The market has rich potential. Here is what is needed to get it going.
When one looks at financial services in the Arab World, there is one sector that stands out for its lack of development: Insurance.
While investments and loans are now commonplace across the region, insurance has yet to achieve the same level of penetration. On average, insurance premiums represent only about 1% of gross domestic product in the Middle East, versus as much as 4% in other emerging markets and 9% in more industrialized countries. The situation for life insurance is even worse.
The low penetration of insurance in the Middle East points to the magnitude of the opportunity, especially given the above-average economic growth of the region, its young population, and ongoing political changes. Those changes include the requirement, in many countries, that consumers carry auto and health insurance. Government privatization programs will also fuel the market, as formerly self-insured entities turn to the market for their needs.
But the fertile environment for an insurance boom in the Middle East and North Africa (MENA) doesn’t guarantee that it will happen. For the potential to be realized, business leaders, regulators, and policymakers must focus on five areas.
1. Establishing a comprehensive legal framework. At present, there is wide variability in the maturity of legal and regulatory frameworks that govern regional insurance markets. In fact, until recently, almost all MENA countries had outdated insurance laws and regulations. Although some countries have introduced new legislation, much still needs to be done.
Specifically, regulators in countries with under-developed legal frameworks need to upgrade these frameworks in line with international standards. Countries that don’t have a judicial authority dedicated to resolving insurance disputes should create one. The regulation of takaful — insurance compliant with sharia law — also needs to be addressed.
In countries at the early stages of implementing legal frameworks, the approach should be to set prescriptive rules and guidelines, and to require that all insurance products be approved prior to sale. As markets mature, regulators can issue guidelines, or principles, giving insurers the flexibility to bring products to market more quickly.
The end goal of a legal framework should be to regulate all participants, including insurance companies, brokers, and professionals. Among other benefits, a well-defined legal framework will attract international players.
2. Empowering a regulator. It’s not enough that there be insurance laws — there also needs to be regulators enforcing them.
All the countries in the region have an insurance regulator in place, although varied in form. In some places, the regulatory body that oversees a country’s banks or capital markets doubles as its insurance regulator. Other nations have, in effect, multiple regulators — creating needless bureaucracy. An example is Lebanon, where the Insurance Control Commission and the Directorate of Insurance Affairs at the Ministry of Economy appear to have overlapping responsibilities.
Ideally, the lines of authority of each country’s insurance regulator should be spelled out in the legal framework and so should the regulator’s independence.
As they step up their supervisory efforts, regulators should look to the guidelines set out by the International Association of Insurance Supervisors. New regulatory bodies should start with an audit-based model, which relies on data collection to ensure compliance with rules and requirements. In the medium term, though, they should shift to the risk-based model common in more mature markets.
3. Creating an environment that encourages competition. For now, the insurance industry in the region is dominated by a large number of small players with limited capital. While that is understandable given the size of the market, the preponderance of small players has limited the amount of actuarial and risk-management expertise.
Regulators need to raise the competitive bar by requiring higher capital levels and introducing minimum standards for governance and risk management. This will result is larger local companies that are better-equipped to serve customers.
4. Offering skills and training. The shortage of skills has a huge impact on the state of insurance in the region, limiting product innovation and introducing inconsistencies into critical functions like risk assessment and pricing.
Regulators and policymakers can foster skills development by setting accreditation requirements for insurance professionals. They can also organize specialized training programs through affiliations with international training providers or universities. Finally, regulators can encourage insurance companies to invest in training their staff by offering a reduction in annual regulatory fees as an incentive.
5. Implementing market-led initiatives. One last thing that will help the insurance industry thrive is the rise of programs and associations that articulate insurance benefits to consumers and attract young professionals to the field. Bahrain and Jordan both have such programs. Bahrain’s program uses a specially created cartoon character, Taamina, to raise awareness. But these two countries remain exceptions. Other Arab countries are doing little to promote the industry or to lure talented college graduates headed for jobs elsewhere in the financial services sector.
Peter Vayanos is a vice president at Booz Allen Hamilton.
