Low insurance penetration rates, growing economies, and privatization in the financial services sector have continued to attract international insurance firms, particularly those from Europe, in developing North Africa’s domestic insurance sectors. All three Maghreb countries continue to outline new modernization programs aimed at liberalizing their insurance sectors through independent regulatory bodies, privatization of state-owned assets in the sector, and legislation encouraging market consolidation.

New and further partnership between domestic and foreign firms is paving the way for new tools, techniques, and better business practices from countries who first introduced the idea of insurance to their protectorates during colonialism. The only difference this time around is that Algerian, Moroccan, and Tunisian firms welcome the intervention and look to European experts whose capital and know-how can streamline operations in North Africa.

Algeria continues to develop its insurance sector and currently enjoys the highest penetration rate, at over 5%, among Maghreb countries. Algeria’s score is nearly triple the penetration rates for Morocco and Tunisia who both have just over 2%. According to Algeria’s Insurance Industry Association, Algeria witnessed an 8.5% growth in recent years, while 80% of insurance revenues were generated from automobile insurance, followed by fire and miscellaneous risk coverage with 19% of total revenues. With a plethora of foreign exchange earnings from increased prices in their primary export of hydrocarbons, Algeria’s government has increased public spending in sectors vital to the health of the insurance industry, including a recently initiated program aimed at investing $60 billion to help property owners acquire insurance plans, boosting penetration levels in the process.

Private opportunity

Other segments of positive growth include year-on-year increases of 40% in credit insurance and 20% in auto insurance. Other branches grew at a modest 4% rate, while agriculture actually dropped by 15%. With more public spending and less public insurance firms, foreign firms will be moving in to assist firms going private and chase around more opportunities. European firms are already betting on higher penetration rates in the years to come and are expanding operations in Algeria to obtain market share at the earliest, and most profitable, point possible.

Morocco’s own insurance market continues to outpace its neighbors, as well as most of Africa, but its sector is still far from being fully developed, so further foreign investment and domestic liberalization will continue to be the country’s main industry targets. In addition to traditional product offerings on life, accident, and car insurance, Morocco will host more shariah-compliant products in the near future. After getting the green light from Bank Al-Maghreb, the country’s central bank, in-country firms have begun to offer takaful insurance products. Experts have long awaited the entrance of Islamic finance to the country and successes are already taking root. As the insurance market develops in Morocco, the variety and amount of Islamic insurance offerings will attest to the popularity of shariah-compliant products in general.

Tunisia’s government has also continued to provide the in-country insurance sector with breathing room through new regulatory and budgetary bodies as well as a detailed modernization plan aimed at stimulating the competitiveness of domestic players against competition from abroad.

While the region as a whole maintains a healthy outlook at similar market trends, specific legislation and further definition by governments are likely to shape the type of growth in the coming years and the rate at which it will occur.

Algerian privatization

Algeria’s privatization craze launched in recent years has not left the country’s insurance market unaffected. As the country continues to search for domestic improvements and ways to strike a balance in an economy still dependent on its hydrocarbon wealth, Algerian authorities will continue to privatize firms and encourage domestic firms to become more competitive and efficient. In 2006, Algeria privatized one of the largest insurance companies, the Algerian Company for Insurance and Reinsurance (CAAR). At the time, 16 companies worked in the insurance sector, but the new balance left the two remaining large firms to fight for market share ahead of privatization plans for their own operations.

While the Algerian Insurance Company and the Algerian Insurance and Transport Company remain under government ownership in the short term, they are likely to be privatized in the medium term as the country continues its slew of privatizations in the financial services industry. Several firms have continued to operate well in Algeria since the sector was first liberalized in 1998, including the Trust Company, AA Insurance, CAAR, Al-Baraka Oua-Al-Aman, GAM, and El Ryan.

According to Mohammed Rafik Benmoufak, Director of the National Council for Insurance, “the process [of privatization] will give the Algerian market a breath of fresh air.” Looking forward, he believes large multinational companies will enter Algeria as privatization can be used to increase market diversity, stimulate investment by foreign firms, and fill gaps in the Algerian insurance market. A more competitive market is also likely to encourage public firms to economize resources and operate more efficiently, moves which will benefit citizens in the long term through premium rates and products offered.

The staggeringly low penetration rates in the country point to a possible opportunity for regional insurance firms but they also highlight the amount of risk in-country firms have taken. The president of the Algerian Insurance Brokers Union, Abdelaziz Boudraa, cited that “just over five percent of Algerian companies, particularly in the private sector, align themselves with insurance.” He continued to mention that “risk management is a concept ignored by most of our economic operators when it is vital to ensure the stability of enterprises so as to prevent companies from closing their doors from a fire or flood, which would not only be a disaster for owners but also for the country.”

Untapped private potential

In addition to the privatized and those still under government ownership are foreign firms operating or looking to branch into Algeria and grab some market share in a largely untapped market. In March 2008, France’s largest bank BNP Paribas SA launched insurance operations in Algeria through BNP Paribas’ international insurance arm Cardif. The venture between Cardif and Algeria’s Caisse Nationale d’Epargne et de Prévoyance (CNEP) will permit BNP Paribas to offer life and savings insurance through CNEP’s 200 retail branches throughout Algeria and is the first step of BNP Paribas to join the ranks of France’s Axa SA and Groupama SA, who are already operating in the country. If the preliminary contract goes well, the group will create a joint venture to cement their partnership.

Other foreign insurance firms are looking to BNP Paribas, Axa, and Groupama’s progress as an indicator of successful partnership possibilities with local firms. Insurance firms from France, Spain, Germany, and a host of other European conglomerates are also looking at the red-tape obstacles and the dynamics foreign firms face with regulatory authorities as further indicators of the insurance market’s health in Algeria.

Additionally, a second public-private partnership exists between the public insurance firm Société Nationale d’Assurances (SAA), which currently has a 28% market share of the Algerian insurance sector and its new counterpart Mutual Insurance Traders and Industries France (MACIF). SAA recently raised its capital from $69 million to $245 million. MACIF, which operates in several European markets, has a turnover of $7.46 billion. MACIF, which ranks first in France for automobile insurance with five million subscribers, and housing with more than three million policyholders, formed the third partnership of private foreign firms with an Algerian firm.

Other contracts are expected, including that of Swiss Mutual with Alliance Insurance, as well as other companies seeking Algerian partners, like Groupama Mutuelles du Mans Insurance and General Insurance France (AGF), a subsidiary of Germany’s Allianz.

