Whether it is due to the rising cost of reinsurance or an increase in underwriting capabilities, there is no doubt GCC insurers are retaining more premium. David Banks explores the 11 factors that point to increasing retention levels in 2009.

It has been anticipated for several years, but after growth in the mid-2000s observers can now confidently say that GCC insurance companies are increasing their retentions in favour of a larger share of their risks and a greater focus on underwriting profitability.

GCC insurers, many of whom are enjoying fairly health balance sheets in comparison to their US and European counterparts, can opt out of reinsurance as the price of such risk transfer take a sharp turn upwards.

However, the change is not just attributed to cyclical trends. Other factors including enhanced regulation, the volatility of the regional stock markets and rising ambitions have also played their part. We have identified the 10 reasons why GCC insurers are destined to retain more risk in 2009.

1 – Uncertainty in investments

Not just the Western financial crisis, but the ongoing volatility of the GCC stock markets. Speculation and price bubbles in construction and property have turned the regional bourses into a rollercoaster since 2005 and conservative insurers have chosen not to rely on such investments to bolster balance sheets.

The only option left is to focus on underwriting results.

regional insurers will want to buffer themselves against any future shocks by accumulating capital.

Increasing technical know-how, improving market and maximising underwriting profit are all part of this equation. Managing risks more effectively and retaining premium will naturally be the goals of companies striving to save for a rainy day.

What a change since 2006 when the shareholders of an Abu Dhabi-based insurance company took legal action against its management for failing to invest in the stockmarket.

2 – Technical expertise increasing

It’s a simple equation: increased expertise allows for a greater retention of risk.

While the region still relies heavily on expatriate staff – and the number of expatriate insurance professionals was predicted to rise as a result of the financial crisis in the West – a second generation of local insurers and brokers is emerging, aided by regional training centres at the Bahrain Institute of Banking and Finance, the DIFC and the QFC.

3 – The role of regulators

Insurance regulators across the Arabian Gulf have been raising capital requirements and increase professionalism via new rules and standards.

For example, SAMA in Saudi Arabia and the newly created UAE Insurance Commission are mirroring the frenetic issuance of regulation by the Dubai International Financial Centre and Qatar Financial Centre.

According to Standard & Poor's, the Saudi Arabia regulator has “ushered in a new era of strength and opportunity”.

"Those that wished to remain active in the Saudi market have had to comply with the new regulations… and had to adopt the authority’s newly defined regulations on minimum capitalisation, corporate governance and market conduct," said S&P credit analyst David Anthony.

Companies have to have the wordings, the pricing and the systems in place, not to mention the marketing channels.

4 – International ambitions

“People are engaged, they want to do things better,” said Gail Norstrom of Gulf Re, emphasising the growing maturity of companies in the Gulf markets. “They recognise that there are significant risks.”

As seen in other liberalised markets, the most competitive Gulf players need to diversify geographically in order to stay ahead in a game where international players are infringing their home turf.

Insurers keen to expand overseas will need to increase technical expertise and underwriting ability both to be able to compete effectively in the market they are entering and to retain greater risk, write more profitable risks and thereby accumulate the capital needed for growth.

The techniques some companies have used to do so might in time prove to have been taken rather too quickly and reinsurance does still have a vital role to play. However, accumulating capital at all costs should not become a guiding principle.

“It is to be hoped that companies do not take undue risks, or else unforeseen major losses could affect them sooner than economic turmoil.”

5 – Rating agency scrutiny

Many people argue that Gulf insurers have felt an obligation to increase retention as they begin to adopt more effective or conventional capital models for the sake of ratings.

The activity of international rating agencies has grown in the GCC and so has the understanding that a rating is essential to provide increasingly clued-up customers and industry partners with a clear marker of financial standards.

“People are asking for ratings more and more, whether it is government agencies or clients, because they all know the value of security,” says Karim Jabri, director of United Insurance Brokers, based at the Dubai International Financial Centre.

Paul Oates, senior analyst for EMEA insurance at Moody’s, says: “Ratings agencies take the view that if a company does not have control over issues that impact the balance sheet, like data quality and modelling, it is unlikely to have robust internal controls.”

6 – Increasing international insurance rates.

As international insurers attempt to fill wide holes in their balance sheets, rates across the board were seen to increase.

Brokers, say that catastrophe losses and the credit crisis have pushed rates up and that the market remains highly volatile. According to Guy Carpenter’s Rate On Line Index, property catastrophe reinsurance rates rose 8% at the January 1, 2009 renewals. Aon Benfield believes the same upward trend will continue through to at least the April and June 2009 renewals seasons.

7 – Growth in risk management

One of the results of the above requirement to satisfy rating agencies is a major focus on managing risks. However, regional and international reinsurers have also been instrumental in supporting the worldwide push towards improved risk management.

Better risk management practices and a more developed understanding of risks lead to a reduced requirement for risk transfer.

8 – Regional reinsurer cooperation

Regional reinsurers have been attempting to foster closer partnership with insurers, partly in an effort to encourage them to take on a larger proportion of their risks.

Mousa Al Rubaian said: “I have been calling for many years for the regional insurers to increase their retention. In the past, however, international reinsurers’ practices sometimes supported lower retention levels.”

9 – Reduced commissions

Gone are the days when reinsurers paid large reinsurance commissions to insurers who reduced their margins. The fluidity of market relationships and the prevalence of more regional and international players mean that commissions are far less an incentive than they were. Reinsurers both regionally and internationally are more interested in constructive partnerships and effective risk control than an instant transhipment approach which often saw insurers appearing more like brokers, transferring large volumes of risk and premiums overseas.

10 – Slowing infrastructure growth

Rather than relying on new business and the next big project to boost balance sheets, Gulf insurers faced with slowing economic growth are being forced to concentrate more on driving more profit from their existing portfolio.