development." Last month saw the culmination of the vision, when DIFC officially opened its doors for business on 20 September.
Geographically, Dubai has the good fortune to be positioned centrally within a region which contains a third of the world's population and which has a combined GDP worth $1.5trn, with an annual growth rate of over 5%.
But for too long, the region has been a net exporter of capital. One of the key goals of DIFC is to create the conditions whereby capital is retained in the region and global investors are attracted to enhance the economic development of the region as a whole. The Crown Prince told IIF that "our vision is to create growth and employment opportunities not only for Dubai and the UAE, but also for the third of the world's population and the countries, which comprise the world's largest untapped emerging market".
Since its conception, DIFC has made a commitment to create a legal and regulatory framework based on 'the best practices and highest standards to be found in New York, London and Hong Kong', pledging integrity, transparency and simplicity. The newly established Dubai Financial Services Authority is the independent regulator of financial services in DIFC and is now issuing licences to operate in the Centre.
In addition to becoming a global centre for Islamic finance, the DIFC's aims include developing the region's potential to become a leading insurance and reinsurance centre to match London and other major markets. Out of the $2.3trn global insurance market, the region currently accounts for less than $10bn in annual premiums. Yet a significant and growing proportion of Fortune 500 companies are located in Dubai, and demand for insurance services is expected to grow at 10-20% over the next 10 years.
DIFC sees itself as a hub for insurance and reinsurance companies, brokers, captives and other service providers, enabling them to establish their regional operations in a single location in the Centre. It was clearly encouraged when, a year ago, Aon issued a letter of intent regarding its application for an operating licence.
DIFC ceo Naser Nabulsi, said: "Aon's intention to apply for a licence represents further resounding endorsement of the DIFC's commitment to develop a world class international insurance and reinsurance centre, serving not just Dubai and the UAE but the region as a whole. We continue to see strong interest from leading financial international institutions such as Aon, attracted by our world class regulatory structure and working environment. We look forward to welcoming them to the DIFC and working together to realise the growth potential of this dynamic region."
Massoud A Shaheen, managing director for the Middle East region, Aon, explained that Aon's plans in joining forces with DIFC will particularly "focus in areas such as captive insurance and risk management. We believe the region offers attractive growth opportunities and see the establishment of DIFC as positioning the Middle East as a key player in the financial and insurance industries worldwide."
While Dubai is working hard to position itself to insurers and reinsurers as a financial centre, Bahrain has already succeeded in creating a strong name amongst international financial centres worldwide. When it began its strategy in October 1975 there were just two international banks, ABN Amro and Citibank, in the region. A year later - in October 1976 - the number of international offshore banking units (OBUs) in the country had jumped to 29, with total assets amounting at that time to $6.2bn.
There has been, however, some volatility in OBUs' results. At the end of 2000, the consolidated balance sheet of the 51 functioning OBUs in Bahrain increased to $93bn from $88.2bn in 1999, a rise of $4.8bn (5.4%).
But the same consolidated balance sheet declined by $4.6bn to $88.4bn at the end of December 2001, and the following year (2002) witnessed a sharp decline by 33.5% to $58.8bn, attributable to the American war against Iraq and the escalation of tension in the region. However, Bahrain reinstated its regional leading position in 2003, when the consolidated balance sheet of the OBUs increased to $83.4bn, a rise of 41.8%.
There has also been diversification in the products offered from Bahrain.
These range from 'casual' commercial banking transactions to different types of national and international investment and project financing, security and bond primary and secondary markets through Bahrain Stock Exchange, Islamic banking, insurance and reinsurance, and both national and global hard currency trading. This allows Bahrain to meet various national and international finance and investment requirements.
Following the publication of a number of consultation papers, the Bahrain Monetary Agency (BMA) is due to formally publish its Insurance Rulebook this month. This will include a module for captive insurers, reflecting BMA's specific focus on meeting the needs of this sector. The guidance provides a comprehensive document describing all BMA requirements for captive insurers, including authorisation, capital and solvency, risk management and business conduct. Captive insurers have the option of being licensed as takaful (Islamic insurance) firms, in which case they will appoint a Shari'a supervisory board and will operate in accordance with the principles of Shari'a.
"Bahrain has taken a significant step in its role as an international financial centre by putting in place a regulatory framework tailored to the needs of captive insurers, thereby recognising the unique nature of this class of insurers," according to Anwar Khalifa Al Sadah, executive director, financial institutions supervision, at the BMA. In fact, the BMA issued its first licence for a captive insurer last year to Gulf Finance House, which was also the first captive insurer to be licensed in the Middle East. In addition, earlier this year, the BMA licensed Stratum WLL as the first local captive management firm in the Middle East.
Intermediaries and non-captive insurers are also establishing operations in the region. The two latest entrants were licensed last month.
In September, the BMA granted a licence to Aon Corporation, to establish Aon Re Middle East, an insurance brokerage firm in Bahrain. Aon Re Middle East is being established by Aon subsidiaries Aon Holdings and Aon International, both incorporated in the Netherlands. The new firm will be domiciled in Bahrain, with a paid up capital of BD100,000 ($265,000). Aon's newly licensed enterprise is in addition to the firm's existing operation in Bahrain, Aon Limited, an insurance consultancy firm established in 2002.
In addition, the BMA has granted a licence to a group of corporations and investors from Saudi Arabia to establish CareCard Insurance Company, a group health insurance provider. CareCard Insurance Company, with an initial paid up capital of BD1m ($2.65m), will provide medical insurance policies, group term life assurance and health claims management services in the Middle East region. A major shareholder of the new firm is Faisal Elseif, partner, Elseif Development Company, one of Saudi Arabia's top 10 groups specialising in hospital and medical equipment. Other shareholders of the Bahrain firm include Arabia Medical Access Company, a leading group medical insurance provider in Saudi Arabia and a subsidiary of Elseif Development Company, as well as other individual investors.