Islamic insurance offerings are also popular with foreign firms, including Salam Islamic Arab Insurance Company, the principal Sharia-based insurer and reinsurer in the world, which recently, through its in-country subsidiary Salama Assurances Algeria, launched Takaful offerings.

For foreign firms, short-term results in Algeria will remain minimal and any firm entering the market must take a long-term outlook to help see through the development of the country’s insurance market. The problem with short-term visions are that governments in the region, particularly Algeria, might decide to delay privatizations of certain firms as demonstrated by Algeria when the state cited reasons of uncertainty from the sub-prime crises as the cause of delay in privatizing their retail bank Crédit Populaire d’Algerie.

However, for those with long-term visions, outlooks are optimistic as the majority of Algeria’s thirty-three million people remain to a large extent uninsured. With an insurance market accounting for less than 1% of Algeria’s gross domestic product (GDP), foreign firms might just be the necessary and sufficient impetus to the development of Algeria’s domestic insurance market.

A Parisian accord

Following a long process of negotiation between the governments of Paris and Algiers, Algeria resolved a historical political impasse with France, after the government seized French assets following Algeria’s independence from its colonial power in 1962. The nationalization of French assets in the real-estate and insurance sectors was finally solved after the Algerian government permitted five French insurance companies to sign agreements with CAAR and SAA. The accord was signed in the presence of French Minister of Finance Christine Lagarde and her Algerian counterpart Karim Djoudi.

According to the French Ministry “the accord will allow the entry into the Algerian market of the French companies, which thus will be able to contribute to the modernization of the Algerian insurance sectors.” The assets, which were seized in 1966, have been repatriated, allowing French insurance to again operate in Algeria’s market. The companies whose assets were confiscated include AGF, Axa, Groupama Mutuelles du Mans Insurance, and Aviva PLC’s.

The Casablanca game

Morocco’s insurance climate continues to outpace others in the region and on the continent. The country’s sector continues to record turnovers of greater than $1.9 billion, ranking the country second among all African states. Life insurance products have reported recent growth of 13%. However, premiums remain high, accounting for 35% of turnover in the automobile industry, 13% for bodily injury, and 9% for work accidents, but with strong growth rates of more than 7% and higher profitability levels. Moroccan insurance remains strong, but the industry is not yet a significant contributor to the country’s gross domestic product (GDP), accounting for less than 3%.

Since 1999, when the sector began a consolidation period, transparency has risen, particularly in response to continued consolidation of firms as mandated in the insurance code, which was updated in 2005. Industry experts see Moroccan insurance as a growth industry with plans in the works for sector upgrades, improvements in insurance legislation, and compulsory health insurance planned for Morocco’s population.

According to Al Wataniya’s CEO Chraibi, Morocco’s economy is under pressure from the international economy to develop and liberalize its financial service sectors, including insurance. On this note, he believed that “it therefore became necessary for us to know exactly where our companies have reached the state of development required.” For Moroccan insurers, critical mass in market share is necessary to stay efficient, which might lead some smaller firms to partner into larger companies.

For Benwahoud Faraj, who heads a brokerage firm, “consolidations taking place currently meet a constraint rather than a voluntary approach on the part of local insurance companies.” He added that “this strategy is perfectly consistent with the free trade agreements signed with the European Union and with the United States.” From fear of foreign insurance giants settling in Morocco after market liberalization following the dismantling of trade barriers, local companies contracted alliances to acquire a certain critical size.

The composition of the Moroccan market include four main companies accounting for over 60% of market share and are the only firms who exceed $160 million in turnover. Among them include RMA-Watanya with a 23% market share, AXA Insurance Morocco with 17% of the market, Wafa Assurance with 13% market share, and CNIA, which accounts for 9% of market share.

Continued capital restructuring in the industry has boosted RMA-Watanya’s position. Bahrain’s ARIG recently sold CNIA to Morocco’s own Saham Group. Saham acquired further market share through its CNIA subsidiary when the group purchased Es Saadi in 2006, giving Saham a total market share of 16%.

Although the sector remains young in Morocco, the new regulatory policy has piqued the interest of several firms who view Morocco as an untapped market. Recently, the Emirati-based Takaful Re expressed interest in the Moroccan market. The firm, created in 2004, is looking to team up with Casablanca-based Sigma Insurance. In March, Takaful Re’s CEO Chakib Abouzaid visited the country to scout possible opportunities, while Sigma executive Brahim Aakaf maintained that “the Moroccan market presents interesting development potentials for this type of insurance product.”

Tunisia’s modernization

Tunisia’s Minister of Finance Mohamed Rachid Kechiche recently partnered with AGF-Allianz’s CEO Francois Thomazeau to strengthen cooperation between the government and Tunisia’s insurance companies. Both Kechiche and Thomazeau plan to raise awareness of the country’s investment potential while Kechiche called for strong ties between Tunisia and France to assist financial and technical exchanges and further cooperation.

Boudraa drove home the point of technical assistance, both intra-industry, and inter-industry, in a 2007 press conference when he explained “insurance no longer relies solely upon the tradition role of reimbursing a company in the event of disaster, but on the contrary, as it may advise and train entrepreneurs to better manage their institutions so they avoid inconveniences.”

Among the most crucial aims of Tunisia’s modernization program for the insurance industry is improving regulatory and institutional frameworks, improving the capital base of insurance companies, developing the sector’s human resource, improving management best practices through internal reforms, as well as modernizing the marketing of insurance products.

In terms of volume, Tunisia’s auto insurance industry is the most important sub-sector of the country’s insurance industry, accounting for 43% of total turnover in the sector during 2006. The industry includes mandatory liability insurance, which has increased from $269 million in 2005 to $302 million in 2006 for a 13% growth.

Recent reforms in Tunisia are aimed at harnessing the continued successes and growth of the country’s insurance sector. In February, Tunisia’s legislature amended the country’s insurance code, which seeks to strengthen the capacity of firms to reform the sector. The amendment also helped the country stay on track with commitments to reform, including those outlined as part of World Trade Organization (WTO) guidelines. The new framework is aimed at helping harness growth in cumulative investments in the country’s insurance sector, which reached $1.3 billion in 2007, slightly higher than its 2006 level at $1.2 billion.

The most important change from the new code is a new, independent supervisory authority for the insurance sector. With an independent budget and mandate independent from the government, the authority will be able to conduct its work through a general committee on insurance. The committee’s budget is funded from the insurance sector but the composition of its leadership is sector-neutral in that individuals chosen have no links with insurance companies, regulators, or investments, according to the description given by Tunisia’s Finance Minister Kechiche Mohamed Rachid on the new body.

