The Insurance Market
The insurance market in Egypt is going through a period of transition. This has mainly been prompted by Egypt's membership of the World Trade Organisation, obliging Egypt ...

The Insurance Market
The insurance market in Egypt is going through a period of transition. This has mainly been prompted by Egypt's membership of the World Trade Organisation, obliging Egypt to complete the liberalisation - privatisation, elimination of barriers to entry, removal of tariffs - of its insurance market by 2003.

The government is looking to privatise state-owned insurance companies that have been nationalised since the 1960s and major changes in regulations have introduced foreign capital into the country, with many international players looking to gain a share of the under-developed market.

There are 13 insurance companies in Egypt, nine of which transact all classes of insurance and reinsurance business, two transact only property and liability insurance and two transact life insurance. There is one specialised reinsurance company within Egypt, Egyptian Re, which is state-owned. There are 595 private insurance funds which transact insurance of persons and the Government Insurance Fund carries on fidelity insurance for shopkeepers. The Insurance Federation of Egypt, Insurance Pools and The Egyptian Insurance Computer Center are also significant members of the insurance market. Finally, the Cargo Supervision & Surveying Office of Egypt and The Insurance Institute for Training Middle Management play an important role in Egypt's insurance industry.

The insurance market in Egypt remains an oligopoly of three public sector insurance companies - Misr, Al Chark and National. These three companies dominate the market (75% market share in 1999) and handle most public sector insurance contracts.

There is only one professional reinsurer, Egyptian Re, which is also state-owned. Companies have been required to reinsure a certain percentage of business with Egyptian Re, but this is in the process of being phased out. In 2000, 25% of fire/engineering/marine hull and 15% of accident/marine cargo/inland/motor business was required to be reinsured with the company. These percentages are set to decrease by 5% increments each subsequent year and compulsory reinsurance is expected to be non-existent by 2005. Also, a further 5% has to be reinsured with African Re of Nigeria, a company established in 1976 by the African Development Bank and 41 member states of the Organisation of African Unity for the purpose of stopping the outflow of hard currency in the form of reinsurance. After compulsory reinsurance, the companies are free to reinsure where they wish. Swiss Re and Munich Re are the dominant non-Egyptian players.

Egypt historically operated on a tariff system, but this was withdrawn in 1998, in line with the liberalisation policy adopted by the regulator. However, current legislation allows the regulator to intervene in the event of individual insurers permitting premium rates to fall to uneconomic levels. In addition to the insurance authority, the Federation of Egyptian Insurance Companies monitors premiums in each company to ensure rates are not being reduced to a level that threatens the solvency of the company and the reputation of the industry.

One consequence of the tariff system was that it led to an accumulation of reserves for a number of insurers, which resulted in some companies releasing substantial reserves (for example, Misr released LE209m (£34.6m) from its loss reserves in 1998). Insurance products in Egypt are largely distributed directly, although tied agents and independent agents are also used.

Egypt's first foray into the free market was the open-door policy of the 1970s, which saw two joint-venture companies established and operating in the Economic Free Zones - Arab International and Egyptian American. Economic Free Zones were established to attract business but also to preserve the "Egyptian way". Free Zone insurance companies received tax and other benefits, but could only conduct business within those zones. However, the Free Zones never established themselves, as the two companies in the Free Zones were excluded from accepting open market policies. In 1981, three "quasi-private" companies, Mohandes, Suez Canal and Delta, were established. These companies have the public sector as their major shareholders and have a market share of around 20% (18% in 1999). By the end of 1993, two fully private domestic insurers, Pharonic and Allied Investors, began operations. Foreign entrants included ARIG in 1996, which acquired a 49% stake in Allied Investors, and AIG in 1997, which set up a joint venture, Pharonic American Life Insurance Company (Alico) with Pharonic Insurance.

The Egyptian insurance market has traditionally been closed to non-Egyptian companies, except for those operating in the Free Zone areas. However, Egypt's compliance with the GATT regulations has opened the local market to foreign companies. Insurance legislation introduced in 1998 allows local insurance companies to be 100% foreign-owned (previously foreign companies were restricted to 49% ownership). There are still some restrictions on single ownership unless special permission is granted by the authorities. This new legislation, coupled with the very low crime rate and the overall move of the economy towards private enterprise, has attracted international investors in the insurance sector.

