News flash. News flash. News flash. The Middle East is a part of the world where radicalism bubbles to the surface more easily than oil. Consider, for instance, the following:
* In Saudi Arabia, car insurance is now obligatory.
* In Saudi Arabia, health insurance for foreign workers is the law.
* Iran has made it easier for foreign insurers to do business.
* The United Arab Emirates have launched a new regulatory authority modeled on western legal standards to oversee the growth of the financial services industry.
* One insurer doing business in the Middle East saw premiums shoot up by 50 percent in 2003 over the previous year.
This is all radical indeed, but not in the ways commonly thought of in the West, where viewers are bombarded daily by images of sectarian strife.
"The Middle East is not a place mired in the past," says Peter Casey, a British-born financial services regulator based in Dubai. "It is capable of being radical."
Take the city of Dubai, for instance, located in the United Arab Emirates, a nation on the shores of the Persian Gulf.
DUBAI LEADS EFFORTS
Since the United Arab Emirates became independent in 1971, it has diversified its economy away from oil. Today the U.A.E. boasts a first-rate infrastructure and has become a leader in attracting foreign corporations and investment capital to the region.
A new hub, known as the Dubai International Financial Center, is quickly becoming a mecca of mercantilism.
The DIFC, as it's known, is designed to speed the repatriation of $1 trillion of regional capital invested and managed in other parts of the world, namely Europe and Asia, according to the DIFC.
The center is also designed to facilitate planned privatizations and enable initial public offerings; create more insurance and reinsurance capacity (65 percent of annual premiums are reinsured outside the region); develop a global center for Islamic finance, a market of more than $200 billion; and build a pension fund industry to meet the needs of the region's aging population.
The laws of the DIFC have replaced the civil and commercial laws applicable to the rest of the Emirates. Casey says the center is, in fact, a "state within a state," and points to the organization as proof that the Middle East is changing in ways beneficial to insurers, reinsurers and the formation of captive finance vehicles.
"Things are changing," says Casey, director of regulatory supervision for the DIFC's Financial Services Authority. "There are substantial changes under way."
A western CEO's caricature of the Middle East insurance world as a quagmire full of bureaucratic obstacles, weak legal standards, outdated regulatory frameworks, uninformed staff and capricious rules is a relic of the 20th century, he says.
Regional governments all over the Middle East, like Bahrain, Kuwait, Qatar, Jordan and Lebanon, are reexamining insurance laws, capital requirements and solvency margins, Casey also says.
Billion-dollar public construction projects, from new airports to huge residential developments on manmade islands in the Gulf, will guarantee that the region generates a source of demand for insurance products for many years.
REGION LAGS STILL
While the Middle East is full of populous nations lumped into the generic category of "emerging markets" by analysts and actuaries, its capital markets have remained underdeveloped.
Though the geographic and cultural crossroads between East and West is undoubtedly a market with "huge potential," it hasn't done well competing with Asia, Latin America and Eastern Europe.
"Over the last 30 years--a period of rising oil revenues and rapid economic growth--a vast stock of excess capital in the region has been transferred to foreign banks and financial institutions," according to a release from the Dubai International Financial Center.
Of the $123 billion in nonlife premiums generated by emerging markets in 2003, according to data published by Swiss Re, Asian markets accounted for 47 percent of the total. Asia was followed by Latin America (21 percent), Eastern Europe (19 percent), Africa (6 percent), and the Middle East (6 percent).
Of the $188 billion in life premiums generated by emerging markets in 2003, Asian markets accounted for 73 percent of the total, Swiss Re figures show. Africa accounted for 12 percent, followed by Latin America (9 percent), Eastern Europe (6 percent), and the Middle East (1 percent).
Penetration rates in the Middle East are also the lowest among the nations that make up emerging markets.
In 2002, nonlife premiums written in the Middle East made up only 0.5 percent of the region's Gross Domestic Product. By contrast, nonlife premiums written in Eastern Europe accounted for nearly 2 percent of GDP, according to Swiss Re. And in Asia, nonlife premiums made up about 1.5 percent of GDP.
Even Casey admits that the Middle East is a "very small market by international standards," and delivers low penetration figures.
In 2003, Turkey, a nation of 68 million people, generated total life and nonlife premium volume of $3.2 billion. Iran, with 67 million people, generated $1.5 billion. The United Arab Emirates, with 3 million people, generated $1.1 billion, according to Swiss Re data.
By comparison, Brazil, with 177 million people, generated total life and nonlife premium volume of $14.5 billion in 2003. Mexico, with 103 million people, generated total premium volume of $10.9 billion.
The good news for companies looking to sell policies is that premium volume in the Middle East is growing. Total life and nonlife premiums grew 8.3 percent from 1998 to 2003, according to Swiss Re data. Total premium volume came to $5.87 billion in 2003.
Insurers selling products in the Middle East include the German insurer Allianz, and the British insurers Royal & Sun Alliance and Norwich Union.
The American behemoth AIG is also selling insurance in the region, and the big brokers Marsh, Aon and Willis have also shown an interest.
"The scope for repatriating the more than $1 trillion invested, managed and administered outside the region represents a huge opportunity for asset management firms, private banks, fund administrators, custodian banks, rating agencies and other ancillary service providers," the DIFC says, in promotional material.
CRACKING THE MARKET
For companies looking to do business in the Middle East, Casey says they should stick with protection products.
"At the moment the market is dominated by protection products, not investment products," he says. "Any insurer going into the market should go with protection products. Don't expect to make money from investment products." He also says that insurance companies may want to offer a form of insurance that complies with Islamic law.
For multinational corporations looking to cover their benefits costs, Casey recommends they set up captives. "The region is underdeveloped in terms of captives," he says. "It is a very obvious possibility. There's a huge potential for a captive industry."
Other tips for companies looking to sell insurance in the Middle East include:
* Establishing a regional, not a local base. If you're intent on entering locally, look first at Saudi Arabia.
* Leverage technical skills to gain an edge over indigenous insurers.
* Enter the market as a reinsurer. Do business with other insurance companies, not directly with policyholders. "Much of the market is fronted," says Casey. Allianz and Royal & Sun Alliance operate in this way.
* Reinsure with a small number of companies and use them as a distribution channel.
* Proceed via partnership to acquisition as local laws allow.
* Think about alternative business models. Consider what alternative business models might meet the needs of the marketplace.
Companies that have taken the time to sell their products through the proper channels have been rewarded.
One firm, the National Company of Co-operative Insurance, which accounted for about 33 percent of the Saudi Arabian market in 2002, saw premiums jump by 50 percent in 2003 over the year earlier, Swiss Re reports.
RELATED ARTICLE: Tips for a 'captive' audience.
So you think you want to form a captive? Here's how:
* Review the pros and cons thoroughly.
Undertake a feasibility study to examine the qualitative and quantitative issues. Among the questions to review: Does this option make financial sense? Is this a good transaction overall for the company? How complex is the transaction? What are the legal, legislative and regulatory risks in doing the transaction? If it involves an employee benefit line, what additional requirements must be met? For example, is U.S. Department of Labor approval needed?
