Arabian lights

For the past few years the Middle East has appeared a non-stop success story with finances riding high courtesy of inflated oil prices, major improvements being made to infrastructure and excellent prospects for the fledgling financial services sector.

Inevitably though the past 12 months has seen a slowdown as the region has not proven immune to the global economic downturn. Oil prices have fallen, as have the financial surpluses that Middle Eastern countries have taken for granted for so long.

In the Gulf Co-operation Council (GCC) region that comprises six Arab states - Saudi Arabia, the United Arab Emirates (UAE), Bahrain, Qatar, Oman and Kuwait - it is Dubai of the UAE in particular that seems to be suffering from a glut of bad publicity.

Its property bubble has burst and as a consequence its construction sector has ground to a halt. Debt and diminished opportunities have sent expatriate workers scurrying for the airport, according to some reports in the mainstream media. Emblematic of the decline in Dubai's economy is the fate of 'The World', a chain of islands reclaimed from the Arabian Gulf and shaped like the Earth.

The purpose of the islands was simple - to make Dubai the envy of the world. Now it lies deserted while arguments rage over whether it is abandoned or simply postponed.

It is the starkest example of a financing crunch that faces the emirate but many other projects are also in jeopardy. In the UAE about $300bn of building is on hold after prices began tumbling. "Dubai has been hit because it was debt-led and so one or two of the other centres look more attractive at the moment," says Mike Peachey, CEO of insurance support provider CTC Axiom.

However, the Dubai International Financial Centre (DIFC) still has its attractions to the reinsurance industry. Recent entrants include hedge fund DE Shaw Group and lawyers Clyde & Co, both firms have a track record in the sector. They join Underwriting Risk Services Middle East (URSME), a managing general agency based in the DIFC, which was created by Bermudian reinsurer Validus' subsidiary, Lloyd's operation Talbot Underwriting, as it seeks to expand its business into the Middle East.

URSME is a joint venture between Talbot and the Abu Dhabi National Insurance Company (ADNIC), a provider of insurance in the region. "We are delighted to be entering into this joint venture with ADNIC who are amongst the most highly respected insurers in the region. URSME will be able to offer substantial capacity across a number of business lines. We are excited by the prospects for this office which will enable the companies in the Validus Group to expand their products into a new regional marketplace," comments managing director Nicholas Hales.

URSME has been granted a license by the Dubai Financial Services Authority and will operate under agency agreements granted by ADNIC and Underwriting Risk Services and binding authorities granted to it by Talbot Syndicate 1183.

Hales says: "We had identified that Dubai had a regulator with some mileage under its belt. There are 30-odd reinsurance entities operating in the DIFC and the marketplace has some traction. The sophistication of the market is growing, the big brokers are all out there and we can access all the Middle Eastern and North African countries from there.

"We wanted to operate as a coverholder and we can do that in Dubai. That gives us more opportunity to place and grow our product lines. We felt we would get more early traction if we were partnered with a local firm and we already had a relationship in Abu Dhabi."

The operation will offer facultative reinsurance products across a number of lines of business and initially will focus on offshore and onshore energy risks as well as the construction sector. "We do not want to just add capacity to this market, we want to have a line size that gives us some influence. We do not want to be a bit part player," says Hales. "It has now truly become a subscription market for local risks."

Figures from the GCC region confirm that it still has its attraction for reinsurers and according to rating agency Standard & Poor's (S&P), in the UAE, overall market gross premiums grew by over 30% in 2007, while contributions (premiums) within the takaful sector increased by roughly twice this rate.

In the GCC as a whole the growth rate may be expected to slow but that comes from a high base of 20% increases during the five years to the end of 2007.

The insurance penetration rate in the region continues to steadily rise and was 0.93% at the end of 2007, a figure that leaves plenty of scope for expansion.

Positive note

Another positive sign for the region saw Arab Insurance Group (Arig) bounce back from last year's loss of $28.6m to record net profits of $8.8m for the first six months of 2009. The company's reinsurance underwriting result was up 67% against the same period last year, producing $6.2m and Arig's investment results appear to have turned a corner generating earning of $15.4m. Both the firm's life and non-life classes reported robust combined ratios of 94.3%.

