Premium growth in the Middle East has continued to climb despite the downturn, with personal lines activity alongside mega-projects in construction, energy and engineering. As the market matures, what opportunities will it bring?

The Middle East market – in particular the countries of the Gulf Cooperation Council (GCC) – has continued to prove a draw for international (re)insurance companies. It has many of the characteristics that make it a popular emerging market domicile for (re)insurers, including low taxes, ease of set-up, comparable legal systems and supportive regulatory frameworks.

As Dubai, Bahrain and Qatar continue to battle it out to emerge as the region’s pre-eminent hub, each is developing its own unique characteristics, while markets such as Saudi Arabia are becoming important for takaful (insurance that observes Islamic law) risks.

Although the region’s total premium volume remains very small – at less than 1% of global premiums – its rapid growth and huge projects in construction, engineering and energy, plus continued investment, are drawing attention from international (re)insurers.

Despite the high-profile problems affecting Dubai during the financial crisis – when it received a $10bn bail-out from sister emirate Abu Dhabi and witnessed a considerable slowing down of construction activity – the rest of the region has continued to prosper.

“If you look at what happened last year when there were a lot of headlines about Dubai and its financial problems, the GCC market still grew by 6% when other emerging markets such as Eastern Europe had a significant decline,” says AM Best general manager of analytics Vasilis Katsipis. “Despite the belief that these markets are driven mainly by the major projects – the energy and construction activity taking place – there is also a very big part of business coming out of personal lines.”

Compulsory covers drive growth

He points to the introduction of compulsory covers – primarily motor and healthcare – in the United Arab Emirates (UAE) and Saudi Arabia as driving significant premium growth. While the growth of personal lines will affect how much risk is ceded on to (re)insurers, with primary carriers retaining more risk in these classes, the overall growth has seen many of the global (re)insurers open branch offices in the region.

Many of the government-funded projects in Abu Dhabi are continuing as planned in 2010. These include the Dolphin Gas scheme, which involves shipping and processing Qatari liquefied natural gas for use in Abu Dhabi, Dubai and Oman. The Khalifa Port and Industrial Zone, the emirate’s $25bn Mazdar carbon neutral town and the UAE nuclear authority are other ambitious energy schemes, while the $35bn Yas and Saadiyat Island developments are ceding the property pipeline.

GCC-wide link worth $100bn

Such mega-projects can also be seen in other parts of the region, including the $80bn King Abdullah Economic City and the 40km Qatar-Bahrain Friendship Causeway (QBFC), due to be completed after 2014. The QBFC is part of a $100bn master plan to link all six GCC members (the UAE, Bahrain, Kuwait, Saudi Arabia, Oman and Qatar) by 2017, including a 2,000km GCC rail project, stretching from the Kuwait-Iraq border to Oman.

“If you look at the King Abdullah City in Saudi Arabia and other projects financed by the government, all the major projects are still going on,” Willis Re regional director, Middle East and North Africa, Ahmed Rajab says. “The risks are still good in the Middle East and North Africa despite the fact that rates are going down.”

Although the region has seen a slowdown, reflecting in part reduced infrastructure spending, AM Best believes that, in general, insurance companies operating in the GCC member countries are well capitalised and able to resist further shocks. In its report GCC – Rich in Potential, But Hurdles Remain – the rating agency notes that future economic prospects for the region are deemed to be better than in many developed markets.

Premium rates in the region remain soft in 2010, partly a reflection of the highly competitive market. Fierce competition “remains one of the biggest challenges to companies operating in the market,” notes Yvette Essen, author of the AM Best report and head of market analysis for the company’s global financial services division. Increasing competition is expected to help fuel mergers and acquisitions activity in the region, with some local insurers partnering with foreign entities.

Consolidation of the primary market has become a key feature, with insurers such as GIG, Medgulf Group and Salama taking on a broader regional stance. Whether the emergence of larger, better-capitalised groups will result in more risk-adjusted pricing in the region has yet to be seen.

