The insurance industry in the Middle East and North Africa (MENA) has made rapid strides in recent years. Salah El-Kadiri assesses whether the sector is experiencing a genuine boom.
Middle East stability is precarious; subject to political uncertainties, the activities of extremists and the presence of foreign troops. At the same time, its economies enjoy healthy oil revenues and a high level of liquidity, particularly the GCC countries (the Cooperation Council for the Arab States of the Gulf). These have seen increased investment in infrastructure, as have Egypt, Morocco and Algeria.
In North Africa, Arab countries have allowed foreign and national investors access to revitalise formerly protected markets. Fast economic growth and banking sector modernisation have been accompanied by reforms such as insurance market liberalisation in Algeria, Libya and Syria; introduction of the takaful insurance concept; privatisation and consolidation.
Decision-makers in the Arab world favour varying strategies. Syria and Libya have followed Algeria’s lead, opening markets to the private sector. In the GCC, the trend is for establishing more takaful and retakaful companies, while Morocco is maintaining a keen pace of mergers and acquisitions.
The maturity of the markets and the influence of politics, culture and religion have seen insurance develop in various ways. For example, the takaful concept isn’t recognised in North Africa, although this may change in response to pressure from Islamic banks seeking to invest in these countries. Takaful is widely accepted in Kuwait, the United Arab Emirates (UAE) and Bahrain. Saudi Arabia is legalising the concept of insurance, and the number of licensed insurance companies there is growing on a monthly basis.
So are we witnessing the emergence of sustainable insurance markets? The insurance premium revenues of the MENA markets offer some guidance:
• Revenue has grown substantially, but contractors all risks, life, medical and motor represent the main share;
• Net retained premium revenue remains lower than in developing countries. Most companies have a limited capital base and rely heavily on reinsurance;
• Lack of capacity means most large risks are placed outside the Arab world;
• Insurance penetration remains very low, even where economies are growing; and
• The estimated retention rate of insurance risks in the Arab world is around 50%, usually lower in oil-producing countries and higher elsewhere.
The MENA Markets
Capital expenditure in the MENA region is below the world average; more than $100 in the GCC, but a mere $13 in Arab Levant and some Arab African countries. Except for major risks, insurance penetration remains low. Life and non-life insurance premium revenues are estimated at more than $7.5bn, with non-life representing approximately 70%.
North Africa: The Maghreb market – Morocco is the region’s most developed insurance market, and the Arab world’s largest, based on estimated premium revenue net of reinsurance of $1.7bn. Mergers and acquisitions are transforming a sector controlled by Axa, Wafa, BMCE Group and Saham Group. Morocco is unique in its relative lack of state ownership, other than SCR Morocco (controlled by CDG Group) and Atlanta Insurance (CDG has a 40% stake). The private sector is active and ready for international competition. National reinsurer SCR is dominant, although insurers can seek cover abroad. SCR will soon lose the privilege of compulsory cession but has a strong relationship with the market and continues to play an important role.
Algeria is an attractive investment market, with heavy expenditure on motorways, housing, and infrastructure. Its insurance market is open to the private sector, but most premium revenue still goes to national companies. Insurance penetration is low, despite a 2003 law making insurance against natural hazards obligatory. Most of the market’s premium revenue, estimated at less than $600m, is generated through compulsory motor and oil and gas business. Local reinsurer CCR Algeria aims to regain its market position after obligatory reinsurance cession was cut, allowing companies to seek reinsurance from abroad.
Tunisia is a well-organised insurance market experiencing steady growth. Premium revenue is an estimated $500m. Private and state-owned enterprises coexist and national companies have a strong relationship with French insurers. Reinsurance is placed mainly with European reinsurers, while Tunis-based Tunis Re and Best Re have strong links throughout the MENA region.
Libya has now liberalised its insurance market and several private companies operate, although Libya Insurance Company remains dominant. Insurance penetration is very low and unlikely to change in the near term – with estimated premium revenue just over $250m – but growth potential is considerable. The economy is transforming as all sectors are modernised, but the insurance industry is struggling to penetrate the Libyan way of life. Most new private enterprises survive on motor business, or compete for the largest oil accounts.
Egypt – The Egyptian insurance market continues to press for reforms. The establishment of the National Insurance Holding company is a step towards privatisation and a major decision on reorganisation is expected during 2007. The private sector is long established but has made few inroads against national companies. State reinsurer Egyptian Re, now 50 years old, acts as a commercial reinsurance company that does not benefit from legal cession. The enormous potential of Egypt’s market remains unrealised, with insurance penetration minimal in a highly populated country. Insurance expenditure per capita of just $20 could produce premium income of $1.6bn for the sector.