The two new enterprises were welcomed by Ahmed Al Bassam, director, licensing and policy, BMA, who said: "At the BMA, we are committed to providing an environment in which financial institutions, in general, and insurance firms, in particular, can grow and prosper." He pointed out that on 14 September 2004 Bahrain signed a free trade agreement (FTA) with the US.
"In the area of insurance, the FTA provides for the two countries to allow market access to their insurance companies."
In addition to the consultation paper on captive insurers, BMA has laid the groundwork for its burgeoning insurance industry and forthcoming Rulebook with a number of other consultation papers including the following.
Proposed standards for insurers on risk management and the combating of financial crime: These proposed rules cover two key areas of rules on business standards for insurers - risk management and financial crime.
The module on risk management addresses risks such as credit, liquidity, market, insurance technical, operational, outsourcing and group. It applies in full to all insurance firms, including takaful/retakaful firms, captive insurers and conventional reinsurers. It also applies in part to insurance brokers, but does not include insurance consultants, managers and appointed representatives.
Highlights of this module include rules on establishing limits for both assets and liabilities and requirements on 'stress testing' firms' readiness to cope with potential liquidity crises and their financial readiness to withstand market risk, resulting from adverse movements in market values, currency or yield of an asset.
The module on financial crime, which applies to all insurance licencees, lays down the required systems and controls needed to minimise the risks associated with money laundering. The consultation paper sets out in detail the requirements associated with customer due diligence.
Proposed rules to regulate the takaful and retakaful industry: These cover such issues as high level controls; segregation of shareholder and participant funds; capital adequacy and solvency; valuation of assets and liabilities, and business conduct. "Bahrain was the first country to develop and introduce prudential regulations for Islamic banks in 2002, and we will be the first to adopt solvency margin on takaful and retakaful that apply the wakala model," said Anwar Khalifa Al Sadah, executive director, financial institutions supervision, at the BMA.
The underlying concept segregates the takaful operator from the takaful fund (the contributions/fees/charges paid by participants). Thus, the takaful operator does not share directly in either the risk borne by the fund or any surplus/deficit, receiving instead a set fee for managing the operations on the participants' behalf. "The BMA is of the view that the Al Wakala model is more desirable from a regulatory perspective. It is also more desirable to have all takaful businesses follow the same model, to ensure that a common understanding of takaful is developed among market players and consumers," commented Mr Al Sadah. "Takaful firms will be required to apply accounting and governance standards set by Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).
Bahrain will be the first country to apply AAOIFI governance standards on takaful and retakaful," he stated.
Proposed rules and guidance for insurance intermediaries and insurance managers operating in Bahrain: The requirements cover various items for each of these categories, including licensing criteria, capital requirements, professional indemnity insurance and record keeping. They refine some concepts in existing regulation related to insurance brokers and consultants, as well as introducing new categories dealing with insurance managers and appointed representatives.
According to Mr Al Sadah, the overarching objectives of the new insurance regulations are to ensure policyholder protection, maintain market confidence and apply international standards of regulation. Existing licencees must comply with the new Insurance Rulebook by 1 January 2005. New licencees authorised after publication of the rulebook will be subject to its requirements as soon as their licence is issued.
Expansion at Arig
The potential for expanding re/insurance returns in the Middle East is illustrated by the recent growth experienced by the Bahrain-based Arab Insurance Group (Arig). The group recently reported $12.2m net profits for the first half of the year. During this period, its underwriting profits increased by $5.8m, compared to growth of $2.4m in the same period last year.
Arig has also issued a rights issue, offering 50 million new ordinary shares to its existing shareholders. The shares were offered at $1 per share which represented a discount on the current book value of the company and shareholders were offered the right to subscribe to one rights share for every three ordinary shares held.
"The issue is being made in order to support expansion and diversification strategies namely in the area of life insurance, medical reinsurance and Islamic reinsurance. The additional capital will further strengthen Arig's competitiveness and its transition from a regional market follower to a serious market leader in the MENA region," said Udo Krueger, chief executive officer of Arig.
A recent rating review by Standard & Poor's confirmed the strong business position that Arig enjoys in the industry by assigning its investment grade 'secure' range BBB long term counterparty credit and insurer financial strength ratings with a stable outlook. The price of Arig's shares has increased by around 50% since the beginning of 2004.
16 February 2002
His Highness General Sheikh Mohammed Bin Rashid Al Maktoum, Crown Prince of Dubai and Minister of Defence of United Arab Emirates, announces the creation of Dubai International Financial Centre (DIFC) to establish Dubai and the UAE as a crucial node in global finance and a regional center of financial services.
28 May 2003
Dubai unveils the regulatory blueprint for its International Financial Centre with the publication of its regulatory law, which it claims creates a framework built on the best practice of leading jurisdictions in Europe, North America and the Far East.
6 July 2004
The Federal Government of the United Arab Emirates announces that final federal legislation to formally enable the DIFC to become operational has been signed by UAE President Sheikh Zayed Bin Sultan Al Nahyan. Over 40 global financial institutions have already submitted applications to the Centre.
17 September 2004
DIFC receives final legislative approval from Dubai Government, with 'The Law of the Dubai International Financial Centre' formally establishing its financial and administrative independence.
20 September 2004
DIFC opens for business, with the DIFC Financial Services Authority issuing licences to Julius Baer (Middle East) Limited, Standard Chartered Bank and The GCC Energy Fund Managers Limited.
- Gordon Feller is a freelance insurance journalist.