An economic boom and the advance of takaful are two trends which mean the much-anticipated retention of Arabian reinsurance premium is beginning to take off, writes David Banks.

Life will become a lot more complicated for reinsurance buyers in the Gulf Cooperation Council (GCC) in the next few months. Not only do they have to decide how much risk to retain, they must also decide whether to opt for the same reinsurance companies as last year (and the 15 years before that) or acknowledge the wishes of clients and investors by investigating Islamic retakaful alternatives.

Although not all direct insurers in the GCC profess to be Shariah-compliant, those insurers that are seen to be taking the Islamic option could have an increasing advantage in persuading a predominantly Muslim audience to choose their products in either commercial or personal lines. Direct takaful companies are increasingly able to source retakaful capacity rather than use a waiver from religious scholars to use conventional reinsurance – new capacity has entered the market in 2008, in the form of ACR Retakaful, Hannover Retakaful and others.

Sameer Abdi, head of Ernst & Young’s Islamic finance services group, points to an increasing appetite in commercial and financial circles for the takaful industry, despite the significant challenges of capacity and skills. “Assets held and financed by the Islamic financial services industry are increasingly motivated to use takaful to underwrite risk,” he says.

“Existing takaful capacity is slowly replacing conventional insurance in the industry. The challenge for takaful operators lies not only in tapping extrinsic demand but also in developing their capacity and expertise to provide a competitive alternative to conventional insurance.”

Paul Oates, vice president and senior analyst at Moody’s, says: “We are certainly expecting to see a shift away from traditional reinsurance because the doctrine of necessity is no longer applicable. The major reinsurers have recognised this and have established their own retakaful alternatives. I think the one thing offsetting that is the position on retrocession.

“There’s not really much retrocession capacity in the region and there could be a risk of a reinsurance spiral and the retakaful companies would have to retro-reinsure each other. All of this means the fall in conventional reinsurance volumes might not be as rapid as some people think.”

Increasing retention

However, the question of retakaful is not the only dilemma facing ceding companies in the region.

Premium retention is the other major discussion point, which is being fuelled by increasing regional expertise, slowly increasing capital and a benign claims environment.

Whereas high levels of reinsurance usage was a feature of the GCC insurance industry in its infant stage, the maturing market is looking to change the way it does business, according to Simon Harris, Moody’s team managing director for EMEA insurance.

“We are seeing better capitalised and more established companies in the region and we expect retention to go up as a result,” he says. “Regional premium retention is also expected to rise as the takaful market makes further progress.

There will be larger individual exposures covered on this basis, so there is an argument that there will be an increase in facultative reinsurance compared to the level of commercial exposures seen at present.”

The main attraction for reinsurers in the GCC is that the primary markets are underpenetrated and growing rapidly. They offer diversification of a portfolio beyond the more traditional reinsurance markets.

Despite the glut of capital in the region, there are several reasons why prospects are still excellent for foreign reinsurers and external capital.

Michael Pilkington, a Dubai-based partner at law firm Holman, Fenwick and Willan, concludes: “Insurance is a low priority for many of the major investors in the GCC, because other business ventures particularly property have a much greater yield and are easier for an investor."

Regional Analysis: Qatar's technological advantage

GR spoke to James Sutherland, head of business development at the Qatar Financial Centre (QFC), to find out about the centre's plans for an insurance-linked technology hub.

Q: How does the Qatar centre differentiate itself from the other financial centres of the Arabian Gulf?

The main difference is that this is a greenfield site, metaphorically. It is our job to make sure that the QFC becomes well populated with insurance brokers and it is proving to be a very interesting experience.
The objectives of the QFC are also rather different with regard to insurance and reinsurance, because our aim is to create a broad-based insurance centre in Qatar and to make it a financial centre in the region.
We have AIG, AXA, Zurich, Marsh and Aon, and there are a number of other companies, including brokers, who are in the queue at the moment. Rapid progress has already been made, but there's no specific timetable.

Q: Establishing a presence at QFC - is it about more than just having a local shop window?

Yes it is more than that, because the companies and people located here have to perform to the same high standards as other leading financial centres in the world.
I think that also plays well in the region, because customers know that they are dealing with companies operating within a strong regulatory sphere. It is important that any business setting up here understands what the opportunities are and designs their business accordingly. They should also understand the seriousness with which the regulators here take their role, which includes strong regulatory and compliance functions.

Q: Are there any regular misconceptions about Qatar?

'Misconceptions' is not quite the right word, it is more like a lack of understanding. I think people are unaware of what is going on in Qatar and the wider region. It really is a bright spark in the global economy and there are some fantastic opportunities.
Infrastructure and the energy sector are growing rapidly, but there are also many other industries growing as a result. Energy prices are not going down any time soon.
Education and healthcare are areas the authorities are keen to develop and both provide opportunities for new companies coming in, which in turn brings opportunity for insurers.

Q: To what extent will the QFC be involved in enhancing skills, training and education?
We are in the process of establishing a Qatar Financial Centre training and development institute alongside the existing Qatar Foundation. This will give internationally accredited qualifications.
We are also working with Bloomsbury Publishing on something called 'Qatar Financial Centre: The Ultimate Resource', which will provide information on global banking and finance standards. It will be a reference resource for finance professionals worldwide, to underpin the fact that the QFC has a record of success to date.

Q: How would you describe the Qatar Insurance Platform?

It's in its early phase and will be a platform for messaging and transactions. We want to cater for deals to a high level of sophistication, but it is our objective that companies can integrate without needing their own platform.
In this respect, we have an advantage over London in that we are overcoming legacy systems and processes.
At the outset, it will not require any investment from the participants apart from their time, and it will be built to allow for systems integration.
And at that point, the users will have to invest in integrating to accept our message into their system, but we would expect those costs to be offset by the cost savings and advantages of being a part of the platform.