The new legal framework encourages companies to merge to stave off competition. By rising the minimum capital requirement to continue operating, smaller insurance firms in Tunisia will be forced to partner with others and focus on scale and efficiency, which, in the long run, will increase their competitiveness against large and foreign firms.

The concept of business process outsourcing (BPO) emerged at the end of the 20th century. Tasks viewed as difficult or time consuming, and where companies had no real competency, were outsourced. The insurance industry is no exception to this trend. Many insurers have decided to divert some of areas of their operation to specialists, in an effort to cut costs. Lebanese company Capital Outsourcing has positioned itself in the auto claim insurance market.

Capital Outsourcing, a company born of the merger of three companies — Logistix, Trinec Group and Blue Wave Group — was launched in 2006. “The company benefited from the three companies’ existing client lists and expertise in the field of BPO, information technology outsourcing (ITO) and proprietary banking software,” said Joe Khayat, chief administrator and HR officer at Capital Outsourcing. The company, which is headquartered in the Dubai International Financial Center, has a $12 million market capitalization and is backed by a team of 200 employees.

Capital Outsourcing delivers personalized solutions to companies, allowing clients to maximize their resources, improving efficiency and focusing and core competencies. In the area of insurance, outsourcing has proved to be a profitable strategy for many companies around the world. “Companies can dramatically reduce costs by outsourcing selected business functions such as payment processing, computer program development and call center administration. As an example, insurance companies can cut down expenses by as much as 15%, by outsourcing their motor claims,” Khayat added.

The insurer is responsible

While distinct blocs of business may be delegated to an outsourcing company, the overall responsibility for that business remains with the insurer from both a business and legal sense. Besides cost reduction, clients also gain flexibility, as they can opt for a number of solutions or services, which can be adapted and customized to match their needs. As Khayat explained, “The number of insurance frauds can also be significantly reduced, although I do not have exact figures in mind.”

Business process outsourcing is not simply a back office procedure but a vast operation that includes people on the ground implementing and monitoring procedures at every step of the way. Companies have complete visibility on the actual claim processes.

According to Khayat, the concept of outsourcing auto claims is built on the belief that insurance companies will naturally tend to focus on their core activity, which provides them with a competitive advantage. In Lebanon, the concept of outsourcing auto claims is not new to the insurance market, as it was introduced a few years ago by the subsidiary of a local insurance company, whose operations were eventually shut down, mainly because of conflict of interest. “Insurance companies became hesitant when they discovered that the outsourcing company was owned by one of their competitors. The case of Capital Outsourcing is very different as it is a completely independent company,” Khayat underscored.

In recent years outsourcing insurance services has become increasingly popular. Among the major business process areas that have proven to be extremely suited for BPO are quotation generation, financial administration, underwriting and associated compliance activities, claims adjudication and processing, policyholder servicing, documentation and information technology.

Insurance companies are mainly looking to outsource some of their “pain points,” which are deemed too expensive to operate by one single company and can be further enhanced by collaborating with a specialized third party. “We also service physical damages associated with automobiles. We traditionally make use of the insurance companies’ network of body shops,” Khayat said. The manager reckons that total loss on cars for 2007 was estimated at 300 vehicles, the figure including losses consequent to act of terrorism recently having taken place in Lebanon.

However, significant cost savings resulting from BPO must be balanced against some substantial risks. Failing to select a qualified and compatible service provider and to put into place a well-structured outsourcing agreement, are among the reasons advanced by industry analysts leading to costly operational problems or even significant business disruptions. Other concerns of insurance companies revolve around the quality of service rendered. Most insurance companies have spent years developing their network of clients built on personal relationships. “On the service level, a client of a company that has outsourced its motor claim will definitely not perceive any changes in the quality of service provided,” Khayat asserted. The end client who has bought an insurance plan from company X and is eventually involved in a car accident will call the company’s hotline, which will connect him to the dispatch center of Capital Outsourcing responsible for handling the call. “Our role resides essentially in handling back office operations,” the manager underlined, “without the client being aware of the change in management.”

No direct competition

The company currently works with five insurance companies, among them Libano Arabe, Victoire and Fidelity. According to Khayat, “We do not face any direct competition for the moment.” Capital Outsourcing’s current car park includes some 140,000 vehicles insured, out of a total 1.5 million cars in Lebanon, of which only 400,000 cars are insured.

The manager admits that the company faced some resistance from market players upon the introduction of the outsourcing claim insurance concept. “When a company decides to outsource some of its operations, it is generally confronted with the problem of firing employees, which is a daunting task from a human resource standpoint. People tend to usually avoid destabilizing a company’s work environment in any way,” he said.

Capital Outsourcing currently boasts a $20 million turnover, which is expected to grow to about $100 million within the next five years. Revenues from the company’s insurance activity are estimated at some $1.6 million, while growth in this particular line of business is expected to reach 25% per year. “We have the possibility to handle auto insurance claims for as many as ten companies and we might expand our current car park by 60,000 cars with two more insurance companies joining our client list. This will reflect positively on our operations and improve our efficiency levels due to simple economies of scale,” Khayat said.

The manager emphasized that the company aims at securing about 70% to 80% of the auto claim market in Lebanon. With a sector growing steadily year by year, Capital Outsourcing is looking to expand its current operations, either vertically or horizontally, by looking into regional markets or adding to its current activities other services such as medical claim outsourcing.

Bancassurance is a sector that has been growing steadily in Lebanon in the last few years. After all, the country is known for its thriving banking sector. The consolidation of the industry has translated on the local level in a simplified basket of products, targeting the mass made available in the far regions of the country through a sprawling network of branches. 

“Bancassurance was launched in Lebanon about six years ago. Currently we tend to identify two main types of products, which are investment and protection insurance plans,” said Rima Rached Baz, head of the Non Credit Product Unit at Bank Byblos. Under the first family of products featured are retirement and educational schemes, while the second type of insurance includes products such as income insurance, obligatory and third party insurance. According to Baz, the advantage of income insurance resides in a flexible payment plan approach, with installments starting as low as $2, and providing a 12-month income coverage for clients who were fired by their employer. 

What’s in the basket?

Naturally, mandatory insurance such as all risk, car and property insurance are also provided by all financial institutions and applied to all loan applicants. Pierre Talhami, Manager of Beirut Brokers, a Bank of Beirut (BoB) subsidiary, underlined that the bank boasts some 11 products, ranging from life, to medical, home owner, travel, personnel accident and saving plans.  Expatriate medical insurance plans are among the many products that are offered by Fransabank through Bancassurance SAL, while their non life insurance type is provided by AXA. 

