THE INSURANCE INSTITUTE OF LONDON
“THE MIDDLE EAST
INSURANCE MARKET INTO
THE NEW MILLENNIUM
THE CHALLENGES AHEAD”
BY
DR ALI AL BAHAR
(General Manager – Kuwait Insurance Co., Kuwait
Vice Chairman – ARIG Group, Bahrain)
DEVELOPED FROM AN ADDRESS DELIVERED TO THE INSTITUTE ON
TUESDAY 7 MARCH 2000
NOTE TO READERS: PUBLICATION OF A PAPER BY THE INSTITUTE DOES NOT
NECESSARILY IMPLY AGREEMENT WITH THE STATEMENTS MADE OR OPINIONS
EXPRESSED FOR WHICH THE WRITER ALONE IS RESPONSIBLE
THE MIDDLE EAST INSURANCE MARKET
INTO THE NEW MILLENNIUM
- The Challenges Ahead -
Dr. Ali Al Bahar
General Manager – Kuwait Insurance Co., Kuwait
Vice Chairman – ARIG Group, Bahrain
Introduction And Overview :
The Middle East Insurance Market
1.1 Introduction
As we enter the new millennium, the world insurance market is passing through a phase
of transformation into a new era of liberalization, globalization and consolidation. The
changes in the market have been so rapid that achieving a competitive edge now
demands a new approach to strategic planning and implementation within an overall
environment, which is more dynamic and more demanding than ever.
There is no time to stand and stare, the players in the Insurance Industry are required to
equip themselves to cope with the changes taking place in the insurance market.
The Insurance Industry in the middle east region do not operate in isolation and the
players in this region are subjected, both to environmental changes and changes
occuring in the International Insurance Market.
Considering the influence of Global & Regional economic changes and the challenges
they throw on the Insurance Industry, I have conducted a SWOT (Strengths, Weaknesses,
Opportunities & Threats) analysis on the Middle East Insurance Market, following a brief
scanning of the environment which has great relevance on my analysis. Following my
analysis, I have also suggested some strategies to be adopted to over-come the
weaknesses & threats and to encash the opportunities for a sustained growth. I have also
briefly touched on the Automobile Insurance in general, as this topic is more specifically
analysed in the last chapters.
1.2 Insurance Infra-Structure
- Government Owned Insurance Sector
- Mixed Sector
- Private Sector
The Insurance Sector exists in three groups and they are; Government owned Insurance
Sector, Mixed Sector (i.e. Govt & Private Sector) and Private Sector.
Government owned Insurance Sector
Insurance plays a vital role in the Economy of any country and it contributes immensely to
the GNP as it is considered an important vehicle to channel Long Tem Savings and
Investments.
Government owned sector has long horizontal structure and abre bogged down by rules,
regulations and re tapism.
The pressure from the world bodies like GATT, WTO, IMF, WORLD BANK etc. is being
imposed on various Governments, to open up the Insurance Sector for the International
players to operate.
Mixed Sector
In the mixed sector the market forces are allowed to operate and both, the government
owned insurance companies and the private insurance companies operate and the
customer is benefited by the competition.
Globalization, Privatization and liberalization are the key words used by many
governments for boosting the economy and raising the living standard of its citizen.
Now the Governments are realizing the potentials of the privatization and are disinvesting their shares in Government owned Insurance Companies.
Private Sector
In the Private Sector, both customers and share holders are the beneficiaries. Product
innovations and excellent services are the distinguished features of this sector.
1.3 Direct Insurance Market
With clients demanding high level of discounts, wide scope of coverage and commission
paid to intermediaries, the insurance industry is becoming more competitive and
challenging.
Insurance & Re-Insurance Players In The Arab World
Having briefly described on how the Insurance industry is put up, the various Insurance &
Reinsurance players in the Arab Sector are listed below:-
Table 1.1
Number of Insurance & R/I Companies in the Arab Market
Year 1997
REGION
GCC
ARAB AFRICA
COUNTRY
NO OF COMPANIES
DIRECT
DIRECT
LOCAL
FOREIGN
BAHRAIN
8
KUWAIT
REINSURER
TOTAL
10
1
19
4
11
1
16
OMAN
6
10
0
16
QATAR
4
4
0
8
SAUDI ARABIA
74
0
1
70
U.A.E.
19
28
0
47
TOTAL
115
63
3
181
ALGERIA
6
0
1
7
EGYPT
12
0
1
13
LIBYA
1
0
0
2
MAURITANIA
1
0
0
1
MOROCCO
19
0
1
20
SOMALIA
1
0
0
1
SUDAN
17
0
1
18
TUNISIA
16
0
2
19
TOTAL
73
0
6
79
IRAQ
2
0
1
3
JORDAN
24
1
0
25
LEBANON
70
10
1
81
SYRIA
1
0
1
2
YEMEN
8
0
0
8
TOTAL
105
11
3
119
293
74
12
379
NEAR EAST ARAB
GRAND TOTAL
Source: ARIG Directory 1999
Table 1.2
Arab Insurance Market – Premium Distribution
US$ Million
1997
REGION
COUNTRY
TOTAL GPI
RETAINED
PREMIUM
REINSURED
PREMIUM
GCC
BAHRAIN
119
75
44
KUWAIT
203
77
126
OMAN
140
85
55
QATAR
155
61
94
SAUDI ARABIA
771
254
517
U.A.E.
656
368
288
2044
920
1124
ALGERIA
271
195
76
EGYPT
537
234
303
LIBYA
222
126
96
MAURITANIA
8
5
3
MOROCCO
862
701
161
SOMALIA
0
0
0
SUDAN
32
16
16
TUNISIA
320
255
65
2252
1532
720
0
0
0
JORDAN
137
88
149
LEBANON
420
304
116
SYRIA
334
284
50
YEMEN
18
7
11
TOTAL
909
683
226
5205
3135
2070
TOTAL
ARAB AFRICA
Total
NEAR EAST ARAB
GRAND TOTAL
IRAQ
Source: ARIG Directory 1999
The large number of players in the Arab World signifies the importance of the insurance
sector, in this region.
From the above premium distribution of Arab Insurance market, it is evident that out of
