Potential exists in the Middle East, but not for the impatient or unwary, as John Sanders explains.

Political strife, under-development and energy-based economies do not make a happy hunting ground for insurers. Add to these challenges over capacity in the global (re)insurance industry, and it becomes hard to see why so many companies want to do business in the Middle East. “There are too many players for too little income. It all comes down to the old laws of supply and demand and in the Middle East they are ill balanced,” is how Urs Kaeser, Swiss Re divisional manager, sums up current prospects in the region.

In the longer term, many believe there is potential in the region, although no-one thinks it will be easy to tease out the opportunities. Like Asia and South America, anyone hoping to do business there must take a long term view and prepare the ground now for uncertain future rewards.

Political and military conflict continue to overshadow the Middle East. Tension between Israel and its Arab neighbours is gradually reducing, but linguistic and cultural differences limit cross border opportunities. Iraq, once a model for insurance in the region, is encircled by sanctions with no sign of an end in sight.Elsewhere, many Middle Eastern economies remain at the mercy of the price of oil. The recent recovery of this volatile commodity to around $24 a barrel does not signal the return of boom times, but does hold out hope of more infrastructure projects. “We are optimistic that the increased price of oil in the last few months will enhance the economic and hence insurance opportunities in the Gulf states,” comments Robert Makhoul, Marsh's managing director in Riyadh.Marsh has some 170 staff across the region, including a representative office in Egypt to monitor local conditions. Brokers are not permitted to operate in Egypt and Mr Makhoul emphasises that Marsh is there strictly as an observer. With Egypt privatising and liberalising its insurance industry, many companies, including Marsh, are optimistic that prospects there will improve.

Egyptian property
However, dragging experts back to the subject in hand is hard when discussing the Egyptian insurance market, the largest in the region with a population of 60 million. Conversation inevitably turns to property and the extensive and desirable real estate portfolios owned by the four Egyptian insurers scheduled for privatisation. “They have fantastic properties. If utilised properly, they would produce a fortune,” says Mussafer Aktas of broking group Willis.Therein lies the rub. Many of these central Cairo properties are in need of repair and the rents are tightly controlled. Realising their commercial value would probably involve a change in the law to update rents fixed in the 1950s.

On top of that, after decades of state control, the underlying business of most Egyptian insurers is not as efficient as it might be, says ratings agency A.M. Best. Best was called in by the government to review three companies - Al Chark Insurance Company, National Insurance Company of Egypt and Mohandes Insurance Company - and is currently working on a fourth.

Best acknowledges there is a question-mark over the property assets and has consequently reflected this in its ratings. However, it defends the government against criticism that privatisation and liberalisation are proceeding slowly, pointing out that progress is quicker than in countries such as India. The ratings agency points out that Mohandes is already privately owned and traded on the Cairo Stock Exchange and that rules on foreign ownership have been relaxed. This puts insurers like Mohandes and Arab International, which is now largely in the hands of AXA, in a completely different light. Although small, they offer a toehold in a market where branch networks and tied agents rule. “Someone like Mohandes would come with client relationships, with distribution channels and branch networks. It is very difficult for international players coming into the market to reproduce that,” argues A.M. Best senior financial analyst Chris Waterman.He sees huge potential for growth in Egypt, which also benefits from a stable currency, a plus for those considering inward investment. However, others point out that non-life premium income in the country is no more than $450 million a year, while life is just $120 million. As Swiss Re's Mr Kaeser notes, that does not go far between the existing 12 companies in the market.

Infrastructure projects
Alan Reeder, a director with Lloyd's broker Alwen Hough Johnson, sees little scope in the immediate future for personal lines in Egypt, but is more optimistic about the spin-off for insurers from development of the oil and gas industry, other major infrastructure schemes, such as the New Valley Project, and business expansion in general.

“There is plenty of construction work going on, roads, bridges, another tunnel under the Suez Canal, two new hotels opening in Cairo this year. If you look through yellow pages, you find that virtually every international company has a local factory in Egypt, whether it is for manufacturing shirts, motor vehicles or pharmaceuticals.”

Mr Kaeser accepts that there are infrastructure projects to insure in the region, but warns that they may hold dangers for reinsurers in a market where most small businesses do not insure. “In most Middle East markets there is no bread and butter business as there is in the rest of the world, no small business risks. It is mostly big exposed risks like refineries and large factories.”

Consequently, Swiss Re has limited its exposure because of the difficulty of making a profit or building up reserves against the inevitable $10-20 million claims such as those from oil production site blow-outs in Libya and Syria. “If there is a loss, you are in the red for years afterwards. Then other reinsurers will come in at a lower rate, because they have not suffered a loss, and undercut you.”

However, there are opportunities other than infrastructure projects and Egypt for those willing to be patient, believes Mr Waterman. “It is a region that is developing fairly quickly. And insurance is one area where growth is taking place. That is pretty well evidenced by the number of brokers and service providers who are setting up there. Certainly a number of London market companies I speak to through the rating process have identified the Middle East as one of their developing markets in addition to South America and Asia.”

Medical expenses
One product where few dispute the potential for growth is medical expenses. The first change is likely to affect the large expatriate populations in the Gulf States, who will have to fund their own medical insurance as governments seek to cut budget spending. Several Kuwaiti insurers are setting up a private medical expenses insurer for this purpose. Other Gulf states are watching closely and some, including Saudi Arabia, are expected to follow suit.

For brokers, this is a promising development. Their expertise with group schemes is likely to be in demand, as Marsh's Mr Makhoul points out: “We believe that there is growth potential in the insured benefits sector, medical expenses and group benefits, both in Saudi Arabia and the lower Gulf.”

Although much smaller in terms of population than Egypt, the Gulf States are wealthier on a per capita basis. Figures are hard to come by, but the total Saudi market for insurance, for example, is estimated at between $500 million and $1.6 billion.

Reinsurers, though, are more cautious. Previous medical expenses initiatives have run up huge losses for local companies and international reinsurers alike. Sceptics fear the same may happen again. Mr Kaeser points out that governments are likely to try to keep the lid on costs, thus limiting the scope for charging realistic premiums. In addition, he is concerned that local companies have little experience of claims handling.

Nonetheless, the Gulf States are seen as a regional financial services powerhouse, largely taking over the role once held by Lebanon. The likelihood that motor insurance will be made compulsory in the region is growing. Domestic and small business property insurance is almost non-existent, so any pick-up in the region's economies could lead to growth in demand here.

In addition, some observers suggest that insurers themselves could do more to encourage demand. Mr Waterman believes that more competition, better products and marketing could generate bigger sales in Egypt, for example. “It is difficult to say why penetration is so low. Obviously the economic climate has something to do with it. Marketing of current and new products would need to be enhanced if the market was completely liberalised with the arrival of new competition. There is competition, but it is not particularly dynamic.”

This view is echoed by Mr Aktas at Willis. He points to the growing population in Egypt and urges insurers to play their part in educating people about insurance and in bringing new products to the markets of the Middle East as a whole. “It is an attitude problem. In this region insurance is something to be sold not bought. Awareness has to be created by the insurers.”

John Sanders is a freelance journalist.