Banks tend to depend on various marketing strategies to attract clients. BoB’s strategy relies on the use of brochures placed on bank counters, while depending also its network of personal bankers. “In addition to our existing network of client we also target institutional clients, by making direct calls,” explained Philippe El-Hajj, head of retail banking at Fransabank.

“The main objective of bancassurance products is to reach out to the mass. Insurance is therefore standardized, made more affordable and flexible. Payments are also made through smaller installments. The process becomes easier to understand and less time consuming, most clients who purchase insurance at the bank will be immediately insured,” said Baz.

Although they are sold through the banks’ branch networks, issuance of insurance contracts remains the prerogative of insurance companies. “The major advantage that is inherent to bank assurance is the smoothness and easiness of the service, which is thus streamlined.  In addition to reminding their clients of payments deadlines banks also offer lower rates than conventional insurance companies due to the law of economies of scale,” El Hajj said. By adding insurance to their basket of services, banks morph into one stop shops where clients can settle electricity bills, their car loans and buy insurance in one single step. “Insurance services also contribute to the cross selling of all other bank products,” he added.

Selection of insurers

According to Byblos’ manager, insurance contracts bought at Byblos are issued by ADIR, a subsidiary of the Byblos holding group. This partnership allows the company to utilize the bank’s network of 73 branches, Baz explained. BoB’s approach to the insurance industry has been to acquire its own insurance brokerage firm. “Through the alliance of BOB and Beirut brokers, clients have access to a varied basket of products through a careful selection of the best insurers available on the market,” said Talhami.

The manager believes that banking and insurance are two sectors that with time are becoming more complementary. With such partnerships, banks are promoting the creation of a new market, one which falls beyond the reach of conventional insurance and brokerage firms. “With insurance payments starting as low as 2$ per month, banks offer products that are too competitive for other industry players,” Talhami pointed out.

Another insurance specialist, who chose to remain anonymous due the sensitivity of the topic, underlined that rivalry is pitting brokerage firms against banks. “[Clearly], banks are invading the natural arena of insurance brokers and chipping away their client pools,” said the specialist.

In only a few years, the industry has managed to grow tremendously, as banks overcome progressively cultural barriers and are able to better educate clients. “We have noticed a positive change in the behavior of customers who tend to automatically inquire about insurance, which was far from being the case only a few years ago,” says El Hajj. 

“Life and retirement insurance have also become increasingly popular. There has been more than a 30% to 40% growth in the bancassurance market, a growth that is spread equally over the country. The south and north regions have also witnessed positive growth levels,” according to Baz.

Talhami agreed that growth levels have been steady for some time, reaching a level of some 25% per year. On the other hand, while Hajj acknowledged that 2005 levels were estimated at around 30%, he believes recent figures will not exceed 18% due to product saturation in certain market segments, with Fransabank’s insurance client pool including some 200,000 individuals. “The younger generation is also more aware of and more inclined to buy insurance,” he said.  Clients seem to also favor investment plans, as they become familiarized through their banks with the idea of safeguarding their future. 

One of the industry’s main challenges remains the relative lack of clarity of the Lebanese legislative insurance environment, which is monitored by the Ministry of Economy. “The adoption of best insurance practices is progressively contributing to the development of the legislative framework,” said Baz. According to Talhami, a proper legislation remains to be developed.

In the current speculative environment, has the subprime crisis reflected on Lebanese life insurance market? Hajj reckons that the subprime crisis has indirectly affected the industry, although it has been subdued by the bank’s alliance with big players such as Crédit Agricole. Fransabank currently boasts some 40,000 life insurance clients .

All managers interviewed by EXECUTIVE agreed that insurance products allow reinforcing sentiments of loyalty among clients who find that their needs are satisfied at a single service window. Most identify culture as the main challenge faced by the industry, hoping that one day insurance will be viewed by customers as a basic need. “The long term objective of insurance companies is for penetration to attain a level of 70 to 80%,”said Hajj.

Lebanon is one of the region’s insurance pioneers with 53 registered insurance companies.  Yet Libano-Suisse General Manager Lucien Letayf believes that penetration levels in Lebanon fall short, with a yearly individual spending of $150, compared to an average of about $1,700 for western countries. The $500 million Lebanese insurance market is very small relative to the Saudi Arabian one worth some $6 billion.

“Penetration levels for medical insurance are estimated at some 15%, property at 5%, while third party motor, excluding compulsory insurance, varies between 30% and 35%,”said Habib Farah, deputy manager of AXA.

Arope’s general manager, Fateh Bekdash, considers Lebanon’s insurance per capita expenditure as very high when compared to other countries in the region. When insurance spending associated with energy risks are excluding from total regional figures, Lebanon’s per capita spending rates are among the highest in the Arab world,” he explained. “The region remains underinsured,” added Letayf.

Lebanese insurance companies have adopted different expansion strategies to beef up their presence.  “AXA Middle East depends on AXA international, which is one of the largest international insurance providers. Our field of operation, although limited for now to Lebanon, also includes Syria, Jordan and Cyprus. Although Syria offers interesting opportunities, it is still in its nascent phase, with the insurance law promulgated only a year or so ago,” underlined Farah.

Reaching into the region

Libano-Suisse has looked beyond Lebanon’s borders and expanded in other regional countries such as Qatar, Syria, KSA and Jordan.  Arope, a subsidiary of BLOM, has reached into the Syrian and Egyptian markets, while Arabia Insurance is also positioned in the region, with Lebanon only representing 6% of the company’s total turnover.  The company also holds majority shares in Arabia Syria, after the country was recently opened to investors.

Most insurers interviewed by EXECUTIVE attribute the industry average growth of about 8% to international and local factors. Habib Farah identified several factors accounting for the sector’s limited growth. “On the local scene, the Lebanese political situation has significantly affected companies. We’ve nonetheless been able to achieve a satisfactory growth of 12%,” he reckoned. 

On the macro-economic level, Arope’s manager identified several factors reflecting negatively on the industry such as soaring oil prices, inflation, higher costs of medical services and technology. Regardless of the challenging work environment, the company has managed to secure an 11.4% growth by March 2008, according to a study published by Al Bayan.

The situation has translated to higher non renewable figures on the local level, as many clients left the country in the wake of the 2006 war, according to Bekdash. The political context has reflected on the turnover of Lebanese companies as well as a number of new ventures, which have decreased dramatically. 