the Total Gross Premium in each market, the market’s retained premium is in the region of
40% to 60% of total premium.
However, this
high retention percentage creates an unbalanced portfolio because
Motor & Workmen Insurance Premiums are fully retained in the local market, where the
loss ratios are very high, while the greater part of the premium from huge risks (specially
energy related risks which loss ratios are very low ) goes out to the international market for
reinsurance support due to low retention capacity of insurance firms in the Arab region.
It would be of interest to note here, the gross premiums in the GCC amounted to $2bn in
1996, accounting for merely 0.1% of world insurance income which was estimated in 1995
at $2.2 trillion.
1.4 Buyers’ Market And Sellers’ Market
The
third point is the Buyers’ Market & Sellers’ Market.
Gone are the days where,
Insurance Companies were selling their products at the terms, conditions and rates fixed
by the companies.
Today, the customers are more knowledgeable and demanding. Insurance Companies
are losing the privilege of quoting on technical basis, rather the customers are
demanding the products as per their needs and budget.
For example, the MNCs (Multi National Companies) are fixing the Insurance cost in their
overall project value and are negotiating the rates within their budgeted figure.
As MNCs are globally positioned and are commissioning projects worldwide based on
their experience and knowledge, they are demanding Insurance products with wider
coverage at minimum or even without exclusions and deductibles.
Furthermore, some MNCs are resorting to self insurance and establishing “captives” as
means of savings.
Therefore the Insurance and Reinsurers are required to equip
themselves with latest technology and know-how to meet the ever changing demands of
insuring public.
1.5
Current Global Insurance Market
Competitive market
The insurance market, like any other market has become highly competitive as
compared to the earlier years.
“Competitive” in today’s context is cut throat competition as insurance premium rates
continue to slide down even beyond the bottom line.
Competition has forced the
Insurance Industry (mainly the International brokers) to develop multi year, multi-line policies
at uneconomical pricing due to excess/huge capacity available in the insurance market.
However, a more disciplined and profitable multi-line underwriting approach following a
scientific portfolio analysis of exposure can benefit the Insurers & Reinsurers.
Growth In Technology
Technology has made the world small. Thanks to the “Cyber Technology”, information
can be accessed from any part of the world and communication is made in split
seconds, which in turn helps the Insurance market in risk analysis, rating, placement of
risks, and providing quick service to the clients.
High Risks, Acts Of God
The Risk Exposure is ever increasing with high loss potentials due to frequent catastrophic
losses like floods, hurricane, earthquake, etc. where the calculations based on the return
cycle are no more predictable, for example, we are hearing the word “Exceptional”
more frequently.
For instance, noted below are a few events termed ‘exceptional’
-
Hurricane in Mexico Killed 400 people.
-
Subtropical Thunder Storms in China led to land slides which wiped out entire villages and left
more than 360.000 people homeless,
-
Hurricane Mitch was also termed exceptional.
The total amount of catastrophic losses between 1987 and 1995 exceeded the total
amount of all CAT losses in the last 100 years.
Year 2000 Exposure
Year 2000 exposure, the widely spoken millennium problem is a man made exposure
which is causing concern to the world community and to the Insurers in particular.
Y2K is a major issue for any business, but for the insurance companies it is doubly so. Not
only do they have to sort out their own internal IT (Information Technology) systems affected
by Y2K problem, but they also have to decide how they will deal with Y2K exposures in
the Policies they issue.
As for the “business insurance repercussion” generated by the millennium issue, the
market in general has voiced its opinion but there are significant differences dividing the
market direction.
However, the insurance companies in the Middle East Region have had separate market
meetings in their respective countries whereby consensus has been reached by some to
use certain Y2K Exclusion Clauses which vary from Total Exclusion to buy back of Y2K
resultant Physical Damage.
The Insurance Markets world-over seems to have become much more cooperative in
their search for a solution to the millennium issue as they are showing an increased
reasonableness with their customers (insureds) in tackling this issue.
1.6
International Changes in the Insurance Market & its Impact on Middle East
Insurance Sector.
1.6.1
Mergers/Take Overs – Capacity Consolidation
Mergers, Takeovers and Joint Ventures have become a fashion.
economies of scale and diversify portfolio exposure.
Mergers achieve
The high expectations of
shareholders for reasonable returns, organic growth of business and the mounting
pressure from rating agencies to strengthen balance sheet, are major reasons for the
consolidation.
I observed the shrinkage of a number of insurance and reinsurance companies and
highlighted in the following chart some of the major deals (above US$500 million) that
took place in 1998 and onward.
SOME OF THE MAJOR DEALS(ABOVE US$ 500 MILLION) IN 1998 AND ONWARD

