UK: Middle East Insurance: Optimism Tempered By Caution?

Last Updated: 17 April 2013
Article by Clyde & Co LLP

Plans were recently announced to construct the world's biggest Ferris wheel in Dubai, where the world's tallest hotel has just opened. The world's biggest mall announced, trumping the existing biggest, also in Dubai. Looking towards the Qatar World Cup in 2022, one estimate puts the number of additional hotel rooms required at 80,000. A return to the vibrant growth and prestige projects of the pre-2008 years? With the developed world experiencing near saturation in some insurance sectors, hopeful eyes have continued to be focussed on the Middle East as a source of potential growth, with its rates of low penetration for both short and long term retail products, and for more complex commercial covers.

Growth prospects

It is predicted that the insurance markets of the Gulf Cooperation Council (GCC) – will grow 20% annually over the next five years. The anticipation is that growth will be partly driven by regulators introducing new compulsory lines of insurance in the motor and health sectors. But there are also signs that as business continues to develop across the region, so more sophisticated covers are required.

In health insurance, mandatory schemes have already been introduced in Saudi Arabia and Abu Dhabi and plans formulated for a Federal Scheme in the UAE as a whole. Qatar is about to embark on launching or phasing in a scheme bringing Qatari Nationals within cover in 2013. Other GCC states are drawing up or contemplating plans for their own medical schemes. The opportunities are drawing the attention of a number of international players including Munich Re, Bupa, AXA, Cigna and Aetna, amongst others.

The region has seen a rise in contentious disputes (many linked to the large scale construction projects being undertaken), coupled with an increasing focus on corporate governance by financial regulators; this has stimulated interest in complex construction covers, professional indemnity and D & O coverage, offered by established international names which have entered the market in a big way in the last few years.

Life insurers are increasingly looking to the high per capita incomes and low life penetration rates in markets like Saudi Arabia as a major opportunity for orthodox and Shariah compliant products and for the first time there are moves to establish pension operations in a region where cash gratuities have been the traditional norm. Zurich and HSBC have recently announced major pan regional long term distribution deals for both wealth insurance and general retail products.

Since I arrived in the Gulf in 2008, all this has meant that there have been expectations of enhanced investment flows into the insurance industry and local market consolidation. These expectations have up to now not been matched by consistent growth in deal flow, however. There are a number of reasons for this.

Legal and regulatory obstacles

Deal flow is hindered by regulatory and legal challenges which mean that orthodox M&A is often seen as just "too difficult".

Since late 2008 there has been a moratorium on new entrants to the UAE market, whether established by way of new company (insurance companies in the UAE must be publicly listed) or new branch. The previous Board of the Federal UAE Insurance Authority was dissolved in September 2011. Although a new Board (and a new acting UAE Director General of Insurance) are in place, the moratorium has yet to be lifted. At least one overseas insurer has strengthened its presence in the light of the moratorium by the purchase of an existing company elsewhere in the region which has pre existing branches, but this is a complex route which will deter many potential new entrants.

Contrary to what many newcomers to the region often  expect, there is no EU style 'passport' which allows an insurer authorised in one GCC Member State to carry on business in others. Each GCC state requires separate authorisation. In the UAE, except in the Dubai International Financial Centre (the DIFC), foreign ownership of insurance companies is restricted to 25% (in contrast to 49% for non insurers).

These restrictions are particularly relevant given the rules on coverage across the GCC which as a general rule demand that a risk located in a GCC State can only be covered by  a primary insurer licensed to carry on business there; there are generally no such restrictions on reinsurance (except in Saudi Arabia). The increasing amount of local regulation presents challenges for insurers issuing 'global policies' to multinational companies now requiring local 'dropdown' policies.

These variations in local law and regulation pose significant legal challenge for insurers seeking to establish operations across multiple Middle East jurisdictions. Centralisation,  perhaps utilising a  'hub and spoke' model, gives rise to questions as to the extent to which operational functions can be outsourced by the local operation in each country to the hub. It will not be possible for the hub to sell direct to regional clients, but it may be possible for regionally licensed operators to outsource some of their backroom operations to the hub, although a number of states are now introducing detailed rules to be observed by third party administrators, which complicate outsourcing. In addition to a comparison of regulatory regimes, other considerations for hub location will include cost of living, political stability, infrastructure and general quality of life for non locally recruited staff.

Looking at the alternatives

The result of all this has been that insurance companies are looking creatively at non-traditional models to expand operations.

The 'fronting plus' approach is designed to enable a local insurer to benefit from the expertise and brand of the international player. This approach was pioneered in the region by Aviva in its relationship with a UAE insurer, NGI, prior to Aviva's restructuring of its business. 

The DIFC (where there is no moratorium on new entrants or restriction on foreign ownership, but from which onshore direct insurance is not permitted) has proved itself a good base from which insurers and reinsurers can undertake reinsurance operations. It continues to attract a steady stream of new entrants.
Joint ventures with established businesses to enter the market are also popular. The health insurance sector provides numerous examples of such arrangements such as the Abu Dhabi government's partnership with Munich Health to form Daman.

Qualified optimism

Having arrived in the region in mid 2008, I have observed the seeming roller coaster ride of property boom, credit crunch, debt restructuring and most recently the Arab Spring. My perception is that there has been no abatement of interest in the region and of optimism that in the medium to longer term the prospects for growth of the industry are excellent as challenges are met and the quality and depth of regulation matches underlying economic growth.  Eventually regulatory and commercial pressures will dictate large scale restructuring.  Exactly when, remains problematic.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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