With increasing interest from foreign insurers the Arab insurance market is rapidly consolidating. James Dean reports from the General Arab Insurance Federation Conference in Bahrain.

The theme for this year’s General Arab Insurance Federation conference in Bahrain was ‘Towards a more integrated Arab insurance market’. So it was not surprising that mergers and acquisitions (M&A) formed the focal point of discussions.

The overwhelming consensus was that consolidation must occur if the Middle Eastern market was to move forwards. But there would be no free ticket provided to foreign investors.

Delegates from over a thousand insurers and brokers from the Gulf States as well as a few hundred from Europe and the US attended the conference, which reflected the pride of members of the Gulf insurance community. This was encapsulated best by Farid Chedid, managing director of Beirut’s Chedid Re, who said: “Prior to the civil war, there were many large insurers in Lebanon. They left during and after, leaving only the family-run insurers which have supported the country to this day. Imagine if there were only foreign insurers present – it would have been a disaster.”

Fady Shammas, chief executive of Arabia Insurance Company, agreed. “Foreign insurers move only where there is greatest growth potential – and mainly into oil-producing countries,” he said.

But these feelings were balanced by an understanding that some foreign investment was necessary, both in terms of capital investment and the expertise that it brought.

“If we are pragmatic and keep our feelings aside, merger and acquisition is the way forward.

Farid Chedid, Chedid Re

Chedid continued: “If we are pragmatic and keep our feelings aside, merger and acquisition is the way forward.”

Nevertheless, if consolidation were to occur, there were a number of barriers that must first be broken down, he said.

Steps towards consolidation

It was recognised that the market as a whole is highly fragmented. Each country within the region has a different regulatory system for insurance, and each has a varying degree of stability. So, for the market to integrate and develop, moves are being made to create a greater degree of regulatory harmonisation between countries.

One suggested means of achieving this is via an EU-style system, whereby regulations are spread across the region from a central source and adopted by member countries. A single Middle Eastern currency has also been mooted as a possibility.

“Foreign insurers move only where there is greatest growth potential, and mainly into oil-producing countries.

Fady Shammas, Arabia Insurance

The Gulf Cooperation Council (GCC) is the body behind some early moves towards integration. Its basic objective is to effect coordination, integration and inter-connection between member states in all fields. The GCC represents only the six Arab Gulf states and is not the insurance industry’s representative body, but many see it as the organisation that will have the greatest impact on harmonisation.

The GCC has so far moved to allow the free movement of people between Gulf States – reflecting one of the first steps taken by the EU. But the EU took decades to implement harmonising legislation, with the insurance market being at the tail end of these liberalising reforms. It is clear that, although underway, regulatory harmonisation of the Middle Eastern market is some way off.

But the harmonisation approach has not found favour with all. Some believe that market forces should be left to work of their own accord, and that a flurry of M&As will occur when the time is right, rather than under the influence of a super-regulator.

Udo Krueger, a director of Bahrain’s Solidarity, said: “Regulators should only interfere to a minimum degree and flexibility must be allowed. Market forces will take hold by themselves and M&As will naturally follow. Regulators should not force M&As.”

Arguments about regulation aside, the government, and in many cases the monarch in each country, have a great bearing on the freedom of insurance companies to operate.

“Market forces will take hold by themselves and M&As will naturally follow. Regulators should not force M&A.

Udo Krueger, Solidarity

Ian Morrison, Saudi Arabia branch manager at RSA, noted that over the last 14 months, King Abdullah bin Abdul Aziz of Saudi Arabia has forged ahead with liberalising the Saudi insurance market. “Abdullah is much more progressive than his predecessor, and in general across the Gulf States, the personality of the ruler is very important. Here in Bahrain, both king and prime minister are very progressive, as is Dubai’s current emir.”

Another consideration is that family-owned insurance companies account for the majority of the market – and they may be less willing to be taken over. “The culture and mentality in a family-owned business sets the Middle Eastern insurance market apart, and provides a barrier to consolidation,” said Shammas.

Many of the smaller Middle Eastern operators present at the conference had been family-run for generations.