St. Paul companies buy USF&G Corp. for $3.5 BN

Commercial Union and General Accident

Exel Ltd. Buys Mid Ocean Re for $ 2.88bn

Ace Ltd. Buys CAT limited for $ 711m

Fairfax Financial buys Crum & Forster for $680m

Berkshire Hathaway buys General Re Corp. for $22bn.

Swiss Re buys Life Re Corp. for $1.8bn

General Electric Capital Corp. buys Kemper Re for $500m

Gerling Global Re buys Constitution Re for $700m

AIC buys Sun America Inc for $18bn

Wintherthur sells reinsurance activities to Partner Re for $750m

ACE buy CIGNA

GRE goes to AXA in £3.45 bn. Acquisition
Consolidation – Lloyd’s
-
Number of syndicates reduced from peak of over 400 in 1990 to 155 in 1998.
-
Average size of syndicate increased from under £ 65 million in 1998.
We can see from the consolidation at Lloyds that there have been a number of
consolidation in the Lloyds where the number of syndicates reduced from 400 in 1990 to
155 in 1998.
Total mergers in 1998 were in the tune of US$2.300bn. While it was in the region of
US$1.500bn in 1997 and US$1.000bn in 1996.
AON (Insurance and Re-insurance Brokers), found that between 1993 and 1998 Offshore
capacity has increased by 137% from US$1.660bn to 3.946bn, and onshore capacity has
increased by 265% from US$ 1.210bn to US$4.455bn. Too much capacity and too little
demand, feed on each other in reducing the premium further.
Going by the Statistics, premium rates in America are down by 17% from 1994-95. In the
London market, many risks are being underwritten for half the prices paid only few years
ago. The Middle East scenario is no exception.
It was assumed that the mergers would curtail the competition, but there are still many
small players who are willing to cut the prices because of their lower operating expenses.
The companies which have merged are fearful of losing their market share by holding on
to their rates. The Middle East Region is also experiencing the “price war”.
One of the reasons for falling of premium rates is the “Capacity Excesses” created by the
“bull stock market” where bonds are floated to back the capacities of the Insurance
Companies, like the recent 150 million catastrophe bond option issued by Allianz,
Europe’s biggest Insurer. This over supply contrast with falling demands has led to fall in
prices and the markets are now contracting.
1.6.2
Sharing & Exchange Of Information / Data
Moving on to the next point – Information, which is the “Life Line” of Insurance Business, is
being exchanged and shared widely. We are blessed with the Information Technology,
which allows faster and necessary communication.
Various Data, Statistics and
Information are being accessed from our own “Cyber Stations” for better “Management
Decision”.
The information that is furnished through the Cyber Technology is of varied nature which is
of much interest to Insurers and Reinsurers. Vital information on the finance, economic
conditions, change in technologies, political situation, geographical risks, research papers
on various topics etc.. are of great treasure. This information is vital for making decisions in
our “business of carrying risks”. The 21st Century will bring in newer technologies at faster
pace than it was in the 20th Century. New millennium may bring in newer opportunities
and threats.
Insurance companies in the Middle East should also wake up to the global changes
taking place in information technology. Technology.
This may cost the companies
initially, but the benefits can be harvested in short duration. Updating and Training in
information technology for all concerned people will be the need of the hour.
1.6.3
Price Control
Touching the important point that is the Price control, there was a hope that the Mergers,
Takeovers and Joint Ventures will lead to beat the competition and result in controlling
the jet dropping prices. But, this is not happening – the prices have fallen to rock bottom
rates which history has not seen.
The absence of catastrophic losses in the past years has only quickened the pace from a
hard market to a soft market that has resulted from overcapacity with too many insurers
and reinsures chasing too few business opportunities.
Premium Rating in Energy Sector, in 1998 was estimated to be between 20% and 30% of
1993 levels which shows how drastically the rates were cut.
1.6.4
Environment
Scanning the environment, we all agree our environment is very important to all living
beings and particularly of great concern to the human race. The climate systems i.e. the
various components of the climate, atmosphere, ocean, cryorsphere, biosphere and
geosphere are changing. These components fluctuate naturally in a dynamic balance
so that one change happens as a result of another, keeping the system stable.
However, this delicate balance is being increasingly disrupted by mankind, through the
injection of harmful factors such as carbon dioxide, sulphur immersions, sulphate/CFC
