With historically low insurance penetration coupled with new Shari'ah-compliant products and major investment, the potential for growth in insurance across the Gulf is massive

In terms of raw numbers, the insurance and reinsurance industries in the Gulf Cooperation Council (GCC) are hardly the most impressive. In 2008, the total GCC insurance market was worth $11bn, while the reinsurance industry was a mere $5bn. Yet behind these top-line figures, there are a number of trends that indicate a huge potential.

Insurance penetration rates in the GCC are low (at 0.94% in 2008, up from 0.73% in 2000). This is at a level of a developing country – a conundrum given the high GDP per capita of the region (Qatar has the highest GDP per capita in the world, with Kuwait 14th and UAE 16th).

The sector is growing rapidly, however. In 2005-08, the insurance market in the GCC grew by an annual compound rate of 30%, with Qatar the star performer growing at 37%, the fastest growth rate in the world.

As demand for insurance soars, so does the need for reinsurance. Yet at present, GCC insurance markets rely heavily on reinsurance, with average cession rates coming close to 50% and for certain ‘mega risks’ even approaching 100%. This dynamic is set to change, however, as regulators worldwide impose higher capital requirements and shareholders apply pressure for better capital management.

In terms of the wider picture, demand and industry development is likely to be driven by the combined forces of the region’s rapid economic growth (4.8% GDP growth forecast per annum between 2009 and 2013, with Qatar registering the greatest growth per annum of 11%); government commitments to use the revenues from vast natural resources reserves to diversify economies; increasing education and awareness; pick-up in growth of life insurance due to new products such as takaful; and regulation and tax, both locally in the GCC and globally.

Financial centres in the GCC are looking to capitalise on the unique proposition of the region. For example, the Qatar Financial Centre has identified reinsurance and captive insurance as two core parts of a three hub strategy (along with asset management). Qatar faces competition from rivals in the area, but has certain advantages: it allows foreign insurers and reinsurers full access to the domestic market rather than just an offshore location, while its legal framework is based on English common law.

Importantly, structural impediments to insurance take-up are being removed and markets developed. The introduction of compulsory lines (including liability insurance for certain professions), developments in motor third-party liability and health protection, not to mention the increasing availability of Shari’ah-compliant products are expected to drive demand and deepen insurance markets. Meanwhile, corporates are fuelling demand for more sophisticated products.

Huge spending on infrastructure across the GCC and the developing trend for public-private partnerships in project finance are likely to be powerful drivers for insurance products and consequently spur demand for reinsurance. Despite (re)insurance still being in its infancy and facing numerous challenges, the combined trends for growth are compelling.

Akshay Randeva is director, strategic development at Qatar Financial Centre Authority