Closing the Gulf: Middle Eastern financial leaders, who for years watched as capital fled the region, are doing more to keep the money where it belongs—at home. The liberalization of insurance laws and new coverage mandates are expected to contribute. Firms looking to do business in the region will seriously want to consider captives

Risk & Insurance, Dec, 2004 by Cyril Tuohy

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.