aerosols leading to the Ozone Layer depletion and resulting in global warming.
This disruption of our stable climate system will have consequences worldwide, many of
which will impact heavily the “Insurance Industry”.
Catastrophic Losses
During the last century, the earth has warmed by between 0.3° and 0.6° C and
meteorologist predict that the global temperature may stand as much as 2° to 3° C
above the year 2100.
Meteorologist say, the temperature change that brought this planet out of the last ice
age was only in the order of 3° to 4° C. We would be facing a change in our environment
on mammoth scale, if the trend continues.
The Hadley Centre statistics, estimates that the global rise in sea level caused by global
warming will be in the region of 21 cm, placing all the coastal communities at risk of
flooding, causing structural and contents damage and presenting a risk to life. In the year
1998, the global mean surface temperature of the earth has been at its highest since
global instrument records began.
Health Insurance
Health Insurance, could also be affected by the changes in climate. We may expect
over the next century, these changes are likely to have various adverse impacts on
human health.
Various diseases of epidemic in nature, may be on the rise, with huge demands on
Medical Insurers/Reinsurers, who have to meet the bills of these epidemics.
Genetic Engineering Insurance
Under the latest climate scenario, by the year 2050 Tropical Forest will die in many areas.
Tropical grasslands will be transformed into desert or temperate grasslands.
Due to
changes in climate and carbon dioxide, agriculture crop yields are expected to increase
in high and mid-latitude countries but decrease in lower latitude countries.
This will pose a problem for meeting the hunger need of the human race. New
Technologies will arrive in agriculture fields like the genetic engineering. We expect that
much more sophisticated technology will be invented to meet the growing demand from
the depleting natural resources. Insurance Industry, will also have a great role to play in
these circumstances.
1.6.5
International / Regional Economics.
Touching International and Regional Economies, we see the international economy,
having their crisis due to various factors, man-made and natural calamities.
The Far East countries had their worst economic crisis, which had its effects on other parts
of the world and especially on the oil producing Gulf states.
The Euro Zone has seen the advent of Euro currency. It has created much hope for the
business community, as it will lead to efficient markets and sizeable opportunities for
commerce and trading of products and services across Europe.
1.7 Regional Economies
Regional Ecomonies are having their impact on the global economies and vice versa.
The Gulf Regional Economies are being ruled by the oil productions and prices. This region
is experiencing a tough market due to falling oil prices. (although the prices have moved
upward slightly, the depression it had created in the state revenue will take time to cover
it).
Table 1.3
The GDP growth rate of Middle East Countries
Middle East Real Gross Domestic Product (GDP) Growth 1994-98m(%)
COUNTRY
1994
1995
1996
1997
1998
Bahrain
-1.00
-1.00
4.20
3.10
1.20
Cyprus
5.60
1.06
1.02
1.02
2.00
Egypt
4.00
4.70
4.90
5.00
5.00
Iran
4.80
1.60
4.50
5.80
2.90
Israel
6.76
7.05
4.60
2.10
1.60
Jordan
8.50
5.90
0.80
2.20
1.00
Kuwait
3.00
1.03
2.80
2.20
0.50
Lebanon
8.00
5.00
4.00
4.00
3.50
Morocco
11.66
-7.60
9.00
-2.20
6.80
Oman
3.85
4.83
3.53
3.00
1.00
Pakistan*
4.00
5.50
4.60
3.10
3.00
Qatar
2.40
1.60
9.90
4.00
3.00
Saudi Arabia
-0.60
2.00
5.00
3.50
1.60
Tunisia
3.30
2.40
7.10
5.40
5.00
Turkey
-4.60
7.20
7.20
7.50
1.50
U.A.E.
-1.00
8.00
10.00
5.00
0.80
E: Estimate
Source: MeedMoney
On analyzing the regional economies of these selected countries of the Middle East for
the years 1994-98, we conclude observing there is no significant growth but there is hope
that the situation will improve and this region will experience higher GDP growth as
governments implement structural changes and diversification from being oil based
economies. The global and regional economies are having their impact on the insurance
market.
These changing economies throw a challenge to the players in the insurance market. To
face these challenges it would be appropriate to conduct a “SWOT ANALYSIS” of the
Middle East Insurance Sector, which may provide the strategies for finding solutions.
1.8 SWOT ANALYSIS OF MIDDLE EAST INSURANCE SECTOR
STRENGTHS

Financially established insurance
companies

WEAKNESSES

Lack of uniform law governing the insurance
industry in the middle east.
Absence of natural catastrophes

Underwriting practices – technical pricing

High return on shareholders equity


Experienced personnel
Dependence on motor
unbalanced portfolios

Wide range of products

Protected insurance markets.

