Financial services and insurance are replacing oil as main revenue earners in many Gulf states. Misbah Kamal explores the new landscape.

The contemporary history of the Cooperation Council for the Arab states of the Gulf (GCC) began with the discovery of oil. This rich, dark resource has been the backbone of its economy. Although the insurance markets of the GCC countries are relatively new compared with older Arab markets such as Egypt, they have moved a long way since the early 1970s and kept pace with changing economic climates.

Each country has reacted positively to recent economic developments; and the reduced role of the state, privatisation of state-owned enterprises and a greater openness and transparency have been reflected in the revised regulation of insurance activities.

Although traditional values prevail and theological conservatism affects various aspects of life, secular trends – not in the strict sense of separating religion from the state – have penetrated these societies.

The modern trends were manifested in the formation of state bureaucracy, education, the organisation of commerce and industry. Insurance activity in the region has been closely associated with these developments. Prohibition of insurance on theological grounds hasn’t prevented the sector from growing. Indeed, even before the introduction of the concept of Islamic insurance (Sudan 1979), popularised as takaful, legitimate vehicles were devised to practice insurance. One example was Saudi Arabia, where insurance companies were registered outside the kingdom and operated as offshore entities.

However, in the absence of an insurance law, all state contracts included strict insurance obligations. The dynamic realities of risk dictated that the consequences of “acts of god” as much as human acts resulting in loss and damage must be insured – a relatively cheap and economically efficient protection mechanism. In 1986, the National Company for Cooperative Insurance (NCCI) became the first risk carrier registered in Saudi Arabia. A decade later, the scene was set for the indigenisation of insurance companies to be run on the basis of the cooperative (Islamic) principle. This development was preceded by debate between advocates of “commercial” as opposed to “cooperative” (compliant with Islamic Shari’ah) insurance. The government commissioned studies, but they were not published. The Saudi Monetary Agency was, and continues to be the kingdom’s insurance regulatory authority.

Kuwait passed its first insurance law in 1961, and Bahrain has steadily developed its insurance legislation since the mid 1970s. The regulatory function was assigned to the Bahrain Monetary Agency (now the Central Bank of Bahrain).

Earlier this year a federal law was enacted in the United Arab Emirates (UAE), establishing an insurance commission as the independent body to regulate insurance activity in the Emirates, while existing insurance legislation was revised.

A process of reinvention

Bahrain and Dubai share a common feature of declining oil revenues and made an early move away from dependence on oil reserves. Both have “reinvented” themselves, becoming financial and service hubs and insurance/reinsurance centres for the region and beyond, on top of their small industrial base. Dubai has been in the forefront with the DIFC attracting international companies. Qatar is following its lead, despite its healthy gas reserves. Saudi Arabia is in a different category in terms of the evolution, scale and regulation of its insurance market.

In this operating environment, Arab Insurance Group stands out as a significant reinsurance company. Arig operates from Bahrain and recently moved to Dubai to engage in the emerging and growing takaful reinsurance business. New insurance companies are still formed in the GCC countries but are mainly based on operating as takaful risk carriers. GCC capital is moving to other Arab countries where markets are deregulated, such as Syria where the monopoly of the state-owned Syrian Insurance Company was ended in 2005.

Insurance density has increased in all markets to produce a more balanced portfolio of large/small and corporate/personal business, although it is a trend that has been noted and commented on, rather than researched in detail. It has been assisted by factors that include the emergence of bancassurance and takaful and, although still in its infancy, a growing role for the retail broker. Another driver is the contribution of qualified and trained manpower, including underwriting and management capacity, coming from other markets including Arab countries. Driven by a desire to succeed they have been instrumental in building company portfolios.

The industry’s manpower resources are generally not native except in Bahrain, while in Saudi Arabia the NCCI has become a training school for insurance expertise. Arab expatriates mainly occupy management and many technical positions, while qualified personnel from the Indian sub-continent have contributed to the successful operation of insurance companies. The future is likely to involve a greater role for national elements in management and technical operations, as part of a state policy to encourage nationals to join the labour market. As insurance and reinsurance companies develop in the Gulf, as well as in other Arab countries, they are becoming receptive to the work of international rating agencies. This underlines their wish to be seen to be on a par with their counterparts in more established markets, and to demonstrate openness and willingness in submitting to the assessment of independent bodies.

