The last three years has seen massive change for insurance regulation in the Gulf States. Wayne Jones reviews the developments.

There can be few people unaware of the pace of development in countries of the GCC (Cooperation Council for the Arab States of the Gulf) region. The rate of growth, particularly in the areas of construction, infrastructure, and tourism, is well documented. It is difficult to go anywhere in the world without being exposed to advertisements for property, invitations to visit, and details of the fabulous projects being undertaken in the region. A vital component in the development of the regional economy will be a strong financial services industry, and the last three years have seen significant changes in the regulation of insurance.

Historically, the region has been characterised by under-capitalised local insurers, operating in a protectionist environment with inherent barriers to foreign investment. The local markets have been reliant on fronting and heavily dependent on foreign reinsurance support. The industry has also suffered from weak regulation by government ministries, usually reflected in inadequate commercial and legal infrastructures and a very low insurance penetration across the economy. Fortunately for the industry, the region also presents a relatively benign risk environment.

The need for insurance has been underlined by the introduction of a range of compulsory health insurance requirements for expatriate workers across the region. Whilst this is certain to generate a premium boom for the industry, the process will need to be carefully monitored to ensure it is successful. This will involve reviewing which of the insurance models adopted around the region prove to be workable in the future.

The wind of change

So what have been the key shifts in regulation over the past few years in the major GCC States? For Saudi Arabia, insurance in the kingdom was regarded as “haram” (prohibited by the faith) until the early 1990s and only in 2003 was a comprehensive set of regulations developed under the auspices of the Saudi Arabian Monetary Authority (SAMA). A belated three-year transitional period for implementing the new regulations is scheduled to end next April. Twenty-six new insurers have been licensed; with a further ten in the pipeline, and a controlled series of initial public offerings of stock is underway for the new insurers. The new entrants can set up in Saudi Arabia with capitalisation of Saudi riyals 100m ($27m), which rises to SR200m ($54m) for reinsurers. The licensing of intermediaries is apparently also underway.

The next few years will prove interesting in seeing how the regulatory regime is applied, and whether it results in a smaller number of better-capitalised companies, with effective recognition and regulation of all market players. Industry observers are particularly focusing on how local restrictions on foreign reinsurance, with a minimum retention level and co-insurance within the kingdom being prescribed, are to be implemented.

Bahrain was for many years the “headquarters” of the Saudi insurance industry and the country consequently enjoys a relatively sophisticated financial services market for the region. This foundation has been built upon by the Central Bank of Bahrain (CBB), which introduced a comprehensive new financial services law in 2006. The legislation includes re/insurance and re/takaful in its ambit. Volume 3 of the CBB’s detailed rulebook governs insurance regulation. The CBB has aspirations to be a world-class financial services regulator and, unlike other financial services centres in the Gulf, is firmly based “onshore” in Bahrain. Bahrain’s attraction for insurers is demonstrated by major names such as AIG Takaful, Hannover Re, and Royal & Sun Alliance having set up there. The recent establishment of a new captive insurer for UAE-based utilities company Tabreed is a further significant development. The Bahrain market is open to foreign insurers setting up in the jurisdiction. Although it is not specifically provided for in the legislation, it is usually the case that a waiver of the usual rules limiting foreign ownership of a Bahrain joint stock company can be obtained.

The United Arab Emirates has had two distinct markets: a true “marketplace” in Dubai, overpopulated by insurers and intermediaries; and what has effectively amounted to a “closed shop” in Abu Dhabi, dominated by a group of national insurers. In September 2004, the Dubai International Financial Centre was established, a financial free zone based in the hub of Dubai, with aspirations to become a leading financial services centre in the region, along the lines of a new Singapore or Hong Kong. The attraction behind the DIFC is a bespoke regulatory, legislative and judicial framework, overseen by the Dubai Financial Services Authority, which itself has drawn on talented people from other established financial services regimes.

The DIFC’s focus is on being a wholesale (as opposed to retail) centre, which means that banking services are restricted to high-net-worth individuals and retail insurance is not permitted. Additional restrictions in respect of UAE risks, which can only be written by way of reinsurance, apply by virtue of UAE federal law. The DIFC’s insurance appeal is highlighted by the names attracted to the centre, which include AIG, Lloyd’s (Creechurch and Watkins syndicates), Allianz SE and the region’s first dedicated retakaful company, Takaful Re.

Legislation dating back to 1984 governing the UAE’s “onshore” industry is also finally in the process of being replaced. A new law issued in February this year proposes that a dedicated new regulatory body (the Insurance Commission) assume responsibility for regulation of the industry. The Insurance Commission appears to be based on the Jordanian model, and apparently falls short of being part of a wider financial services body. This would mean a continuing divide between the UAE’s Central Bank and the insurance industry; a gulf that has created problems, with areas such as life insurance and bancassurance continuing to be “grey areas”. The success of the new commission will depend on the quality of its personnel, but the identity of its director general is not yet known.

The commission’s arrival comes at a time when the 100% restriction against foreign ownership of local insurers has been relaxed to 75% and new foreign insurers are finally being permitted to set up in the UAE – although this has only resulted in two new entrants to date.

Qatar is another territory that has made great strides in reforming a previously wholly undeveloped financial services industry, with the introduction of the Qatar Financial Centre. Based on the familiar UK Financial Sevices Authority model, and also exempt from the majority of local Qatari commercial legislation, the QFC also boasts its own world-class regulator (QFCRA), courts and tribunal. They are staffed by recent appointees of the highest calibre, such as Lord Woolf and William Blair QC.

The QFC’s mandate is primarily to build Qatar’s own fledgling financial services sector, and to offer a regional hub to insurers for their GCC operations. It has attracted a number of new entrants, which include Axa, AIG and Marsh. The latest arrivals have nearly doubled the number of insurers, and look set to develop what has previously been a virtually non-existent local brokers’ market. There are indications that all financial services will migrate to the QFC in due course, thus expanding its role as a regulator for the country.

Looking ahead

Few would disagree that regulation of the insurance industry across the GCC needed to be considerably revamped and overhauled. The advent of sophisticated new financial centres promises to prove a catalyst across the industry in the region, providing effective regulation of the industry as the norm rather than the exception.

Progress will not only hinge on local regulators. Self-regulation, industry codes of conduct and other initiatives will all need to play their part. In order to increase stakeholder participation, GCC regulators will need to ensure consultation and dialogue within the industry and service sectors is made a priority.

Finally, recent reforms to the insurance industry must be seen against the backdrop of an overhaul and upgrading of reforms in other areas, including the legal framework for dispute resolution, local company laws and the introduction of effective corporate governance codes and standards. Can regulation of the insurance sector keep pace with the scale and speed of other developments in the region? This remains to be seen, but the current signs are encouraging.


Wayne Jones is a partner of Clyde & Co.