Lack of internal control systems and financial
transparency.

Under capitalization.

Investment portfolio.
OPPORTUNITIES

THREATS
premium
and

Vast resources available in the
middle east

Economic diversification

High market potential

Merger of broker firms and insurers and
reinsurers (international)

Islamic insurance

Opening of insurance sector

Organic growth

Oil companies
solutions

resorting
to
alternative
“S W O T” is an analysis of the Strengths, Weaknesses, Opportunities and Threats.
While, Strengths and Weaknesses refer to the internal environment, the Opportunities
and Threats refer to the external environment, for any given Industry or Company.
1.8.1
STRENGTHS
The Middle East insurance sector has few Strengths listed herebelow:
Financially Established Insurance Companies
The Middle East Region has a few financially sound insurance companies with sound
capital base and high solvency margins. The local Insurance Industry is reasonably
mature and many companies have national status.
The schedule below shows a few top companies in the Arab World by shareholder’s
Equity and Total Assets.
Table 1.4
The Top Insurance & Reinsurance Companies In The Arab World
By Shareholders Equity/Total Assests
(USS Million)
Incorporated
Company
Country
Equity
Total
Assests
1980
ARIG (Unconsolidated)
1997
Bahrain
448.69
967.69
1964
Libya Insurance Co.
1994
Libya
213.75
967.42
1960
Kuwait Insurance Co.
1998
Kuwait
155.54
317.49
1972
Abu Dhabi National Ins. Co.
1996
UAE
222.37
316.50
1934
MISR Insurance Co.
1994
Egypt
104.15
952.90
1934
Qatar Insurance Co.
1994
Qatar
98.95
146.82
1986
National
Company
Coop. Insurance
1994
Saudi
Arabia
91.42
213.86
1962
Gulf Insurance Co.
1994
Kuwait
84.71
153.58
1962
Al Ahleia Insurance
1994
Kuwait
84.59
157.69
for
Source: ARIG Directory 1999
Absence of Natural Catastrophes
The gulf region in general is blessed in the absence of “Acts of God Perils” which leads to
profitable insurance and reinsurance environment.
High return on Shareholders’ Equity
The top performing companies tend to achieve a high return on shareholders’ equity and
high earnings per share whilst maintaining sound financial position to protect
policyholders’ interest.
Experienced Personnel
The Middle East Insurance Companies have many technically experienced personnel
which gives them strength to provide value added service to their Clients.
Wide range of products
Middle East Insurance Sector is also marketing a wide range of non-life and life Insurance
Products to the public.
Tailor made products are provided to suit the different requirements of various clients.
1.8.2 WEAKNESSES
The major weaknesses are briefed as follows:Lack of uniform law
The laws governing the insurance industry across the middle east are not uniform. This
hinders crossborder activity.
Homogeneous laws undoubtedly will enhance trade and trans regional services, which
ultimately will contribute to the regional economies growth.
Underwriting practices
One of the weaknesses, which should be taken into consideration is the underwriting
practice.
Here, my stress is on the technical pricing of the insurance products.
The
insurance products should be priced based on technical variables mainly nature of risk
and its exposure, loss ratio, scope of cover, risk management and administration cost etc.
Competition should not force the Insurers to price
the product below the burning cost
rates.
Middle East Region has many players operating at different costs. The small players with
their lower operating cost are creating the heat in the insurance market by slashing the
premium rates. This is forcing the big player also to cut their rates to retain their market
share.
Dependence on motor insurance/unbalanced portifolios
For the GCC Insurance market, Motor business accounted for 36.13% of total non-life
premium income in 1997. For national companies it generated 35.20% of non-life premium
income, and for foreign companies it is 49.32% of non-life premium income.
The GCC region have the highest rate of motor accidents in the world.
The insurers are
feeling the pinch due to higher loss ratio in motor portfolio caused mainly by untechnical
pricing and low tariff for mandatory third party liability cover.
The unbalanced nature of their portfolio stems from the dependence on large energy
related premium income which is misleading as major part of this premium is in the form
of outward reinsurance and earning insignificant commission.
Protected market
Many companies are still surviving on the exclusivity of insuring Government Projects and
property. This practice has hindered many companies from
enhancing their products
and services.
Lack of internal control systems and financial transparency
Many companies in the middle east region are overshadowed by the absence of well
defined underwriting guidelines, operational manuals, poor internal audit systems and
fully operational information system.
Furthermore, financial transparency is undermined by the non compliance with
International Accounting Standards especially in relation to protection of life funds and
full disclosure of investment activities.
Under capitalization
Companies with inadequate capital base and under-reserving would threaten their very
existence, should there be any major losses.
There are more than 380 insurance companies in the middle east region but many of
