Enjoying a life plan

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Toward the end of last month, insurance managers from the Middle East and North Africa crowded onto the website of Saudi Arabia’s Monetary Agency (SAMA) to download the final version of the kingdom’s new insurance law. Many an executive surrounded himself during the following days with the new Lebanese insurance draft law and the Saudi law.

Years in the making, the Saudi law defines a new insurance regime that provides sector companies with a window to a potential boom in what is currently the region’s most interesting insurance market, with a per capita expenditure of merely $46 in 2002 and an insurance penetration of 0.35%. According to statistics published by Middle Eastern ratings agency i.e., this makes Saudi Arabia the lowest ranking oil economy in terms of insurance penetration.

The law’s announcement also points to an issue at the heart of the Arab world’s insurance industry concerns: the disparate regulatory environment. Observers and industry members widely agree that regulations have been, and still often are, either insufficient or damaging to insurance development – the latter occurring mostly in countries where protectionism eliminated competition on government projects. A paper analyzing strengths, weaknesses, opportunities and threats (SWOT) for the Middle East insurance sector in the year 2000 by then vice-chairman of Arab Reinsurance and Insurance Group (ARIG), Ali Al Bahar, stated “laws governing the insurance industry across the Middle East are not uniform. This hinders cross border activity.” He went on to note that the practice of protected markets “hindered many companies from enhancing their products and services.” Self-defeating underwriting practices in some ruinously over-competitive markets, under capitalization of many insurers, one-sided portfolios and lack of internal transparency were other weaknesses listed in Bahar’s paper, juxtaposed by a smaller number of strengths, including the absence of natural disasters, high returns on shareholder equity, and wide availability of products. Promoting harmonization of regional insurance laws is one of the core aims of the General Arab Insurance Federation (GAIF), said the secretary general, Abdul Khaleq Raouf Khalil, in remarks to EXECUTIVE outlining the Federation’s principles and policies. In Khalil’s views on regional industry concerns, the era of economic globalization created new challenges to Arab insurers by opening these “promising markets to international companies, which made giant companies flock toward them.” As a result, established companies in Arab countries faced the challenge of “confronting weak insurance awareness comprehensively by unifying efforts among institutions.” Khalil named insurance education in schools and insurance promotion through the media as desirable means to increase awareness but specifically called upon governments to aid the sector by reducing taxes on insurance and offer incentives for policy buyers.

In context of larger demographic and cultural changes, societal provisions for retirement plans and pension funds are issues of monumental dimension in the Arab world. According to recently published research by Lebanese financial firm Saradar Investhouse, the share of life insurance premiums out of total premiums is remarkably low in nearly all Arab countries. Ranging from 31% in Egypt down to 4% in Saudi Arabia and 1% in Syria, life insurance ratios are in stark contrast to developed markets, where life insurance and wealth creation through insurance products dominate. Also in global averages for developed and developing countries, life premiums outweigh general insurance, said the report.

Executives from Arab insurance companies point to a number of reasons for the Middle East’s low acceptance rate of life products. Throughout most of the period following the eruption of their national wealth (which in some countries coincided with their independence), oil economies in the Gulf region provided their citizens with extensive free welfare assistance. In a few countries, selling of life policies was simply outlawed. Population growth and experiences of economic and cultural transformation have begun directing these societies towards appreciation of the tools that life insurance offers. However, communal and religious identities in Arab countries run strong, and carry an element of rejection to life insurance on account of dual factors. On the one hand, many Muslims abstain from buying standard life insurance products because risk concepts and investment structures of conventional plans are forbidden under the Islamic legal canon. On the other hand, the notion of ‘life insurance’ also carries emotional messages that can be interpreted as attempts to outwit the creator and deny the sole divine authority over life and death.

Arab advocates of the benefits of life insurance thus have been emphasizing that the real character of a life plan lies in financial safeguarding of people’s loved ones and in preparing for the future. And in course of the overall trend to evolve Islamic finance, insurance companies in Muslim countries are working towards a stronger presence of TAKAFUL insurance, that is insurance where policies and investment methods are in compliance with SHARI’A rules, satisfying both Islamic religious and secular supervisory standards.

Insurers involved in TAKAFUL, including subsidiaries of global financial player HSBC, speak of a great potential. However, provider experiences do not yet suggest that sales growth of either Islamic or conventional life policies would suffice to meet the region’s needs for wide spread wealth creation and building of pensions. “Some insurance and reinsurance companies are building experience with TAKAFUL, but it is yet premature to pass judgment on the feasibility and relevance of these concepts,” opined the deputy general manager of regional reinsurance firm Arab Re, Tayseer Treky. Given the youth-heavy demographic structures of the large and populous Arab countries – from Algeria and Egypt to Iraq, Saudi Arabia and Syria, as well as smaller countries such as Lebanon – in conjunction with severely underpowered public sector social nets, planning for ageing populations appears as a need that will only increase in importance and urgency for decades to come.

In relation to this massive socioeconomic issue, concerns over intra-regional reinsurance capacities may be of lesser long-term consequence, but they have been weighing on the minds of Arab insurers for many years, and attracted a massive increase in attention after global reinsurance markets began to harden four years ago – and more so in the aftermath of September 11. Numerous Arab insurance companies felt hard pressed by the sudden drop in reinsurance availability, and industry members renewed calls for strengthening regional reinsurance pools. For the region’s reinsurance providers, the development offered a welcome opportunity. Nonetheless, managers do not dream of replacing the international firms in the market. “We do not look to international reinsurers as a threat. Reinsurance is international per se,” said Treky.

All deliberations of economics and business concerns in the Arab world are void without paying reference to regional security and political issues. Every Middle Eastern war, from 1948 until the 2003 Iraq invasion, dented the economic stance of the insurance industry to at least some extent. The abrupt decline of the Lebanese standing as the region’s avant-garde location for insurers after 1975 and the downturn of the Iraqi market after 1990 were both directly conflict-caused. And fundamentally, the regional insurance outlook will not be completely positive in the absence of peace.

Future prospects of individual markets with the greatest development potential thus are subject to the two key influences of political stability and improvement and liberalization of regulatory regimes. Iraq shows the strongest current promise of a yet to be realized huge peace dividend for insurance operators. Saudi Arabia is the encouraging example of market opening and regulation for the day, Libya is also en course, Syria another candidate for opening up. Countries that have a history of a strong private sector insurance market and countries that have successfully established and implemented advanced insurance legislation have the best prospects to serve as centers for Arab insurance development. Bahrain, where authorities adopted ambitious aims of establishing a major financial hub, is the noted example for the latter scenario, Lebanon the indisputable representative of the former. Veterans of the Lebanese insurance industry do not tire to declare that the Human Resources, experience and expertise concentrated in this country create a fertile ground suited like no other country in the region for fulfilling the role of insurance center. In view of the benefits of multi-polar structures and respectful competition, the Middle Eastern insurance industry would be extremely well served if these two and eventually additional countries were to evolve into centers of insurance excellence. Sound domestic markets with healthy, well-governed companies and exemplary supervisory regimes are required as ingredients for achieving such functionality for either country. In the opinion of Abraham Matossian, president of Lebanon’s insurance association, ACAL, and head of the event’s preparatory committee, the 25th GAIF conference represents a good omen for developing Lebanon’s role in the Arab insurance world. ”This is not one of many conferences,” he said. “More than 1000 participants have registered, which is an unprecedented number. Our topic is the future of Arab insurance. The fact that the GAIF is convening here this time is unusual because the conference never before assembled twice in the same country within a twelve-year period, and what further adds to its importance is the fact that this is the Federation’s silver jubilee conference.”

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.