“Our company has been able to attract a number of clients away from other insurers,” explained Farah. He believes high fixed costs, intense competition, and scarcity of new projects are factors heavily weighing down the insurance industry, and they are exacerbated by the unstable political situation. “In order to survive companies are either looking into other regional markets or drastically reducing prices, a measure which affects their profitability levels.  Some players are even failing to abide by the legal fixed price of mandatory insurance, which is frequently commercialized at discount. Such measures are increasing companies’ exposure to risk,” he added.

Socio-economic demographics have prompted companies to develop new insurance products or focus on new segments to curtail the downward trend.  LEAF, the Lebanese Education Aid Fund,  was created by AXA  in collaboration with the Council of Catholic Schools. This product targets parents of students of Catholic schools around Lebanon, whereby some of the profits are allocated to a special school aid fund for the less fortunate. “We were able to identify a need for which we tailor made a product,” said Farah. The company has recently issued a new property insurance product called LM7, or London market seven, which provides an extensive coverage exceeding other types of property insurance. 

According to Farah, the Lebanese insurance clientele is becoming more professional, with awareness levels for insurance products rising steadily, a factor that has contributed to the growth of the sector as well as encouraged competition.  “Penetration levels for third party car insurance did not reach 15% some ten years ago,” he added. With time, client profiles have also evolved.  While ten to fifteen years ago, clients belonged mainly to the upper crust including business owners or self employed individuals, today insurance is more and more addressed to the masses.

Mandatory insurance

The introduction of the concept of mandatory insurance imposed by banks to loan applicants progressively modified the insurance market and created awareness among the population.   People seeking a bank loan for buying a car or house are required to purchase third party and life insurance.

“The introduction of mandatory insurance associated with car loans, visa applications (to Europe), expatriate compulsory insurance for house maids, have all spurred awareness among the Lebanese public,” said Bekdash.  Market players such as the CDR and Solidere have also positively affected the insurance industry by imposing property insurance on projects and rental space.

At a later stage, the emergence of bank insurance as a new market segment has modified the insurance playing field. Products became increasingly standardized, and payments made more flexible.  Letayf believes that although banks are certainly playing a pivotal role in insurance, the relation between banks and insurance companies needs to be regulated in order to protect consumers and competition.

In the last few years, the market of bank insurance has taken off rapidly. Banks considered as respected economic players in Lebanon have provided insurance products with an added credibility according to Letayf. “We have witnessed a 100% growth in life insurance product from previous years, partly due to the introduction of bank insurance. It has become increasingly difficult for insurance companies to influence banks which are restricting choices of consumers,” said Letayf. Because of bank insurance, he believes brokers need to modify their market approach and focus more on larger institutional accounts.

To secure a larger piece of the pie, each company has relied on a different marketing approach.  While AXA’s client base is mainly constituted of corporations, which amount to some 60% of its total portfolio, Arope has focused its attention on the retail insurance segment, although it features, in addition to its individual clients, medium to small size enterprises.  At Libano-Suisse, retail insurance makes up to 60% of the company’s total client base. Arabia’s customers are mainly institutional, while up to 50% of their retail insurance clients stem from their wide brokerage network.

Most companies agree that motor and medical insurance coverage are driving the industry.  “On the other hand, life insurance is one of the most profitable types of insurance,“ underscored Farah.

New trends have emerged on the international insurance scene, triggering the development of innovative and sometimes unusual products.  “We have recently launched insurance products offering coverage against sabotage and terrorism risks as well as in case of event cancellation, involving war and terrorism attacks,” Bekdash pointed out.

Other products that have become increasingly popular abroad are ones covering losses associated to credit card fraud or embezzlement, which are adapted to modern life requirements. Travel insurance is another type of insurance that has become more popular and “credit insurance is another interesting segment,” reckoned Farah.

Insurance managers interviewed by EXECUTIVE underlined that although Takaful (Islamic insurance) presented promising opportunities, it required careful analysis and preparation. But, as Bekdash said, “There is a definite need for Takaful.”

Nabih Baaklini, COO of Arabia Insurance, explained that generally speaking Lebanon’s market is quite westernized in terms of insurance products, although certain lines of risks are still untapped; mainly those covering engineering liability, medical malpractice or risks associated with the responsibility of directors and officers.

“In Lebanon the high competition has improved drastically the standards and quality of products offered,” underlined Letayf.  Products that are more complex require higher awareness levels, in the general manager’s opinion.  “You will have a sense of the market when you take the insurance legislative frameworks, where only third party bodily damage is considered as mandatory, while third party material damage is excluded,” he pointed out.

New trends appearing on the market involve outsourcing. “Outsourcing remains an interesting tool at the hand of insurance companies, one that can be mainly utilized in areas such as IT and HR.  Outsourcing claim management can also be beneficial to companies. It was introduced a few years ago, unfortunately the concept failed due to obvious conflicts of interests,” said Baaklini.

Mednet has positioned itself as one of the primary outsourcing companies in the medical claim segment in Lebanon. “Given the excellent results our partnership with Mednet has brought and allowed us to drastically reduce our expenses, we are also considering outsourcing our car claims,” said Farah. AXA’s manager believes some of the bankruptcy cases witnessed in the 1990s were mainly due to the costs associated with cumbersome operations, such as medical claims.

Letayf agreed that outsourcing is a general principle that is commonly accepted. “We are studying outsourcing motor claims but it will ultimately depend on our regional expansion. We might eventually decide to use an in-house one motor claim center for the whole regional group, if this solution makes more business sense for us,” he said. 

On the other hand, Arope has adopted a different stance on the matter as the company has chosen to manage directly its high frequency claim department. “We feel that our relation with the client ought to remain personal, as no one knows our clients better than us.  We are reputed for the quality of our service, the best in town according to people,” Bekdash claimed.

Waiting challenges

Many daunting challenges await insurers in Lebanon. “On the regional level, insurance companies will have to compete with foreign firms who are increasingly eyeing the Arab markets. Compliance is also becoming another important concern for insurance companies,“ Baaklini claimed. 

Other challenges perceived by Arabia Insurance’s manager reside in the areas of H.R., where issues such as attracting and retaining talent and the ability to make profit on the underwriting are becoming more prominent.  Most companies are also confronted with the issue of low penetration levels, which can be partly improved by an active collaboration between insurers and governments and the use of mandatory insurance.  “Other factors slowing the development of the industry are low income levels mainly in countries such as Lebanon and Syria, although the situation has definitely improved in Jordan in recent years,” said Baaklini.