them are under-capitalized. The following will give a clear picture:FINDINGS out of a “sample of 175” insurance companies in the M. E. Region considered,
based on their Shareholders Equity
Shareholders’ Equity
Number of Companies
(1997)
1.
2.
3.
out of the sample
Below US$5million
Between US$5-10million
Between US$10-15million
Total (below US$ 15mln)
33
22
21
----76
18.85%
12.55%
12.00%
---------43.40%
(Rest 99 companies of the sample have shareholders equity above US$15million).
Note: Capital base alone of these companies are much lower. Shareholders’ equity below US$15 million is
considered poor security (my own point of view).
As many as 76 companies (representing 43.4% of the sample) are with a very low equity
base, which is considered poor security, hence should invite immediate intervention from
authorities to increase minimum capital requirements to safeguard policyholders’ interest,
and to maintain healthy market environment.
Saudi Arabia is now seriously considering to develop, Insurance Regulatory System and
has proposed minimum paid-up capital requirement to SR.100mln (i.e. US$26.7million). If
this is implemented, many out of about 80 insurance firms in Saudi Arabia will be forced to
cease their operations or have to go for mergers or alternative solutions.
However, mergers will eventually reduce the number of Insurance firms to a few big
players but, that will further enhance the insurance market in the middle east sector.
Investment portfolio
Most Companies in the Middle East do not have a defined investment strategy nor
investment guidelines for safety of capital and income growth.
Shareholders remain dividend driven rather than growth oriented,
this view leads
management to concentrate on short term gains from their local volatile stock markets or
other speculative investment instruments.
The Investment Department in many of the insurance companies are usually not well
emphasized and they lack direction and in-house professional investment strategists.
1.8.3 OPPORTUNITIES
Vast Resources
Many of the middle east countries are blessed with a vast resource of “Black Gold” i.e.
the Oil. This finite commodity provides many opportunities to all of us, for years to come.
Global demand for oil will increase substantially in the years to come. The oil income will
provide lot of opportunities for upcoming of many projects in this region and the insurers
and reinsurers have to provide the insurance protection for these projects.
High Market Potential
The insurers and reinsurers have been focussing their
attention on new markets and
developing new products. The Long-term savings schemes are being devised by the
insurers in collaboration with the banking institutions. Pension schemes and unit linked
insurance schemes, which still untapped are now being examined.
Table 1.5
GDP and per Capita Insurance Expenditure
Of selected Middle East Countries (Year 1997)
Algeria
Bahrain
Egypt
Kuwait
Libya
Population (in Million)
29.0
0.62
62.01
1.81
5.78
Gross Domestic Product (US Billion)
40.3
6.09
75.63
30.37
33.35
1,387
9,834
1,220
16,780
5,771
9
192
9
112
38
GDP Per Capita (US$)
Insurance Premium per capita (US$)
Insurance Premium as % of GDP
0.7%
2%
0.7%
0.7%
0.7%
Oman
Qatar
Saudi
Tunisia
U. A. E.
2.4
0.57
19.5
9.22
2.58
Gross Domestic Product (US$ billion)
16.13
8.68
145.79
18.90
48.02
GDP Per Capita (US$)
6,722
15,228
7,480
2,050
18,612
58
272
41
35
265
0.9%
1.8%
0.5%
1.7%
1.4%
Population (In million)
Insurance Premium per capita (US$)
Insurance Premium as % of GDP
Source: ARIG Directory 1999
The above schedule shows the figures of GDP and per capita expenditure on Insurance
Premium of some selected Middle East countries. It may be noted here, that Insurance
Expenditure as a percentage of GDP in these countries range from 0.7% to 2% while in the
European and Western countries it ranges from 6% to 12%.
The Health Scheme is an area where the governments are deciding to place it on the
insurers. If the free health scheme provided by the governments are dismantled, it will
then become the responsibility of the insurers and reinsurers to provide health insurance
protection to the residents. This will provide the insurers an opportunity of serving a wide
market.
Islamic Insurance
I have just highlighted the potentials available in general, and in my opinion to exploit this
untapped opportunity especially in the Arab Countries, is to adopt Takaful or cooperative
or mutual insurance. This will help to alleviate the common attitude of many people that
conventional insurance is not in line with Islamic belief.
As Takaful or Cooperative Insurance is a subject itself, I would only be referring to its
current status and the potential.
List of Islamic Insurance Companies – Arab World
Some of these companies may not be writing business actively
1.
2.
3.
4.
Name
Country of Operation
Incorporation
Islamic Corporation for the Insurance of Investment & Export
Credit
Islamic Insurance & Reinsurance co. (IIRCO)
Islamic Arab Insurance Co. (IAIC)
National Cooperative Insurance Co. (NCCI)
Saudi Arabia
1994
Saudi Arabia
Saudi Arabia/UAE
Saudi Arabia
1985
1979
1986
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
Islamic Insurance Co. Ltd.
Takafol Islamic Insurance Company
Al Rajhi Islamic Co. for Cooperative Insurance
Al Salam Islamic Takafol Company
Islamic Takafol & Retakafol Company
