GCC Market Overview
Low levels of insurance product penetration
The insurance market in the GCC is, by the standards of Western Europe and the US, relatively underdeveloped. Factors that have been seen to contribute to this state of affairs include the following:
- Cultural unfamiliarity - there has historically been little tradition of businesses or individuals taking out formal insurance policies with third party institutions;
- Islamic law issues - conventional insurance business is generally regarded to run contrary to the principles of sharia’a law on the basis that it contains prohibited elements of Al-Gharar (uncertainty), Al-Maisir (gambling) and riba (interest);
- Low consumer awareness - this is in part due to the relatively low level of marketing of insurance products;
- Lack of incentivisation/employer requirements - there are few (if any) financial incentives in participating in such arrangements (e.g. tax benefits) and no general obligations on employers to establish schemes for employees;
- Nature of population - Local (non-expat) populations have historically had little interest in retirement planning, while the large expatriate communities have tended to look to maximise current income for reinvestment in home institutions when they leave the region;
- High income disparities - there are often high income disparities which effectively lock a portion of the population out of the market; and
- High barriers to entry - it has historically been difficult for international insurance players to gain a foothold in the GCC market.
Recent growth in insurance premiums
Despite the factors above, the insurance industry in the GCC has materially expanded in recent times, largely driven by the following factors:
- Economic growth - many GCC states have seen the creation and expansion of a wealthy middle class and a rapid rate of development which has brought with it an increased volume of risk to be insured;
- Mortgage market practice - as increasing numbers of people take out mortgages to buy housing, the demand for life cover has grown (indeed, life insurance cover is now required by a number of mortgage providers);
- Development of Islamic structures - the availability of Islamic insurance in the form of takaful, family takaful and retakaful has broadened the market for insurance products in the sharia’a-compliant Islamic world; and
- Compulsory insurance - for example in many states car insurance is now mandatory (which has resulted in penetration for this insurance class being almost 100% across the GCC), and in some states health insurance has been made mandatory for expatriates (e.g. in Saudi Arabia and Abu Dhabi).
Conclusions
In line with the increased demand for insurance products and the growth across the region in insurance premiums, regional governments and financial centres have taken steps to improve their insurance regulation. There remains, however, a large disparity in comparative insurance regulation across the region with varying standards of compliance, supervision and reporting, as can be seen from the overview of the GCC set out below. This disparity, when coupled with a perceived lack of local risk assessment, product development and a low level of actuarial sophistication (stemming in part from the fact that the domestic insurance market is made up of a large number of lowly-capitalised insurers), has led many international market participants to take the view that the effective marketing of insurance products across the GCC, and the drive for further innovation and growth, will remain challenging.
Jurisdictional Overview
As mentioned above, there is a wide range of approaches to insurance regulation taken across the GCC. We set out below very brief outlines on key elements of the respective regimes, including any significant recent developments or trends.
UAE
Introduction/Relaxation of Market Restrictions
In the UAE, a long-standing moratorium on the licensing of foreign insurance companies onshore was lifted in 2004. Since then, it has been possible, within the framework of the legislation, for a foreign insurance company to establish a branch operation in the UAE.
Recent Reforms
Aside from developments in the health insurance market (see below), there has been an absence of recent regulatory development. A new federal insurance law took effect in 2007 (the “Insurance Law”) which included provisions establishing a new Insurance Authority which is semi-independent from the government and responsible for the regulation of the insurance industry in the UAE.
Despite optimism that the Insurance Authority would drive forward a greater pace of change in the market, a material promulgation of further regulation has not materialised, partly due to the slow progress of the extensive consultation exercises being undertaken with other government bodies and partly as a result of political attention largely being focused on dealing with the economic downturn over the last 18 months. As a result, a number of key areas of regulation still require clarification (including, for example, minimum levels of UAE national ownership).
STOP PRESS
In January 2010 the UAE government announced that a new set of regulations was coming into force governing the insurance sector. At the time of going to print the detail of these regulations was not available. We will provide an update on this development in due course.
Healthcare Insurance
The Dubai Health Authority announced in 2008 that it would introduce further regulations in order to overhaul the healthcare funding system in Dubai which would include the introduction of mandatory health insurance in Dubai and the Northern Emirates. To date, such regulations have not been implemented following concerns raised by certain domestic employers about taking on additional financial obligations in the current economic downturn. Compulsory healthcare has only been implemented (in 2008) in Abu Dhabi.
International Market Participants
Several international insurance groups including Friends Provident, Zurich, RSA and American Home are established in the UAE.
DIFC
Introduction
The Dubai International Financial Centre (DIFC) has been in existence as a "free zone" within Dubai since 2004. It benefits from the regulatory system of the Dubai Financial Services Authority (DFSA) which has been accepted as a full member of the International Association of Insurance Supervisors (IAIS).
Structural Requirements and Regulation
The regulatory regime in the DIFC is based on the model of that operated in the UK by the Financial Services Authority.
Historically insurers in the DIFC were largely restricted to acting on a reinsurance basis for UAE-based risks. Since the beginning of 2009, however, DIFC based insurers were able to affect direct insurance business in relation to risks located in the DIFC and, subject always to local law requirements, risks based outside the UAE.
