Indicators for the Middle East are more positive than they have been for years and insurers should benefit. William Sturge gives an overview.
The Middle East could be poised on the edge of a new era. In May, Ehud Barak's convincing election win in Israel caused a sensation. The amount of progress Israel's new Prime Minister can make will depend on both the composition of his coalition government and the reception he meets from neighbouring countries.However, his supporters predict that his election will lead to an end to the deadlock in the Middle East peace process. A change in Lebanon is also expected, with Mr Barak pledged to withdraw all Israeli troops from the occupied buffer zone within a year.
This gives rise to the interesting question of the effect that the “globalisation” of business will have on the economies of the Middle East, should this new scenario develop. Undoubtedly, the multinational companies are ready as never before to take advantage of easier political relationships and any unfreezing of various major cross-border contracts which have been on hold for the past few years.
Meanwhile, the insurance industry is benefiting, and ought to benefit further, from the clear increase in prosperity in Israel and neighbouring countries. Although it is impossible to generalise, important steps are being taken to develop the insurance industry in various parts of the Middle East, notably Egypt, the largest Arabic speaking nation.
In May, A.M.Best Co assigned ratings to three Egyptian insurance companies that account for nearly half of the Egyptian insurance industry: Al Chark Insurance Co, A-(Excellent), National Insurance Co of Egypt, A-(Excellent), and Mohandes Insurance Co, B++(Very Good).
This may reflect the fact that Egypt has had nearly two decades of relative political stability, recent legislative reforms, a stringent monetary policy and greatly improved foreign relations.
Egypt also benefits from a tradition of university education. There are many well educated and skilled professionals employed within the Egyptian insurance industry. The 12 insurance companies operating in Egypt are carefully regulated by the local supervisory authority. Insurance penetration is generally low, but the government is positive towards the sector and seeking to use the insurance industry to promote savings.
There is foreign investment in the local industry and already competition on rates is intense. Egypt complies with GATT, and it is planned that tariffs will be abolished by the year 2000. Liberalisation will, of course, only serve to increase competition for the Egyptian insurers.
Foreign ownership in a direct Egyptian insurer has been permitted since 1998. In addition, the government is actively considering privatising the four state owned companies which control 90% of all life and 70% of all non-life business (Misr, National, Al Chark and Egyptian Re). The government is approaching this carefully, since the social and economic ramifications of such a move could be extremely significant, given the role Egyptian insurance companies have played in holding nationalised assets in the past.
This is perceived as a benign environment for developing the range and quality of insurance products available. The Aon Group is particularly upbeat about the region. Bob Naudi, managing director of Aon IPM, is now based in Cairo and focusing full time on the Middle East.
He points out that the rates and terms offered in the local market are affected by the presence of multinationals. Real opportunity lies in the fact that local insurers are becoming more amenable to granting coverage to a local subsidiary on terms which match those available to the multinational in other jurisdictions.
Jordan and the Gulf
In Jordan, amendments in 1995 to the law governing insurance companies led within a few months to a 50% increase in the number of participants, making some 20 companies in all competing in a small market. Jordanian insurance companies have subsequently been required to raise their minimum capitalisation, but here also competition remains fierce.
The UN's long-running sanctions against Iraq have adversely affected Jordan's international trade. The perception is that the economies of both Jordan and Iraq will be boosted enormously as and when sanctions are lifted, and the process of reconstruction begins.
The insurance industry in the countries of the Gulf Cooperation Council (GCC), the geographical area which encompasses Kuwait, Qatar, Bahrain, the UAE, Saudi Arabia and Oman, is currently made up of some 178 companies, of which 63 are foreign.
All GCC countries allow foreign insurers to conduct business in their local market, except Saudi Arabia, where foreign companies operate through agencies or joint ventures with local companies and there is no legislation regulating the registration of insurance companies.
Over the last two decades, the insurance sector in the GCC region has depended heavily on expansion in the oil industry and on infrastructure projects undertaken by governments. Here again, insurance penetration is low. Meanwhile, the local companies continue to operate with a high reinsurance rate in many cases.
An exception to the general pattern is the region's largest insurance company, Bahrain based Arab Insurance Group (ARIG). ARIG set up a $300 million reinsurance company subsidiary, Arig Reinsurance Company, in July 1998 as part of a strategy to distinguish reinsurance from its other activities and increase the group's presence in the global reinsurance markets. Incorporated in 1980, ARIG was converted into a public company in 1997. Its original sponsors, the governments of Libya, the UAE and Kuwait retain 49.5% of the shares.
The insurance markets of GCC countries are being opened up. Kuwait, Qatar, Bahrain and UAE are already full members of the World Trade Organisation (WTO), while Saudi Arabia and Oman have applied to join. Given the fragmented structure of the GCC insurance industry, foreign insurance companies will be able to compete relatively freely as the GCC countries begin to implement the principles inherent in membership of the WTO.
Meanwhile, in Oman, the ministry of commerce and industry is understood to be taking the lead in setting up a regional reinsurance company with a capital base equivalent to at least $150 million, in order to retain the reinsurance premium currently going to European and American companies.
Turkey and Lebanon
In Turkey, some 68 companies, including 18 life insurers and four reinsurance companies, operate in the context of intense competition. The liberalisation of the sector in 1990 tripled the number of insurance companies in the country and intensified competition over rates. The main problem is inflation and the sector is also operating in the absence of laws or regulations governing it, since the Constitutional Court struck down the cabinet decree dealing with the sector some three years ago.
One of the principal opportunities appears to lie in the construction industry. Earthquakes are relatively common in Turkey. The insurance of buildings under construction is now compulsory, the intention being that insurance companies will take on responsibility for examining buildings as they are constructed.However, it is perhaps in the Lebanon, with her long tradition of sophistication in financial services, where the insurance industry faces the greatest challenges. There are some 80 insurance companies operating in the country, for a population of less than 4 million, generating the equivalent of approximately $266 million of gross premium income in 1997.
Currency erosion has taken a terrible toll. Forty-four of the Lebanese insurance companies have a capital worth some $13.9 million between them. New regulations will require insurers to have a capitalisation of the equivalent of $1.5 million with guarantees of the same amount, and to raise insolvency margins. Meanwhile, WTO accords come into effect in 2003, when companies will need size and profitability to stay in business.The insurance industry in Lebanon has, understandably, been brutalised by years of civil war. Indeed, the country is still partly occupied by Syrian and Israeli forces. Fraudulent claims are not uncommon, and a minority of agents and insurers still handle claims with rank unprofessionalism. In addition, an economic recession has gripped the country.
Despite all this, the government is said to be more committed than any of its predecessors in 40 years to implement administrative reforms, revamp Lebanon's capital markets and strengthen the rule of law. Some of the largest international reinsurers are present in Beirut,+ as well as Lebanon's own Arab Re, but it seems that it will be a long haul for Beirut to re-establish itself in the region's hierachy.
Which brings us back to Israel and the newly elected soldier-statesman, Ehud Barak. The approach adopted by all sides over the next few months could have a profound effect on whether the economies of the Middle East can at last be permitted to develop to their full potential. What is beyond doubt is that there is enormous potential in the region.
William Sturge is a partner in Lawrence Graham's Insurance Group. Tel: +44 (0) 171 379 0000; fax: +44 (0) 171 480 5156.