In the area of life insurance, managers acknowledge financial performance was far from hitting its peak in 2007, due to the overall economic situation. “The subprime crisis bore an indirect effect on the Lebanese industry, although insurance companies were not as badly hit by the crisis as banks, as their investments extend over a longer time,” explained Farah. By law, Lebanese insurance companies have to invest at least 50% of their life insurance portfolio in Lebanon.  “We follow the ratings set by a board of directors, which focus essentially on triple A products and certain economic sectors,” emphasized Bekdash.

The regulatory framework remains at the heart of insurers’ preoccupations. “The legislative environment needs to be further defined, mergers should be encouraged as well. There are some 53 operational insurance companies in Lebanon, a figure that is extremely high for a country this size,” said Letayf.

Insurers agree that third party mandatory insurance should extend to property, as well as car insurance for material damages.  “Most companies in Lebanon are awaiting the new insurance law, which is supposed to reorganize and redefine the new industry framework, but remains for the moment under discussion.  The new legislation will certainly set the tone for the overall insurance industry and might encourage mergers and acquisitions, which have become a necessity in the current environment,” explained Baaklini.

Many insurance specialists believe that although mergers have been discussed repeatedly, it remains a distant dream, one of the barriers to mergers and acquisitions residing in the structure of the insurance industry where many companies are often family owned.

Compared to the global insurance industry market, the MENA industry is characterized by a severe under-penetration. The demographics of the region are partly responsible for this, as the region’s majority Muslim population is hesitant to purchase insurance products for traditional, religious reasons. However, according to EFG-Hermes, “knowing that the region is under penetrated is not of itself very interesting, unless we understand some of the demographic, cultural, legal and institutional reasons for this under penetration.” The emergence of Takaful is aiding the industry in addressing the cultural issues of the regional market.

What is Takaful?

Takaful is the concept of Islamic insurance, and complies with sharia rules. Historically, various forms of Takaful have been around for over 1,400 years. In an article for Pak-Qatar Takaful Group, Muhammad Ayub writes that, “Takaful is not a new concept in Islamic commercial law,” and moreover, “contemporary jurists acknowledge that the foundation of shared responsibility or Takaful was laid down in the system of ‘Aaqilah’, which was an arrangement of mutual help or indemnification customary in some tribes at the time of the Holy Prophet.” According to leading provider of Takaful solutions, SALAMA Insurance, this system of aqilah laid “the foundation of mutual insurance” in the Muslim world.

The foundation of Takaful is based on the notion of mutual cooperation, assurance, protection, responsibility, and assistance between groups of insurance participants. It can be said that Takaful is a form of mutual insurance. Many insurance companies in the region are adopting Takaful methods as it is sharia-compliant and hence adds appeal to the insurance industry.

Takaful vs. Traditional insurance      

SALAMA Insurance states that “the concept of insurance which simply means the pooling of common resources to help the needy is very much in line with the teaching of Islam which propagates solidarity, mutual help and cooperation among members of the community.” Further, SALAMA highlights that “[i]t is important to understand that Islam is not against the concept of insurance but the basis of operation of conventional insurance, which does not meet the requirement of Shari’ah.”

According to SALAMA, “The essence of insurance could be seen in the system of mutual help in the Arab tribal custom of blood money or diyah. Under this system, a victim or the injured party would be compensated by the members of the community whose action had resulted in the loss of life or impairment of the victim.”

Takaful insurance is “the Islamic alternative to conventional insurance products,” according to EFG-Hermes. As it is based on the principle of mutuality, EFG-Hermes finds that Takaful “emphasiz[es] (particularly for life) on co-operation, inter-responsibility, and assistance between groups of participants. In essence, the economic structure of a Takaful company can be seen as a hybrid between that of a mutual insurer and a conventional insurer.”  The purpose of the Takaful system, as opposed to traditional insurance, is not to profit but rather to uphold the idea of “bear ye one another’s burden.”

Ayub notes that “[d]ifferent views have been expressed about the status of conventional insurance from the point of view of Islam. An overwhelming majority of the Shari’ah scholars believe that it is unlawful due to involvement of Riba (interest), Maisir (gambling) and Gharar (uncertainty). Takaful, the Islamic alternative to insurance, is based on the concept of social solidarity, cooperation and mutual indemnification of losses of members. It is a pact among a group of persons who agree to jointly indemnify the loss or damage that may inflict upon any of them, out of the fund they donate collectively. The Takaful contract so agreed usually involves the concepts of Mudarabah, Tabarru´ (to donate for benefit of others) and mutual sharing of losses with the overall objective of eliminating the element of uncertainty.”

One distinctive characteristic, according to Ayub, between Takaful and conventional insurance “is more visible with respect to investment of funds. While insurance companies invest their funds in interest-based avenues and without any regard for the concept of Halal-o-Haram, Takaful companies undertake only Shari’ah compliant business and the profits are distributed in accordance with the pre-agreed ratios in the Takaful Agreement. Likewise they share in any surplus or loss from the pool collectively. Takaful system has a built-in mechanism to counter any over-pricing policies of the insurance companies because whatever may be the premium charged, the surplus would normally go back to the participants in proportion to their contributions.”

SALAMA Insurance emphasizes that “the operational framework of conventional insurance is against the tenets of Shari’ah, but not the basic concept of the insurance. Takaful which means ‘the act of a group of people reciprocally guaranteeing each other’ – is based on the concept of mutual cooperative insurance.” Evidently, Takaful is simply a culturally altered form of traditional insurance.

Current growth trends and industry watchers point towards a US$ 10 to 15 billion industry (in per annum contributions) within ten years, but not without addressing critical factors…

Insurance market influences

Source: FG-Hermes

Family Takaful vs. Life Insurance

The cultural characteristics of the MENA region have created obstacles for traditional life insurance to penetrate the regional insurance industry. EFG-Hermes holds that “while life insurance was seen to be problematic initially, scholars looked at Islamic principles of mutual insurance and providing a social safety net. This eventually matured into the concept of Family Takaful, which provides insurance for the loss of family members.”

Interviewed by EXECUTIVE, Dr. Saleh Malaikah, CEO of Dubai-based SALAMA Insurance, said that “the biggest potential for growth is in the life Takaful segment. It is the most interesting and exciting area right now in this part of the world.” Family Takaful, and Takaful solutions in general, are currently gaining momentum in the region, especially in the GCC countries.