Many European and US companies sensed long ago that opportunity exists in this market. “Recent years have seen rates of growth of insurance premiums in these markets far in excess of those registered globally,” said Simon Harris, a managing director at Moody’s. “We expect this trend to continue for the next few years on the back of rising per-capita GDP, increasing awareness of the benefits that insurance can bring and government actions to encourage individuals to save for their own retirement.”

The takaful insurance market could be expected to offer huge potential in the predominantly Muslim Arab states, but industry leaders based in the region say this is not the case. Andreas Molck-Ude, Munich Re’s Middle East and Africa chief executive, said: “The main aim of takaful was to access previously uninsured individuals with a product that was compliant with their religious beliefs. But this has not happened – only existing policyholders have been targeted. New, highly-capitalised companies that were set up to take advantage of this market have ended up fighting for very little premium.”

“The main aim of Takaful was to access previously uninsured individuals with a product that was compliant with their religious beliefs.

Andreas Molck-Ude, Munich Re

Krueger went further, saying of the launch of Takaful Re in 2005: “We were wrong. Other market forces were in play, and we did not see them.”

But despite the stagnation of thetakaful market, there are huge opportunities in other areas. Anybody flying into the financial hubs of the Middle East can look out of the plane window and gaze across acres of sandy yellow land reclaimed from the Gulf Sea.

Building is continuing apace, but it is not limited to big offices, residential developments and oil wells – vast oil refineries are being built or planned in a number of Gulf States as the region moves to further capitalise on $100-a-barrel prices.

Bob Peilow, managing director of global specialties and the Middle East for Willis, highlighted the potential outside of the construction sphere. “Health insurance as part of employee benefits packages is one growth area, as is aviation due to the massive number of people now wishing to travel between states.” But the largest, he says, is terrorism insurance. “All the big lenders behind the big developments are starting to require terrorism insurance – and in general, lender-driven needs are becoming very important.”

Peilow said that opportunity also exists in the professional liability sector, which has opened up since Middle Eastern companies began investing outside of the Middle East. Previously, products such as directors’ and officers’ liability (D&O) cover were uncommon because of the relatively low levels of litigation in the Gulf, but this outwards investment has brought novel risks from the highly litigious West, and directors at Middle Eastern companies are beginning to seek protection.

“All the big lenders behind the big developments are starting to require terrorism insurance.

Bob Peilow, Willis

To take advantage of emerging and existing markets, insurers and brokers alike stressed that value-added services were key to gaining a competitive advantage. “It’s not just about bringing capital into the region”, said Giles Ward, regional director for the Middle East and North Africa at Ace. “You need to have specialists within the region on hand to assist your clients.”

For those entering the market for the first time, setting up a branch – rather than buying into an existing company – is normally the first step. The ability to underwrite, backed by a strong financial rating, import existing talent and the difficulty, in some cases, of gaining a sufficient stake in a Gulf insurance company were cited by Ward as reasons for this.

Jane Dellar, managing director of Bahrain Financial Services, a government-backed agency that helps companies set up on the island, revealed that three large insurers are currently in discussions with a view to setting up. “Companies are looking for some stability following the sub-prime crisis, and one way they are looking to stabilise is by gaining a foothold in the Middle Eastern market,” she said.

Retaining talent

But the Arab market is suffering the same pains as the UK in terms of training, recruiting and retaining talent. This was a much-discussed topic throughout the conference and moves have already been made to train a generation of insurance specialists. The Gulf Insurance Institute (GII) opens its doors to students this March, offering full diplomas and individual competency certificates accredited by the CII – although with modules tailored to the political and regulatory systems of the Middle East.

Wendy Maddison, director general of the GII, was quick to point out that many Western companies will only be attracted to a market if the talent is there to sustain its business. “To survive as a financial sector you need to provide the skills required by the foreign companies coming into the market. For example, Bahrain has a very well educated workforce but does not have some of the professional skills necessary – especially in the loss adjusting field.”

Despite the views of some that the market should be left to develop of its own accord rather than by heavy harmonising regulation, the latter path seems the most likely. In a snap poll during the conference, 81% of delegates said that regulators should control the issuing of licences to new companies.

On top of that, 95% of delegates said that M&As within the region was the way forward, although 60% were of the opinion that there were not enough premiums available to sustain new companies. The only major concern is whether the expanding market can be supplied with a stream of fresh talent.