In terms of ownership, unlike in other GCC markets, there no restriction on 100% foreign ownership of insurers/reinsurers based in the DIFC and no restriction on the repatriation of profits.
Future Developments
Looking forward, the DFSA has confirmed its intention to bring its regime more in line with global insurance regimes. We expect significant changes for insurers in the near future in relation to prudential capital and supervisory processes as well as the enhancement of market discipline.
The DIFC is increasingly looking to raise the profile of the DIFC with the captive insurance market and expects an increased number of market participants in this insurance sector to take advantage of the regulatory regime offered in the DIFC and the availability in the DIFC of the protected cell company structure.
International Market Participants
In the last year, a number of large international insurance players have entered the DIFC marketplace, including Generali, Gulf Re, Alliance, Marsh, Aon and Tokio Marine. The independent captive insurance manager Heritage also established a captive management office in DIFC earlier this year.
Kingdom of Saudi Arabia
Introduction
Until recently, insurance was an unregulated sector of the Saudi economy. The insurance sector in Saudi Arabia is now governed by the Law on Supervision of Cooperative Insurance Companies and related secondary legislation, which are enforced by the Saudi Arabian Monetary Authority (SAMA).
Structural Requirements
Insurance and reinsurance business may be conducted only by Saudi-registered public joint stock companies (with minimum capital requirements). Foreign (non-Saudi) parties may hold stakes in such public companies (even majority stakes), but this will always be subject to minimum free-float requirements of between 25 and 49% (free-float shares will be issued on launch/IPO only to Saudi nationals and thereafter restrictions on transfers of shares to non-Saudi persons will apply). Foreign parties, however, may be able to increase their effective participation in Saudi insurance or reinsurance companies through contractual structures such as management or consultancy agreements.
Regulation
SAMA is currently in the process overhauling the regulation of insurance companies in the Kingdom. For example, a Market Code of Conduct came into force on 17 September 2008.
One key point to note is that the current regulations require insurance companies to retain 30% of insurance premiums and that a further 30% should be reinsured within Saudi Arabia (i.e. with a local reinsurer authorised by SAMA), though it remains to be seen how these restrictions will be enforced by SAMA in practice.
Qatar
Introduction
The Qatar Financial Centre (QFC) was established in 2005 as a financial and business centre with an international outlook, following a similar model to that of the DIFC.
Structural Requirements and Regulation
As with the DIFC, the regulatory structure of the QFC is similar to that operated in the UK by the Financial Services Authority.
The insurance regime in the QFC is similar to that established in the DIFC (and importantly also allows 100% ownership) subject, however, to one significant difference. Insurance companies setting up in the QFC can write direct, retail insurance business in the Qatar market, something which would not be possible to be undertaken by DIFC insurance entities in relation to the wider UAE given current prohibitions on entering into direct contracts of insurance in respect of UAE based risks.
International Market Participants
The QFC has so far attracted some of the major international insurance companies, including Zurich, RSA and AIG. The Qatar Insurance Company has also relocated its international operations to the QFC. In addition, brokers such as HSBC, Aon and Marsh are either authorised or in the process of becoming authorised in Qatar.
Oman, Bahrain and Kuwait
The insurance markets in Oman, Bahrain and Kuwait are underdeveloped in comparison with the rest of the GCC, both in terms of economic value and regulatory sophistication. A brief overview of the market in these jurisdictions is provided below.
Oman
Oman’s Capital Market Authority (CMA) is in the process of reforming the system of regulation of the insurance sector, including producing a set of detailed regulations and a Code of Governance for Insurance Companies . It is worth noting that there remains a requirement for Omani insurers to demonstrate that they cannot offer adequate reinsurance cover before placing risks with foreign reinsurers.
Bahrain
The Central Bank of Bahrain (CBB) is the integrated regulator of financial services in Bahrain, including insurance. The CBB’s policy is to allow foreign insurers to establish in the market with no local ownership requirements, either as a branch or as a new start-up.
Kuwait
Kuwait has also announced its intention to introduce regulatory reforms in the insurance sector, updating the current law which dates back to 1961, although no draft revised legislation has as yet been published.
Takaful - Islamic Insurance Structures
Insurance in the GCC has historically been arranged using the concept of takaful, an arrangement of mutual assistance and communal risk-pooling rooted in Islamic tradition. Takaful structures have much in common with conventional mutual insurance schemes (though there are some important differences) and can be used to spread or pass on risk in much the same way. The key elements of an takaful arrangement are:
- there is no bi-lateral contract between insurer and insured. Instead participants make unilateral donations to be pooled in a takaful fund (which is owned by the participants, not the takaful operator) and, in the event of a claim, the fund will make another unilateral donation to the relevant participant;
- the operator is responsible for the day-to-day operation of the fund (including the making of investments, which must all be sharia’a compliant) and will receive in return for its services a percentage of contributions and/or a percentage of net income/surplus; and
- after the payment of any fees to the operator, any surplus is shared among participants. In theory the participants could also be required to make further contributions in the event of a deficit but in practice the operator would usually be required to provide an interest-free loan to make good the deficit.
For further information, please contact:
James Wootton (james.wooton@linklaters.com, +971 4369 5838);
James Coleman (james.coleman@linklaters.com, +971 4369 5862).