Growth in the Takaful sector has largely outpaced that witnessed in respective insurance sectors…

Growth of the Insurance Sector and Takaful Sector by Country (CAGR % 2004-2006)

Industry experts have highlighted six areas which are most likely to affect future profitability and growth…

ReTakaful vs. Reinsurance

EFG-Hermes defines the difference between reTakaful and reinsurance rather simply, stating that “Just as a primary Islamic insurer can accept primary business from both an Islamic and a conventional customer, a reTakaful company can reinsure both an Islamic and a conventional insurer. The main difference lies in the management of its investment portfolio: a reTakaful insurer must ensure that it makes only Shari’ah compliant investments.”

Cultural context and ethical appeal of Takaful

EFG-Hermes notes that the “most important feature of the GCC markets, and to a great extent all markets where Islam is an important religion, is the injunction on traditional insurance products from Islam. This injunction is, however, not total: In pre-Islamic and early Islamic society, there was little concept of risk-transfer beyond that of a social insurance obligation.”

Thus, continues EFG-Hermes, “when it is said that there is a conflict between Islam and the construction of insurance instruments, this is an inferred injunction and not a direct one. In fact, the Islamic injunction against some types of insurance is really an injunction against gambling, although in the case of life insurance, there are additional factors.”

EFG-Hermes goes on to importantly accentuate “the fact that these are derived injunctions means that there is considerably more ‘wiggle room’ than there would be otherwise.” This “wiggle room” means “that there has – in most places – been an insurance market operating perhaps unofficially, for a significant amount of time. [And] this has resulted in a section of the population taking out insurance. Nevertheless, clearly the injunctions themselves, as well as the lack of a properly regulated insurance market which is a natural by-product of these injunctions have been strong contributors to the underpenetration of these markets.”

Oussama Kaissi, General Manager of Abu Dhabi National Takaful, noted that because Takaful is sharia-compliant, it acts as “one of the main drivers behind the growth we are witnessing, but its penetration into the western market should remain humble due the demographic distributions.”

Ghassan Wazen, Managing Director of ACE Insurance Egypt, thinks that “people will feel more comfortable when they buy Takaful insurance than any other traditional insurance,” due to its compliance with Islamic law. He also feels that because Takaful has been rather successful in areas like Malaysia and the GCC, he sees “no reason for it to not have the same success here in Egypt.”

Holding that Takaful “is very well developed,” Wazen believes that it “will avoid the religious question because it will make people more comfortable with the idea of insurance.” He also goes further to shed light on the Islamic insurance market in Egypt, saying “there are six companies that are interested in doing this type of business in Egypt.”

Insurance industry leaders feel that Takaful holds an ethical appeal to not only Muslims, but non-Muslims as well.  Kaissi finds that “Takaful products and investments in their nature are ethical and that has been proven to be a selling point with non-Muslims entities and individuals,” adding that “the examples are many, i.e. the assets of Christian churches in some Muslim countries are being insured with Takaful operators.”

Michael Bradford, Senior Reporter for Business Insurance Europe, also feels that “Not only will Takaful grow among Muslim customers, but some experts say marketers of the coverage are finding that non-Muslims also are interested in Takaful products. As long as Takaful providers put together dependable products and earn a reputation for quality service, their offerings will be in demand.”

Similarly, Malaikah believes that “Takaful has the potential once it hits a certain critical mass and credibility to really share into the conventional market for non-Muslims simply because it is rewarding from a financial point of view. Because Takaful is saying that this pool of insurance premiums belongs to the insured, and the excess is shared in a certain way between the insurance company and the insured. Logically and economically it is more rewarding to clients.”

If one looks at the actual statistics, one will see in a country like Malaysia, with its multi-ethnic population, unlike the GCC, most of the participants in Takaful companies are non-Muslims.  Malakaih highlighted that “Takaful is definitely appealing to non-Muslims because of its economic model that makes it cheaper than the conventional model. Takaful has the potential to attract non-Muslims not only ethically but also economically.”

Osama Abdeen, Vice President of AIG MEMSA, also feels that “Takaful on its own, regardless of being Islamic or non-Islamic, has a certain appeal especially due to the concept of ownership.  For example, in the past in Europe, there would be mutual insurance companies … these dealt with policyholders, which had more ownership of the funds, and if that fund performs well, those policyholders will be getting dividends or repays of the profits.”

Takaful is thus appealing because it is based on a cooperative approach, i.e. it is more evident that the policyholder will benefit from bringing good risks from the healthy management of that fund.  From that point of view, outside the religion, it has a huge appeal. 

“We do in fact witness some companies who are maybe not run by Muslims, and not really Islamic institutions… some of them do opt for Takaful covers,” Abdeen said, accentuating that Takaful “has some certain appeal, and that is the beauty of it. It creates a new concept for other segments to consider; it creates more options for the customer to consider.”

Demographic fundamentals infer significant future demand in many existing Takaful markets…

Current and potential growth of Takaful

Like the overall rates for the regional insurance industry as a whole, figures for Takaful growth rates are not very concrete and easily accessible. Most expect the Takaful market to grow at 20% per year. Ayub believes that “the Takaful business has proved its viability in a period of only two decades. It has been growing at the rate of 10-20% p.a. compared to the global average growth of insurance 5% p.a.”

Ayub also pointed to the regional reach of Islamic insurance, as “[a] large number of Takaful companies exist in the Middle East, Far East, Iran, Turkey, and Sudan and even in some non-Islamic countries. There are over 60 companies offering Takaful services […] in 23 countries around the world. Malaysia has developed ReTakaful business as well. Takaful products are available to meet the needs of all sectors of the economy, both at individual as well as corporate levels to cater for short and long term financial needs of various groups of the society.” 

Overall, forecasts regarding the growth of Takaful are rather subjective throughout the industry. Malaikah, for example, personally estimates that “the Takaful market in 2007 was somewhere around $7 billion. It has been growing in the last three years.” In contrast, Bradford finds that Takaful “is expected by some estimates to reach around $7.4 billion worldwide in ten years, up from $2 billion per year now.”

Evidently it is difficult to tell whether the Takaful market is already valued at $7 billion or will be valued globally at around that number in a decade from today. 

Kaissi acknowledged this challenge saying, “There is a great potential for the Takaful industry, but the anticipated current and future size of the industry is highly debatable in the absence of empirical data, what we have are pure assumptions that are being based on the state of the economy worldwide and the growth of Islamic finance. There are models that need to be tested and proven and the burden shall be shouldered by all stakeholders, i.e. regulators, investors, board of directors, management and Shari’ah scholars.”

Abdeen added that “For Takaful to grow you need to have stronger capacity from the front and back ends, i.e. from the direct insurer to the reinsurer; we are not there yet on the reinsurance side. We still have small capacities from most of the players in Takaful … maybe we are one of the exceptions because we do have a large capacity at AIG, but other companies have smaller retention limits and they cannot find 100% Takaful reinsurance support. So there is an area for this to grow well to complete that circle.” 

