With the Middle East continuing to enjoy economic growth, James Sutherland looks at how to capture the full business potential of electronic risk trading in the region.

Non-life insurance markets in the six countries of the Gulf Cooperation Council (GCC) trebled in size between 2003 and 2008, reaching a level of close to $10bn. The region’s growth dynamics are not expected to weaken any time soon given the huge pipeline of large-scale infrastructure projects and the still embryonic development stage of personal lines business. Current moves towards electronic risk handling across the entire insurance value chain can go a long way in fully capturing the region’s insurance and reinsurance potential and promoting its aspirations to develop into an industry hub of global relevance.

Compared with the sharp economic downturn in most OECD countries, the GCC region (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates) has weathered the global turmoil relatively successfully. The most recent forecasts by the International Monetary Fund put the area’s real GDP growth for 2009 at 2%, against contractions of up to 6% in the more mature economies. Based on significant fiscal reserves and surpluses, the GCC countries are maintaining government spending at high levels, cushioning the impact of the global slowdown.

In 2008, according to Swiss Re and Business Monitor International, total non-life premium volume in the GCC countries amounted to $9.4bn, compared with only $3bn in 2003.

Despite their recent rapid growth, the GCC insurance markets still offer significant room for expansion. Non-life premiums account for just 1% of GDP – similar to considerably less wealthy countries such as China or Turkey.

Based on the GCC region’s GDP per capita levels, one would expect a share of closer to 3% (such as in the UK), translating into a potential market size of $30bn.

The growth momentum, therefore, is likely to be sustained. Personal lines, in particular, are expected to experience a significant expansion going forward as compulsory insurance schemes (e.g. in health) gain in importance and Takaful insurance and reinsurance solutions become more prevalent. Commercial lines expansion will continue to be underpinned by huge domestic investments in high-value projects, with the GCC’s projects pipeline (primarily construction and oil & gas) estimated at $1.7trn.

Traditionally, reinsurance has played a crucial role in the GCC countries. About 50% of domestic insurance premiums are ceded to primarily foreign reinsurers. However, this extraordinary reliance on reinsurance is diminishing as regulators have started to impose higher capital levels, domestic shareholders question traditional reinsurance purchasing strategies and the share of (compulsory and largely retained) medical business expands steadily. At the same time, the quantum of business available to reinsurers is set to grow robustly from its current level of about $4.7bn, on the back of rapidly expanding primary insurance markets – a trend underlined by the increasing number of reinsurers who have established in the region in recent years.

LESSONS FROM SWIFT

There are many challenges in introducing technological change to an industry with many practices virtually unchanged since the end of the 17th century, when wealthy individuals visiting Edward Lloyd’s coffee house on Tower Street in London clubbed together to insure marine vessels and cargo in return for a premium. But fatalism is misplaced as the experience from the banking industry demonstrates. The widely known financial messaging and communications provider SWIFT grew its presence over the past 15 years from less than 100 to more than 200 countries. Message traffic increased seven-fold.

A key lesson learnt from introducing SWIFT to the banking sector was to automate already existing processes, thereby avoiding the headache of having to change the way banks did business. In insurance and, particularly, reinsurance, this is a crucial consideration as every reinsurance or large-scale insurance transaction is unique. The reinsurance and wholesale insurance sector is an industry of relatively low numbers of complex transactions. Therefore, the capability of electronic platforms to build on existing user systems matters greatly.

And last but not least, an incremental approach has turned out to be important when introducing SWIFT to the banking sector. Functionality was limited at the beginning and scaled up in line with increased usage.

Taking heed of these lessons from banking is likely to facilitate the introduction of electronic trading platforms to an industry that has proven rather resistant to embracing technological opportunities. However, because of its economic robustness and growing market for insurance services, but relatively low uptake up to now, the Middle East (and particularly the Gulf) provides a fertile environment that does not allow legacy issues to prevent a greater and more effective use of technology in the sector.

The region’s rapid growth of insurance uptake brings a wealth of opportunity and leads to an increase in transactions and a greater level of information and paper flow. That generates a greater administrative burden on the market and a growing need to streamline and improve the essential transfer of data securely from one party to another.

The intelligent use of sophisticated yet accessible technology can ease that burden.

More importantly, it has the potential to unlock significant commercial benefits for insurers, reinsurers and brokers as well as for the marketplace as a whole. Based on an electronic platform, individual participants are set to profit from additional business opportunities on the back of an easier, broader and cheaper access to potential transaction partners. They are also expected to capture sizeable efficiency gains from an electronic trading platform which offers end-to-end functionality and spans the entire insurance transaction chain, from pre-placement, placement, accounting and settlement, mid-term adjustment and claims to renewal. And finally, the insurance marketplace at large should benefit as a community of insurers, reinsurers and brokers develops around the platform, capacity increases and talented staff embrace technology. The development of a market-expanding insurance and reinsurance cluster along these lines, which is the intention of a technology-based trading hub called “Qatarlyst” based in Doha, Qatar, is poised to be a positive-sum game.

James Sutherland is chief executive officer of Qatar Insurance Services LLC, Doha, Qatar