As the S&P figures suggest, takaful reinsurance is playing an increasingly important part in the region. Mahomed Akoob, managing director of Hannover ReTakaful says: "There was great development between 2007 and 2008 and that meant huge growth in premiums and 2009 will see another big rise. But, we are not just accepting any business that comes our way."

The rating environment in the GCC region has come under pressure in the first half of 2009 as excess capacity and competition have forced them down. Property rate changes in the first half of 2009 were between 0% and -10% in Saudi Arabia and the UAE, according to broker Marsh. For casualty rates the figures are worse in the UAE, down by between -10% to -20%, while in Saudi Arabia they remained flat.

"The ongoing financial crisis is forcing clients to control and reduce expenditure therefore premiums are lower due to reduced sums insured as well as reductions of up to 20%," says Bruce Trigg, leader of Marsh's risk management practice in Europe, the Middle East and Africa, of the UAE casualty market. "New insurance enquiries are limited, therefore insurers are working to retain and gain accounts by offering lower premiums. This trend is expected to continue in the second half of the year."

Marsh believes that the glut of capacity and competition has acted as a brake on rates despite rising claim notifications that are increasing the upward pressure on rates.

"As clients look to manage their way through the economic downturn, they are reducing the sums they insure in an effort to cut costs where possible, potentially leaving them underinsured," adds Trigg. "This has resulted in premium reduction and increased capacity in the market."

The overall insurance marketplace remains competitive, Trigg says: "Capacity is largely unchanged and insurers' appetite for risk remains. However, as claims rise, insurers are beginning to negotiate more aggressively on renewals, as previous rate reductions were unsustainable".

The Middle Eastern reinsurance markets are still developing markets and as such face some of the issues common to all markets, but particularly to young markets. "The market there has a couple of problems. It is successful because it captures local business but the problem is that they have not capitalised sufficiently to retain enough risks," he adds. "They are developing a mindset for financial services in general, and insurance specifically, that they have the ability to generate financial centres, but the value is leaking out to Europe."

Peachey agrees: "Dubai, Saudi Arabia, Bahrain and Qatar have all taken a look at Singapore and Bermuda and what they have done in developing regional markets. In terms of how you need to develop as an international centre they have been great models."

"The principle problem is to recruit and train enough quality people. They do not have the necessary calibre of underwriting and claims staff. The underwriting expertise to write the business is in Europe and if they are to retain more business they need to recruit more experienced staff and expand their capital base."

Akoob backs this view: "A lack of skilled and experienced staff is a problem in the industry in general and in the takaful sector particularly. There are institutes in Malaysia and Bahrain doing good work to address this, but demand continues to outstrip supply."

However, there is at least one GCC country taking action to redress this imbalance.

The Qatar Financial & Business Academy (QFBA), which is a joint venture between the Qatar Financial Centre (QFC) Authority and Qatar Foundation(QF) for education, science and community development is due to open in October.

"QFBA forms an integral part of Qatar's strategic intent to become the regional centre for the financial services industry. We are helping to develop Qatar's financial sector by attracting international financial firms to establish operations here and we have a duty to help develop Qatar's human capital needed to provide its workforce," says Stuart Pearce, CEO and Director General, QFC.

Qatar's new business academy will offer a number of learning and development programmes in insurance, as well as banking, asset management, capital markets and financial services leadership. Staff will be drawn from world-class business schools such as Columbia, Harvard and the London Business School.

Clearly addressing training is one issue, but experience cannot by definition happen overnight, it takes time. So centres that meet vital criteria for expatriate workers will maintain an advantage over their rivals.

"You have to have the facilities for people and their families. They have that in Dubai and Doha but also if you're in your thirties or forties you need lots of people and businesses around you," says Peachey. "You need a vibrant insurance market around you or you will stagnate. So there has to be a critical mass and Dubai has a head start there."

Hales says that key to the success of URSME will be cultural understanding and the correct assessment of pricing requirements. "We will use a mix of local and London people and there will be reciprocity in what they can show each other," he says.

"As long as we have the right mix of people and the right underwriting skills we will be in good shape."