Yassir Albaharna, CEO of Bahrain reinsurer Arig, argues that the partnership between the Middle East's insurance and investment communities requires attention.

Unlike the rest of the world, insurance markets around the Arabian Gulf were not short of capital during the financial crisis. On the contrary, lured by a mixture of favourable regulation and the prospect of high returns, investors seemed to have fallen in love with the industry. In 2010, however, the honeymoon looks like it’s over and I cannot help but wonder if the marriage will last if the reality of the partnership does not meet the two sides’ expectations.

So why could the relationship turn sour? First, we are seeing dips in profitability across the region. Interestingly, this is the result of reduced investment income, as well as delayed asset revaluations, while underwriting profitability has somewhat improved. Ironically, that spells trouble for current business models, which traditionally relied on investment income and ceding commissions. Underwriting profits took a back seat, as they would mostly end up in reinsurers’ pockets.

Now all of a sudden, insurers find themselves in a situation where the insurance business is expected to substitute income lost from investments, and this must be causing some headaches.

Local insurers are not used to running higher retention ratios. Traditionally, they felt more comfortable with financial market volatility than insurance risk, which means they now have to step up hiring the resources necessary to do their own underwriting, product development and channel marketing. Unfortunately, this all comes at a time when, following years of top-line competition, market prices are at historic lows.

Extraordinary levels of capitalisation, paired with generous terms from reinsurers trying to buy their way into the region, have created surplus capacity that is now clashing with lower reinsurance demand as a result of the economic situation. Make no mistake: we are still seeing mega-projects on the launch pad but these are too complex and large to fit even the largest, predominantly proportional, local treaty capacities.

And little has been achieved by way of increasing the regional talent pool; for too long, the Indian sub-continent and other Arab or non-Arab territories have been a convenient source for qualified staff.

This may or may not continue, but the issue remains that with every expatriate leaving, most of their know-how vanishes.

In the absence of meaningful risk retention, only very few companies have shown the motivation to build up costly in-house expertise.

Naturally, Arig wants its regional clients to do well. We see a sea change ahead and hope that leaders and regulators in our industry will have the wisdom and foresight to see the writing on the wall. It will take a considerable amount of consolidation to combine existing resources and transform companies from fund managers into underwriters. Large global direct insurers now pushing into the Gulf can show us the way to make money if we are prepared to watch and learn.

Personally, I would also like to see the first Arab life insurance companies setting up, as it is largely the absence of individual life business that keeps insurance penetration at its low levels internationally.

At Arig, we have been following our own strategy for a number of years. The Middle East still stands for the largest source of premium; however, we have steadily grown into other territories as well as new products and relationships.

In 2009, the personal lines of life and medical already stood for 36% of our income. The company has retained almost 97% of its business and we have learned to make money from underwriting. Most of our reinsurance contracts are still proportional and reflect current market terms, but we came to realise that we cannot simply place Arig’s fortunes into the hands of regional markets.

Venturing into new fields of operation has not always been a straightforward process, but today we believe we are one step ahead on the curve and hope we can keep it that way. GR

Yassir Albaharna is chief executive of Bahrain reinsurer Arig and recently spoke at the MultaQa conference in Qatar