Islamic Int’l Co. for Insurance (Salamat)
International Islamic Insurance Co.
Saudi International Islamic Insurance Co.
Islamic Universal Insurance
Takaful International Insurance Company
Islamic Insurance Company
Islamic Insurance Company
Al Baraka Insurance Company
Sheikan Insurance Company
Watania Co-operative Insurance Co. Ltd
National Reinsurance Co.
Best Re
Qatar Islamic Insurance Company
Saudi Arabia
Saudi Arabia
Saudi Arabia
Saudi Arabia
Saudi Arabia
Saudi Arabia
Saudi Arabia
Saudi Arabia
Saudi Arabia
Bahrain
Jordan
Sudan
Sudan
Sudan
Sudan
Sudan
Tunisia
Qatar
Dormant
1983
1985
1992
1986
1985
1992
1995
Dormant
1989
1996
1979
1985
1990
1991
1968
1985
1993
Takaful business in the Arab Region – 1995
US$m
Life
Takaful
General
Takaful
Total
Takaful
Total
Market
% Takaful
Saudi Arabia
1.2
49.0
50.2
712.0
7%
UAE
1.0
7.9
8.9
645.0
1%
Qatar
-
3.2
3.2
149.0
2%
Bahrain
-
2.4
2.4
100.0
2%
Sudan
0.3
31.9
32.2
41.0
78%
Jordan
0.2
2.2
2.4
116.4
2%
Total
2.7
96.6
99.3
1,764.9
6%*
*The Takaful share increases from 6% to 19% if NCCI is included in the above figures.
In 1998 worldwide total Takaful premium amounted to US$550million of which
US$350million represented the Arab Region.
Islamic Insurance has huge potential but needs creating mass-awareness in the line with
Takaful system.
If we look at the Islamic Finance & Banking, they have established
themselves with total assets over US$4 trillion. This speaks for itself, that millions of people
who are not participating in conventional insurance can be brought under the fold of
Islamic Insurance system, especially under Life/Pension Schemes.
Organic growth
The Insurance Companies should focus on organic growth. They should diversify their
source of business and expand in other markets, whilst concentrating on product
innovation.
But as I have found out there are many insurance companies in this region whose capital
base and size of operation do not favour them to bag this opportunity.
1.8.3 THREATS
The business environment poses controllable and uncontrollable threats. Those which are
controllable can be managed by using various scientific and management techniques
and decisions to convert them as opportunities.
The variables like decisions of government, climatic changes, global political changes
are beyond our control, yet Insurers should have contingency plans to meet the
challenges thrown by such uncontrollable elements.
Economic diversification
Serious efforts remain to be taken to diversify the middle east economies from being oil
based and to open up for foreign investments which will ultimately create opportunities
for the insurance industry.
The fluctuating oil prices result in holding up the government projects when the prices are
low and defreeze when the prices move upward. Dependence on oil revenue alone has
serious adverse impact on the economy of oil producing M. E. countries.
Mergers
Merger of Broker Firms and Insurance & Reinsurance Companies has led to fewer number
of players in the direct and reinsurance market. This trend is leading to dictatory of terms,
condition and rates by the brokers/reinsurers specially as the market is hardening.
Merger among corporate gaints creates financial strength and ability to be self insured,
hence contributing further to the reduction of world premium income.
Opening of Insurance Sector
The opening of Middle East insurance sector for the international players to operate may
bring new challenges to the existing players especially to those with small scale
operations. The Government properties and projects which were underwritten by the
national companies will face competition from the international companies with their
superior solvency and expertise. Only through proper management strategy this threat
can be converted as an opportunity.
Oil companies resorting to alternative solutions
Top Int’l brokers are trying to convince the oil companies in the Arab region to have their
own captives.
As the oil sector contributing to the major part of the over-all premium of the Arab region,
the National Insurance companies will stand to lose in such a move by them.
However, an integrated risk management may not necessarily be an ultimate solution.
1.9 SUGGESTED STRATEGIES
Having analyzed the middle east insurance sector on the four counts,
strengths,
weaknesses, threats and opportunities, strategies have to be developed to encash the
opportunities provided by the environment and to encounter the threats and to convert
them into our advantages.
I would like to suggest Strategies that can be adopted to cope with the fluctuating
market situations, i.e. the “sustainable growth strategy”, which would include:
1.9.1 DIVERSIFICATION OF PRODUCTS
Diversification of the product i.e. innovation of new products to meet the needs of the
insuring public.
Relatively New Products can be marketed by considering the
psychographic lifestyle of the target group.
With the strength that the Middle East Insurers & Reinsurers have like, technical manpower
and the wide distribution networks, products can be developed for the public need and
also for the industrial requirement. Personal lines like Health Insurance, Pension Scheme,
Life Insurance and other personal policies which are still an untapped market in the
middle east region should be exploited.
1.9.2 NEW TECHNOLOGIES