For the big risks, pricing has remained relatively stable, as the major (re)insurance players apply their pricing models. “In lines where there have been very significant cession ratios – that is, the local companies have kept a small part of the risk – it has helped the rates remain more stable than if they were net retained,” Katsipis says. “As the impact of compulsory covers wears off – and because these risks are mainly net retained – that’s where you’re going to see a greater emphasis on competitive pricing and where you will see the highest decline in pricing.”

Adverse weather potential

The soft rates are also partly a reflection of the low catastrophe exposure and relatively benign loss experience. Nevertheless, recent claims include a spate of attritional fire losses, while hailstorms, a cyclone in Oman and flash floods have been notable weather-related events. Cyclone Phet brought heavy flooding to Muscat when it made landfall in June and is the second significant storm in recent years, following Cyclone Gonu in 2007.

It is a common misconception that the region is entirely devoid of cat activity, notes Rajab, and the potential for adverse weather should affect how (re)insurers approach the region.

“There is definitely some climate change happening in the region and we have witnessed huge floods in Jeddah and Riyadh, which we haven’t witnessed in the past,” he says. “Are they just one occurrence or are they going to happen more often given the Arabian Peninsula is between the monsoon and the Mediterranean climate? On the earthquake side, Iran is a major earthquake region and what everyone thinks of is a major earthquake in Iran, which could impact the Emirates.”

Start-ups focus on region

A number of start-up reinsurers have also been established, with a focus on regional risks. Some of these are backed by international players and investors, including sovereign wealth funds. In 2008, Arch Re and Gulf Investment Corporation (GIC) set up Dubai-based Gulf Re, while Bahrain-based ACR Takaful was a joint venture between Dubai Group Khazanah Nasional Berhad and ACR Capital Holdings.

The latest to come to market is Underwriting Risk Services, a joint venture between Validus-owned Talbot Underwriting and ADNIC (Abu Dhabi National Insurance Company). Other start-ups include Al Fajer Re (Kuwait), Saudi Re and Oman Re.

While 2010 has seen no new companies come to the table, there is growing premium for existing players. “We see an uptick again on the major projects because the economies are starting to accelerate their growth and there is an increased emphasis from the primary carriers on the personal lines,” Katsipis says. “On the one hand, the reinsurance cession has been very high and that’s why many reinsurers establish themselves or try to become more local from their international positions. On the other hand, there is a lack of expertise in the local market to accept these risks.”

As the primary market develops and retains more risk – driven largely by the growth of personal lines – (re)insurers will need to adapt their approach to the market, thinks Katsipis. “The headline cession ratio will probably come down because there will be proportionally less big ticket insurance like engineering and energy and proportionally more personal lines, which is net retained. For reinsurers, it will still remain a significant emerging market but if they want to access the growth of the market, they will probably have to access the personal lines of business.”

For international (re)insurers considering the merits of geographical diversification, there will be some benefits – particularly under Solvency II – in having a globally diversified book of business. But the bigger benefit from writing business in the GCC comes from diversification of earnings, thinks Katsipis. “Is [geographic diversification from the GCC] significant for someone like Munich Re, Swiss Re or Scor? It’s positive, but the absolute impact on their capitalisation is minimal because it’s an emerging market.”

Which hub will triumph?

As newcomers to the region size up the merits of the competing insurance hubs, it is clear each is developing its own USP. The Dubai International Financial Centre, Qatar Financial Centre and Bahrain Financial Harbour have each introduced internationally-recognised legal systems and principles-based regulation. They boast speedy set-up times and have developed infrastructures to cope with international business, including global brokers, service providers and technology platforms.

“Dubai was the first one and has made some pretty good strides in developing an international hub,” Katsipis says. “On the other hand, Bahrain has the greater history behind it and Qatar is making strides to develop its regulatory system.”

He considers that, ultimately, three hubs may be “two too many”. At the same time, changing distribution channels and the growth of centres in South East Asia will mean the GCC is used less to access business outside the region as business is increasingly retained locally.

“In the medium term, you’re going to be looking at one hub for activity and the other two being of lesser importance, and the focus of the companies will be 90% on the Middle Eastern business in the Gulf than global,” he says. GR