In 2000, Allianz (Germany) bought an 80% stake in Arab International, one of the two insurers operating in the Free Zone areas and was granted a license to operate throughout the country. Al Chark has sold 98% of the shares in the second free zone insurance company, Egyptian American, to ACE (Bermuda); ACE has also applied to operate as a fully-fledged Egyptian business. AIG Group (US) has been another entrant via the acquisition of a 90% stake in Pharonic Insurance, one of the companies operating in Egypt proper.

These major acquisitions by big international players dwarf pre-existing foreign activity in the market, which was limited to joint ventures. Furthermore, Egyptian authorities have granted the newly founded Egyptian Saudi Insurance Company (set up by Saudi Arabian and Egyptian insurance companies, investment firms and banks) preliminary approval for a license to operate in Egypt. In addition, in March 2000, the state began the process of evaluating its four insurers (Misr Insurance, Al Chark, National and Egyptian Re) for the purpose of privatising them. In April 2001, the Egyptian authorities had drawn up a short list of international businesses interested in taking a stake in one of the four state-owned insurers. However, it is widely felt significant restructuring of these state-owned companies will be required before any privatisation can take place.

Following the market reforms, the insurance market has considerable room for growth. The current government is looking to overhaul the whole financial sector and part of this policy will address those issues that have led to a relatively low rate of penetration of insurance products in Egypt. These include:

  • low income levels that leave little disposable income to spend on insurance
  • a perception of inefficiency and lack of customer focus
  • the lack of a coherent and effective system of consumer and investor protection systems
  • a lack of adequate disclosure of financial information on the solvency and performance of individual companies
  • religious/cultural views on insurance, which is seen as unnecessary and contradictory to Islamic values.

    The influx of foreign companies and liberalisation will likely lead to increased competition in the long term, resulting in foreign expertise being used to streamline operations, expand the product range and provide greater customer focus. In an effort to increase transparency, the government is making economic information more readily available, with companies following the trend and boosting their expenditures on information technology to facilitate this.

    Insurance supervision and regulation
    The High Council of Insurance is responsible for setting goals and policies for the insurance market. The insurance regulatory body, which monitors insurance companies is the Egyptian Insurance Supervisory Authority (EISA), situated at:

    28 Talaat Harb Street
    Po Box 2545
    Cairo

    EISA was established to supervise the proper application of the Insurance Law. It has the authority to control and supervise all companies operating in Egypt, encompassing the areas of licensing, solvency and dissolution. Under the Insurance Law, every insurance company pays EISA an annual fee.

    The insurance industry falls under the control of the government and the main insurance legislation regulating the insurance market is:

  • Act No.10 of 1981 for the Supervision and Control of Insurance in Egypt and its amendments by Act No. 91 of 1995 and Act No. 156 of 1998
  • Act No. 54 of 1975 for the Private Insurance Funds and its regulations
  • Act No. 652 of 1955 for Motor Liability Insurance.

    Act No 10 and its amendments are the key regulatory statutes and include the following:

  • Rules on the participation of foreign capital in the establishment of insurance companies. No restrictions exist for reinsurance companies.
  • A minimum capital requirement of LE30m is required to establish a direct insurance company.
  • Firms are encouraged to practice either life, or property and personal liability, insurance.
  • Regulations for, and monitoring of, solvency requirements of insurance companies.
  • Provisions for the creation of a contingency fund to protect the rights of policyholders and beneficiaries.

    Insurance and reinsurance companies take the form of joint stock companies. These include both public and private sector companies. Previously, foreign insurers were not permitted to write insurance in the domestic market, but this can now be done through obtaining permission. Foreign brokers are not allowed into the market. The law allows the formation of co-operative insurance companies. All companies must comply with the reporting requirements of the Insurance Law. Annual financial statements must be audited by an independent auditor and submitted to EISA.

    Accounting conventions
    The financial year of a company (other than those operating in the Free Zone areas) must coincide with the fiscal year of the government, currently 1 July to 30 June. Composite companies are permitted; the accounts of life assurance and capitalisation must be separately maintained from those of general insurance. The accounts are prepared to adhere to Egyptian Accounting Standards and, in most cases, provide business lines breakdown. Required solvency margins are set at either 20% of net premium income or 25% of the net incurred claims in the preceding year, whichever is greater.

    Securities are valued at lower of cost and market value and real estate at cost. In addition to the unearned premium reserve and outstanding claims reserve, there is also a loss ratio fluct-uation reserve. The fluctuation reserve is treated as part of Shareholders' Funds by Standard & Poor's and allocations to and from these reserves are not included in the income statement. Some companies also have an additional reserve and this is treated similarly.