Advent of future technologies will open a new arena for the insurers to focus and provide
insurance coverage through various products that will suit the needs of the customers. But
with regard to Insurers own Information Technology Management, I would suggest that
insurance companies should expect returns from the use of technology & not technology
itself i.e; assess the use of technology and not the technology installed and maintained.
A proper adoption of technology will enable the insurers to provide value added
products and services to the customers.
1.9.3 CREATING INSURANCE AWARENESS
As I have analyzed and stated earlier, there is a high market potential for personal lines in
this region and particularly in the Gulf States where the population is wealthy but due to
the benevolent welfare system of these countries greater efforts
required to tap this
enormous potential market.
In addition to creating public awareness the insurance industry should also encourage
their own personnel to pursue insurance courses to acquire professional qualifications to
provide value added service to their clients.
1.9.4 MERGERS & ALLIANCES
Mergers will ultimately create stronger companies that will be able to stand foreign
competition whilst increasing the retention of premium and reducing dependency on
reinsurance which will eventually create more funds for investments and developments.
I support mergers only if it generates shareholders’ value growth and profitability.
Alliances will create opportunities for cross border sharing of business and will avoid
outflow of premium from the region. The Insurance Industry in the Middle East Region
should be developed to a tight knit community.
1.9.5 MERGERS BETWEEN BANKS & INSURANCE COMPANIES
I suggest Mergers and Allliances between Insurance Companies and Banks as these
institutions compliment each other.
Insurance Companies should use Banks as retail selling points. They should also utilize
Bank’ sophisticated Assets Management and Investment products expertize in designing
the unit length of the insurance products. Likewise Banks can use Insurance Life Products
and saving schemes to combine with their existing schemes in terms of “value addition” .
1.9.6 INVESTMENT
Investment is a very critical and sensitive area where well defined strategies are to be
followed.
Asset allocation should be predefined to meet the obligations of the company whilst
investing in a spectrum of financial instruments in different markets that will ensure the
maturity periods of its investments are in harmony with the liquidity requirements of the
company (i.e. proper Assets/Liability Management).
Investment decisions should stress on preservation of capital whilst achieving income
growth.
As international investments require special skills and adequate research, they should be
entrusted with internationally recognized portfolio managers or investment bankers on the
basis of
managing the funds on full discretionary basis, whilst setting predefined
guidelines for the manager and deciding on a recognized index as a performance
benchmark.
Furthermore, most middle eastern economies reference currency is US
Dollars, therefore, dollar denominated investment should outweigh other currencies in
order to minimize cost of hedging and currency fluctuations.
A suggested model for middle eastern insurance company asset allocation would be as
follows:30% Equity (Maximum)
15% Bonds (Government and AAA Corporate Bonds)
45% Bank Deposit (Cash) **
10% Real Estate
**
GCC countries have no tax implications, hence most insurance companies in these
markets have a large portion of their fixed income investments in Bank Deposits
rather than in bonds.
The basis of the allocation is derived from my own experience in Investments and in my
opinion this is an ideal model for achieving preservation of capital, income generating,
investment growth etc…
I may also point out that this suggested allocation depends on each company’s risk
tolerance profile and expectations of return on investments and may vary as investment
opportunities prevail.
A suggested model for international portfolio management with a three-year investment
horizon would be:
30% Bonds
70% Equity
Reference Currency 70% US$
Summary of Middle East General Insurance Market
Innovation, greater flexibility and ongoing development are key areas for a company's
survival in the competitive arena. As a result of these requirements, the demands on
insurance companies are constantly increasing.
There is a need for new unified insurance regulations in the Arab market stipulating
minimum capital requirements. Entry of international insurance/reinsurance companies to
this region is expected to result in increased competition.
These changes eventually
compel mergers and consolidation among existing small players.
The vast business opportunities that lie ahead for the arab insurance industry are sizeable,
in view of a combined arab population of 245million people with an income base of
nearly US$600 billion.
I have tried to brief you on the operations of the Middle East Insurance market and also
on the impact they are facing from the changes that are taking place in the business
world. I hope the SWOT Analysis has given you a critical view of the Middle East Insurance
Sector and the strategies that I have suggested are to address the challenges at hand.