Arab Levant – Lebanon’s political turmoil has deterred investment, yet the insurance market enjoys steady growth, with revenue at more than $420m. The top ten companies have more than 60% market share, with Medgulf and Bankers the leaders.
The number of insurance companies in Jordan reached 29 in the first quarter. Premium grew at a double digit rate in 2006, to more than $300m.
Syria’s insurance market has opened to the private sector and several companies, including takaful-type insurers, have been authorised. Penetration is extremely low but economic liberalisation should spur growth.
Iraq had both the largest and most professional insurance market before its war with Iran. Many Iraqis left when the market collapsed and now manage companies in other Gulf countries. The current political situation makes it unlikely that the sector will see real development, other than for major risks.
GCC Countries – Most Gulf countries have enjoyed healthy premium revenue growth in recent years, but cultural and religious beliefs, lack of consumer awareness and relatively few staff with insurance qualifications have hampered development of personal lines insurance.
Despite this, most have experienced favourable trends, including high rates of investment, the introduction of new insurance regulations in Saudi Arabia, rapid growth in takaful insurance, and rising demand for medical and motor insurance. UAE and Qatar’s huge investment in infrastructure and commercial building have boosted contractors’ all risks premium revenues, creating the misleading impression that insurance penetration is growing strongly.
Saudi Arabia’s newly licensed insurance companies face the challenge of raising insurance awareness in a traditional society. Foreign workers’ compulsory medical cover will generate additional premium, but possibly not enough to please investors attracted to this newly regulated market. The potential for growth in these countries is great but small populations suggest most revenue will still depend on the large industrial and commercial risks and motor business.
The drivers of growth
Regulation of the Saudi market will have a major impact. Although insurance penetration is currently low, as the largest free market economy in the GCC the kingdom has the highest growth potential. This will be assisted by regulations to improve customer confidence and promote the insurance concept. Other factors helping growth are the compulsory purchase of medical and motor business and the growth of takaful insurance.
The takaful insurance market is expanding in the GCC, Jordan and more recently Syria, with continuing double-digit growth. This has triggered concerns about the application of Shari’ah law from critics, who believe some takaful companies have strayed from the concept of Islam to become more commercial. The takaful and retakaful concepts have extended their influence to foreign companies. AIG Takaful, Hannover Re-Takaful and others have Bahrain as their base for underwriting takaful-type business. Arig pioneered the first takaful reinsurance operation in Dubai, Takaful Re, and many other projects for takaful and retakaful companies are in the pipeline.
Qatar’s new financial centre, in addition to those of Dubai and Bahrain, make the GCC region an interesting one for financial institutions. The main task for all three is to attract large players. While Dubai has the advantage of being the first financial hub, companies such as AIG and Axa secured licences from the Qatar Financial Centre, just as Takaful Re and Alliance Re established their presence in the Dubai International Financial Centre (DIFC). Brokers are also becoming interested in these centres, with several setting up offices in the DIFC.
Bahrain Financial Centre, like Qatar and Dubai, has strengthened its credentials through sound monetary and financial policies and practices in line with international standards. The Central Bank of Bahrain has moved to control money laundering and applies a pragmatic approach to insurance and banking regulation. It also enjoys the advantages of well-educated employees and good training resources. Several countries, such as Bahrain, Jordan and Morocco, have signed free trade agreements with the US, enabling American companies
to set up subsidiaries and joint ventures, but this is likely to trigger or accelerate consolidation.
No insurance or reinsurance monopoly markets now exist in the Arab region, after Syria followed other countries in opening up to the private sector. The impact of the new entrants has been to push rates down, making it difficult to achieve technical profits and forcing management to rely heavily on investment income. While stock markets in the region have experienced volatility, returns on investment were high during 2006, which allowed for continuing fierce competition. But the trend carries potential for the demise of several companies should stocks crash.
All of these factors make it hard to determine whether the MENA region’s insurance industry boom is real. The industry is evolving and at different stages of development in different countries, although a common thread of dynamic growth, development and reform evidences fast growth. The next interesting question is when will the MENA markets begin consolidating to meet international competition?
Salah El-Kadiri is managing director, Middle East & North Africa at Guy Carpenter.