This trend has been accompanied by the introduction of new regulations and the creation of insurance commissions, as separate entities or as part of a ministry, to ensure adherence to the regulations by insurance and broking companies. Both are contributing to the emergence of a new insurance business culture. Directly and indirectly, international institutions such as the International Monetary Fund and World Trade Organization also have a marked influence on the opening up of the region’s insurance market.

European insurers and takaful

The entry of major European insurers into the market is expected to boost takaful premium income to $15bn by 2015. Their involvement is likely to influence the developing range and structure of products. The criteria of these insurers are different from those – particularly Muslim capitalists – promoting takaful as a purely Islamic concept compliant with Shari’ah rulings. As capitalist enterprises, European insurance companies’ prime motive is to seek profit in markets where insurance is at a low state of development, while also contributing to development of the products. Elsewhere, they will fight for market share to maintain profit margins. As pure economic entities, they will be less concerned with doctrinal issues than the dynamics of the markets in which they operate. It is, however, possible that compliance with Shari’ah will create a new re-combining of features of takaful and commercial insurance. The lead will come from the Europeans to replicate what is happening in the Shari’ah-compliant banking and financial sector. Western universities are already capitalising on these developments and will, over time and through research, contribute to transforming the parameters of takaful insurance and financial products.

Life insurance remains the weak link, although it is developing slowly in response to the enlightenment process. This is assuming greater importance, as economic and political pressures at home and abroad are placed on the state to abandon or curtail its welfare function. These are not benign developments but areas of contention among vested interests (stakeholders) competing for influence and privileged entitlement.

Theorisation of the takaful concept, expected to come from academic institutions, should make a positive contribution to models of life insurance products that prove acceptable to devout people. Takaful models in non-life insurance are already well established and life insurance will follow suit.

An anomaly of business life in the region is the growing involvement of individual investors, rather than institutions, in their home stock market and those of other countries. Yet despite this casino face of financial capitalism, they refrain from buying life insurance on religious grounds. The weakening of the extended family, gradual curtailment of the state’s welfare function, market deregulation and openness to the operations of foreign risk carriers should all contribute to improved popular understanding of life insurance products.

Private health insurance is the fastest growing class of insurance in the Gulf and other Arab countries. Several factors lie behind the increasing demand for healthcare insurance products. One is the state health sector’s inability to accommodate an increasing demand for its services resulting from a high rate of population growth coupled with the presence of foreign workers. The expatriate population of Saudi Arabia is an estimated seven million, the largest in the GCC. The governments of the region have responded to this demographic pressure by making health insurance compulsory for companies and establishments employing foreign labour and have extended it to nationals.

At one time compulsory motor liability insurance constituted the core premium income of insurance companies; today health insurance has become a major source of premium for many. As both are compulsory, health revenues may eventually match motor; Saudi healthcare premium income in 2006 was an estimated SR1bn and is expected to jump to SR9bn by 2009. Global healthcare providers have actively promoted their services in the region, while the commoditisation of healthcare has generated keen interest from investors globally.

As competition intensifies, the region will witness increasing sophistication in the marketing and delivery of insurance products. A new area of activity will be risk management, a discipline still in its infancy. The presence of larger and more complex companies with a greater number of exposures will give rise to better understanding and application of risk management techniques to handling enterprise risks. This could take the form of in-house captive insurance companies, as the regulatory regimes of markets such as Bahrain allow the formation of captives.

In response to globalisation and the requirements of WTO access, the structure of the region’s insurance market is beginning to change: not only by introducing better regulatory regimes consistent with international standards but also permitting foreign participation in the capital of insurance companies. The efficiency and technical synergies of this participation promises to raise standards and enhance best practice principles, but the benefits will take time to filter through.

Misbah Kamal is a director of UIB Holdings (UK).