The Gulf insurance market is set to double in the next three years to reach $4bn. Geoff Bromley takes a look at what is driving this incredible growth.

Although the insurance and reinsurance market in the Middle East cannot be described as a mature market, it is rapidly evolving. Driven by a range of factors such as the raft of major infrastructure projects across the region, the introduction of legislation for compulsory health and motor insurance in some countries and the emergence and ongoing development of takaful products, the Gulf has become a key target growth region for an array of international insurance companies, including brokers, insurers and reinsurers.

The Middle Eastern insurance and reinsurance market is currently growing at a rate of approximately 10% per annum and this rises to 20% within the Gulf Co-operation Council (GCC), which is made up of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. By 2010, it is estimated that the population in the Middle East and North Africa (MENA) region will reach 330,000,000. Combined with the current low insurance penetration rates of just under one percent for the region, the result provides significant growth opportunity in both the insurance and reinsurance markets.

A number of leading insurance groups have identified the Middle East as a major growth opportunity over the next few years, with likely annual growth levels targeted in the double digit range. Analysis by AIG suggests that the Gulf insurance market is expected to almost double in the next three years to reach a collective value of $4bn.

Increasing capacity
According to Nigel Bond, a credit analyst at Standard & Poor’s, in their respective markets, Middle East insurers are faring better than their western counterparts in terms of competitive position and operating performance. Their main challenge will be to manage the fast growth that is being achieved.

“In their respective markets, Middle East insurers are faring better than their western counterparts in terms of competitive position

In November 2007, the S&P report “How Middle East Non-Life Insurers Are Developing From A Ratings Perspective” identified that Middle East non-life insurers are generally rated lower than their international counterparts, mainly due to the fact that they implement less developed enterprise risk management and have much higher risk investment profiles. “We expect the credit ratings on Middle East non-life insurers to move gradually higher and narrow the gap,” added Bond.

A fundamental aspect of insurance development in the Middle East is the clear need for strong national, regional or multinational insurance group involvement. Until recently, Middle East markets have been characterised as involving many small and medium sized companies with low retention capacities that have acted more as distribution channels as opposed to real risk takers.

As a result of the rapid sector growth, however, many companies are setting up and in some cases relocating to the region. There naturally exists an aspiration to retain more risk within the region and to date, this has been difficult at times to achieve due to the lack of locally-based capital. Not only are overseas insurance companies setting up, domestic reinsurers are being established. February 2008 saw the creation of Oman’s first national reinsurance company, as well the world’s largest retakaful company in Kuwait. All this leads to significant amounts of capacity being brought to the region, alongside increasing degrees of sophistication and knowledge.

The Gulf insurance market’s growing sophistication can be seen in the development of the local market for the placement of risk. Dubai is emerging as an alternative competitor to the London insurance market in various lines of business and this is no self-proclamation. These were the words of Richard Ward, chief executive of Lloyd’s of London who noted the realisation of London underwriters that there was increasing competition provided by local insurers in Dubai and other Middle Eastern markets to underwrite more risks in the region.

“Whereas much of the Gulf business used to be placed outside the region, it is now being transacted in the region

Whereas much of the Gulf business used to be placed outside the region, it is now being transacted in the region by international brokers, insurers and reinsurers who are increasingly establishing a greater local presence. Whilst a number of these entities have chosen the Dubai International Finance Centre (DIFC) as their regional centre, other locations are also proving popular. There is little doubt that more and more of the local business, including specialised areas of insurance coverage will be increasingly catered for by locally-based carriers. This is a natural consequence of the evolution and development of the local market and is to be welcomed.

Captive audience
We are also seeing significant changes in the way that Middle East corporations are acting in their approach to risk management. The globalisation of Gulf sovereign funds and investment activity in the international markets has led to a greater focus on corporate governance, as well as a more global outlook. This is resulting in a more sophisticated approach to risk management, which can be seen, for example, in the emergence of the first Gulf-based captive.

Increasingly recognised by big corporations as a desirable risk management tool and as an important alternative risk transfer method, the captive phenomenon is expanding. With more than 5,000 captives worldwide, and equivalent premium income of $60bn with capital/reserve of $500bn, the captive industry is booming and the Middle East has every reason to want a slice of the action. Aon’s own research shows that more than 80% of the Global 500 companies now have captive insurance vehicles.

Tabreed – the UAE-based cooling provider, which set up the first captive in the GCC, in Bahrain at the end of 2006 – will provide a lead for other industrial companies from various sectors. We can certainly expect captive insurance schemes to play an increasing role in the Middle East in the years to come.

“February 2008 saw the creation of Oman's first national reinsurance company, as well the world's largest retakaful company in Kuwait

Takaful and retakaful
Whilst these market elements remain relatively modest in size to date and growth has been far less than that experienced in the Shari’ah-compliant banking sector, most commentators see takaful and retakaful as significant growth opportunities in the future.

According to the Bahrain Insurance Association, the takaful non-life market is currently estimated to be approximately $2.3bn worldwide with the Middle East accounting for 46% of total sales. By 2015, this business is expected to grow to between $7.4bn and $14bn. Whilst the range of growth predictions vary considerably, by any measure, this will be one of the fastest growing sectors in the global insurance marketplace in the medium term, a fact recognised by many of the world’s leading risk carriers which have established their specialist takaful and retakaful entities.

The pace of evolution in the insurance and reinsurance markets across the key financial centres within the region will continue to rely, to a certain extent, on oil prices and the important issue of regional stability. Should these two fundamentals remain in place, it is likely that the very high levels of economic growth achieved in recent years will continue, providing a strong platform for insurance and reinsurance growth in the region.

This strong economic development will be accompanied by growth in average disposable incomes and the creation of greater wealth in the broader community. This, together with the major infrastructure projects, the increasing development of compulsory insurance lines and the broader acceptance of insurance coverage within the economic model will provide a strong engine for insurance growth in the region.

As the region’s insurance and reinsurance sector continues to grow, there will be emerging challenges arising from the developing regulatory regimes on offer, particularly around the relative lack of a locally experienced insurance workforce. Whilst this is not a new phenomenon, 2008 will perhaps be seen a watershed year for the industry in the region as the human resource management challenge gains even greater momentum.

Geoff Bromley is vice chairman of Aon Re Global.