Regional insurance holds long-term potential

Subject: The outlook for the insurance industry in the Middle East and North Africa.

Significance: There has been a rapid increase in insurance market activity in some countries; however, the regional outlook for insurance is mixed.

ANALYSIS

Traditionally Middle East and North African (Mena) economies have tended to overlook Western-style insurance; several factors are at play:

- There is a strong preference for Takaful, insurance that complies with Islamic law; moreover, Takaful companies have been successful in developing insurance products that are viable alternatives to Western products.

- Islam's emphasis on family and community means that the region is characterised by a longstanding reliance on extended family networks for support - reinforced by the continuing low proportion of women in the workforce, which allows them to assume the role of carer.

The Gulf Arab governments have long adopted a cradle-to-grave approach to welfare, thereby lessening their nationals' belief in the necessity of insurance.

The insurance industry's take-up in the non-Gulf economies has remained minimal, primarily as a result of these countries' low GDP per capita. Insurance works best when risks are idiosyncratic to a household, but in the low-income societies of the Maghreb, the role of insurance is limited by widespread low life expectancy and unsteady living standards even in urban areas.

The dampening down effect of high aggregate risks is particularly true of these economies' still-large agricultural sectors, where the weather has the potential for causing widespread negative effects.

Consumer demand in these countries will remain low in the short-to-medium term, undermined by low incomes and continuing rises in food and housing prices.

In the Gulf, and primarily in the UAE, gross written premiums in commercial insurance have grown exponentially in the last decade. Underpinning this development is the rapid growth in insurable assets in the construction, aviation and infrastructural sectors:

- This has lead to an increase in net profits for UAE insurance companies and caused a flurry of activity in the sector - specifically, the expansion of existing insurance companies and a number of new entrants into the market. Some of the world's largest insurers have now set up in Dubai, including Royal & Sun Alliance and AXA.

- Others such as the Zurich Takaful Company Limited, a Dubai joint venture between Zurich and the Takaful Company, are taking advantage of the importance of local relationships and knowledge of the local market, in particular Islamic requirements.

- Local knowledge is particularly important as demand for Takaful products is growing in line with increased demand for Islamic banking products, especially in Saudi Arabia where all insurance activity must comply with Sharia.

Recent falls in UAE stock markets will severely affect the investment income of many poorly capitalised niche players. This will alleviate the longstanding problem of a fragmented insurance market and, ultimately, result in the market being dominated by well-known local players with strong balance sheets or those with links to international companies. This consolidation means local companies will be better able to take on larger and more complex risks, although reinsurance written externally will remain important for the region.

Other Gulf economies, which are also characterised by fragmented insurance markets, will follow this pattern as membership of multilateral trade agreements obliges their governments to open up their economies to foreign insurance companies.

These large well-capitalised companies can expect their turnover to increase. Underpinning this is governments' newfound recognition of the role of insurance in contributing to economic development.

As a result, many Gulf governments are in the process of introducing, or have introduced, mandatory private health insurance for expatriates. This has also led Gulf governments that are determined to establish their economies as financial hubs, particularly those of Dubai, Qatar and Bahrain, to encourage the growth of the insurance sector through improved supervision and regulatory frameworks.

Nonetheless, there are a number of factors that will in the short term stymie the growth of insurance products in the Gulf:

1. Slowdown. While high-value infrastructure projects, especially in transport, will not be severely affected by the world economic slowdown and the concomitant fall in oil prices, construction in property will slow as consumer demand drops off :

- This will mean a fall in the take-up of mortgage-related life insurance products, which had increased with the massive influx of expatriates into the UAE, many of whom bought their own properties along with the type of property-related insurance policies they would have taken out in their home countries.

- Affluent local middle class consumers in the UAE, Qatar and Kuwait, countries that enjoy some of the world's highest GDPs per capita, were previously seen as a potential spillover market, but this will no longer be the case.

-The outlook for insurance is even bleaker in Bahrain, Saudi Arabia, Oman and Iran where oil income has failed to produce such high GDPs per capita or eradicate high unemployment. As in non-oil Mena economies, consumer demand will be dampened down by continuing high inflation.

2. Human resources. The lack of trained personnel creates the longstanding problem that local institutions are poorly equipped for assessing risk, fine-tuning prices and developing new products geared to local needs. Insurance policies are usually occurrence-based policies, rather than claims-made policies, with premiums increasing according to actual loss history.

The local market needs to develop more sophisticated risk and pricing models as well as product diversity if it is to expand, but this is held back by the insistence of Gulf governments on employing locals in the sector - with some targets set as high as 15% of all those employed - as well as by the cost of bringing in qualified expats.

Insurance is still characteristically peripheral to local business practices:

- This is particularly true in the construction sector, which despite its crucial role in the economy is still marked by widespread use of casual labour, poor safety records and the absence of government regulation - lax standards that have militated against the take-up of insurance policies.

-The Bahraini government recently announced plans to form its own National Occupational Safety Authority, which will be charged with curbing the number of work-related deaths in the kingdom.

- The UAE and Dubai in particular remain behind; although free zone companies are obliged to take out a level of property, employee and public liability insurance at present, there is no Federal obligation on owners, developers or landlords to take out building insurance.

- There is also growing pressure on the UAE government to introduce mandatory insurance in trade; the National Association of Freight and Logistics (NAFL) is pushing for mandatory liability insurance for freight forwarders, arguing that Dubai's status as a trading hub could be hampered by the lack of professional liability insurance among a large majority of freight forwarders.

CONCLUSION:

Insurance in the non-oil economies continues to be undermined by low per capita incomes, while the high-value business on offer in the Gulf offers considerable potential for future growth - although the short-term outlook is less benign due to local conditions and the global downturn.