    General
    While the parliamentary elections last year returned a large majority for the ruling National Democratic Party (NDP), the current parliament is likely to be more vocal and to question the government, as many NDP candidates who were not chosen by the party leadership were elected. President Mubarak and the NDP remain firmly in control of the main decision-making institutions of the country.

    Rationale
    The investment-grade ratings on Egypt reflect the following factors:

  • Strong external liquidity. Central Bank reserves cover seven months of imports, twice the BBB median, and about 200% of the external financing gap in 2000/2001.

    The current-account deficit should narrow to less than 0.5% of GDP in 2000/2001 and remain at this level in 2001/2002, down from 1.3% in 1999/2000 mainly due to higher energy and tourism receipts and lower import levels.

  • External debt service, including short-term debt, is 30% of current-account receipts and is expected to remain broadly stable for the next few years. This ratio is in line with the median for the peer group.
  • Growth of 5% and higher since 1996.

    Despite projections that growth might slow this year and next to 4.5%, this level compares favorably with the country's BBB-rated peers. Inflation has been relatively low and stable and on a par with similarly rated sovereigns.

    Egypt's ratings are constrained by its:

  • Slow pace of structural reforms. Low per capita income - at about $1,330 (£933) in 2001, less than half of the BBB median, $3,820 (£2,681) - labour-market rigidities, lack of a social safety net and wide income disparities will continue to constrain the government's commitment to structural reforms, as maintaining stability will remain at the forefront of the government's agenda. Although the present government has recently stepped up its legislative efforts and parliament has passed a number of reform bills, implementation of these measures is still at an early stage and a number of bills have yet to be approved. Egypt lags behind most of its peers in liberalising key sectors of the economy (for example, telecommunications and energy) and attracting significant foreign direct investment.
  • Weak expenditure control. The deficit target for fiscal 2000/2001 has been missed due to expenditure overruns, and is expected to reach 4.5% of GDP rather than the budgeted 3.4%. It remains to be seen whether the government will be able to adhere to its 4% of GDP deficit target for fiscal 2001/2002. Standard & Poor's is concerned that despite the steps taken to improve the transparency of public finances and to enforce stricter budgetary controls, capital-expenditure overruns have not been avoided and might occur again in future. The government plans to strengthen further its fiscal institutions and procedures, but these will be implemented in the medium term. Smaller deficits are required if Egypt's general government debt burden is to converge with those of its peers. The ratio of gross general government debt at 95% of GDP in fiscal 2000/2001 remains far higher than all the country's peers and is projected to stabilize at 93% of

    GDP in 2001/2002.

  • Inflexible exchange rate regime and under-developed financial markets. The change in the exchange rate to Egyptian pound (LE) 3.85:$1 (70p) from LE3.40:$1 represents a major step in the right direction, and the new exchange rate regime has restored some order to the foreign exchange market. The central rate, however, now at LE3.90:$1, is not seen as a market-clearing rate (compared with the market rate of more than LE4:$1). The ability of the authorities to manage adverse internal and external shocks will continue to be limited in the absence of a more flexible exchange rate. Moreover, monetary policy instruments remain underdeveloped, thereby increasing the likelihood that the Central Bank would resort to administrative rather than market-based measures to control liquidity and defend the exchange rate at a particular level. The establishment of an interbank market and the approval of a mortgage law are important developments, but several long-awaited measures (such as the primary dealer system) are still pending.

    Outlook
    Standard & Poor's continues to be concerned about the level of public debt, weak control over public capital expenditures, sustainability of the exchange rate regime, and the pace of structural reforms. While the government has taken commendable measures to address all of these issues, the strength of these measures has been tempered by the need to maintain socio-political stability.

    Moreover, the country's institutional capacity needs to be enhanced in order to make policy implementation more effective. If the government succeeds in establishing a track record of improving financial indicators, and accelerating the pace of structural reforms within the next year, then the outlook could be revised to stable and the current ratings affirmed. Conversely, if within the next year the government misses its fiscal deficit target, the current exchange rate regime loses credibility, and the pace of structural reforms remains slow, then the ratings would be lowered.

    Egypt insurance analysts :
    Tristan Whittingham London 020 7847 7086
    Kevin Willis London 020 7847 7085