Malaikah gave his own estimate of what is happening in terms of growth of the Takaful market, saying “We know the global Takaful industry has been growing at an average of 25%-30%.  The trend seems to continue growing at 25% or so.  Conventional insurance, by comparison, is growing at around 5%.  So if you take 2007, as [your] base year with $7 billion and you’re growing at 25%, it will take you three years to double, [and] six years to grow four times. The estimates of growing to $20 billion or more in five years are not that far fetched.”

Seemingly, Malaikah sees the possible growth of Takaful reaching $20 billion in the next few years as realistic and attainable.  Kaissi presented a different take on the Takaful market and its future potential, stating “In the next few years, and with the lack of specific regulatory frameworks for the Takaful industry, the industry shall find itself to be highly fragmented, operating in very competitive markets and competing against well established traditional players. But, it is to be seen that the Takaful industry will prove to be much more receptive to the concept of mergers and acquisitions than its traditional counterpart and as such will consolidate within the medium to long term.”

Also commenting on the global potential for Takaful, Abdeen stated that “Takaful has been established in other parts of the world, like Malaysia and now it is in the UK; so it has a global spread…and it is capable of having this global spread.” He added that he sees Takaful “as more than just a local industry, but rather a global industry.”

Kaissi pointed out, however, that “we find the Takaful operators mushrooming but regrettably some with no clear vision and/or focus on the future.  There are several challenges facing the Takaful industry and that while the Takaful industry grows fragmented, it should be able to prove itself as a strong contender in the local and regional markets in order for it to play its intended role.”

Abdeen carefully mentioned the negative aspects of Takaful, as he believes the sub-sector is “established not on a very strong ground with the right capacity,” adding that “at this stage the Takaful market is going into what I would consider the ‘green field operation’, at least within the Middle East; it has been well established in Malaysia and other countries in the world.”

Abdeen also recognizes the “mushrooming effect of Takaful companies,” that are “opening here and there. But there will be a point where service, capacity, and capability will start consolidating or competing. The next level of Takaful growth is extremely promising, and our company AIG has definitely done many studies and taken this route; this will give us more access to various segments. It’s a very exciting period for Takaful.”

In Osman’s view, “there is great potential for [Takaful to grow] because there is a demand from the clients and this can be noticed by the growth rate of Takaful premiums as well as growing number of Takaful companies” in the region.

To what extent Takaful will actually fulfill its predictions is hard to say at this point, as the Takaful industry remains to be quite a small market at present.

The underdevelopment of insurance in OIC countries can be attributed to a number of factors…

Foreign insurers

According to the industry leaders and experts interviewed by EXECUTIVE, the attitude towards the role of foreign insurers is of a varied nature. 

Bradford says he “wouldn’t be surprised if there are further announcements from foreign insurers that new operations will be established in the region.” He also thinks that “[i]nsurers are locating there because there is business to be written in the Middle East and they have the capacity to handle it.”

As a reporter, Bradford believes – parallel to the top players in the insurance industry – that the role of foreign insurers is not one to be taken for granted in the MENA region, stating “foreign insurers are increasingly setting up operations in the region and that is good for insurance buyers. The arrival of foreign insurers can only stimulate competition, which will in turn bring the level of service from domestic companies to a higher level, another benefit for buyers.”

Nazer also thinks that “foreign insures have the expertise from working in the industry for a long time, and this definitely helps in bringing in expertise into the local market of the Middle East.”

In contrast to such opinions of foreign insurers’ prominent roles in the region, Malaikah opined that their role started early on, and since then they have run their natural course. “Foreign insurance has been the early influence in these countries. If you look at the early insurance companies working in the GCC, you will find that they are Western companies. However, local companies are taking over in terms of acquiring the market share.”

Western companies would thus become niche players. According to Malaikah, they had a role in introducing insurance in the market, but they never had the agenda to carry on developing the insurance market and the awareness and becoming the leader.  Western companies have been looking at their insurance operations as arms or branches in the area, not as main business. Home grown companies, on the other hand, have been looking at their operations as the main business.

In Malaikah’s view, “It’s exactly like what happened with the banks. Yes, they introduced the service, but now they are niche players.” He went on to boldly state that “Now local companies have the full spectrum of insurance services, so I really doubt there is anything else to learn from the foreign companies.”

On the contrary, thus Malaikah, “the Takaful business is becoming the leader and it is the other way around now; we are seeing foreign companies copying Takaful products and combining them with their range of products.”  Not many members seem to have considered this idea, as foreign insurers are coming into the region and finding the only way to penetrate the MENA market is to imitate local traditions and policies.

Abdeen still maintains that foreign insurers absolutely add benefits into the regional insurance industry, as they “bring competition, innovation, talent, replicating success stories of products which were launched in other parts of the world, etc.  The whole world is becoming a small village.  All these are positive things coming out of foreign insurance companies. I think foreign insurance companies who are committed to be on the ground, to provide the service, will definitely add great value to the most important aspect – the customers first, and to the industry as a whole.”

Contrarily, Kaissi said he “would like to see foreign insurers play a complementary role,” as there is “a lot that we can learn from the multinationals in the areas of IT, back office services and support, corporate governance and more. But, the local and regional players are not short on introducing new innovative products and services to their market and that has been tested and proven. Where we lack as regional players is on the distribution side, we are good at innovation but fail when it is time for execution.”

It seems that Kaissi hopes for foreign insurers to help improve the actual execution process throughout the MENA insurance industry.

Saudi Premiums (USD million)

Saudi Penetration

UAE Premiums (USD million)

UAE Penetration

UAE Insurance Premiums by Region

Growth of Insurance Premiums

Competition – local and global

EFG-Hermes puts forth that with the recent inception of numerous insurance companies – 47 in the UAE and 13 Takaful companies in Saudi Arabia – “competition is fierce.” It notes that the bulk of insurance companies throughout the region are based in the UAE and Saudi Arabia.

Kaissi feels that in order to be able to compete with the financial might of the global players, reduce back office costs through synergies and increase profitability, MENA insurance companies “should seriously start considering the creation of large regional insurance companies through mergers and acquisitions.”  He further noteed, “The only edge we hold on that front is our in depth knowledge of our markets and that still can be acquired by global players in a short period of time.”

Osman finds global competition for regional insurance companies a definite challenge at present, due to short-term implications in the regional industry. “Meanwhile,” he added, “the regional insurance companies are growing considerably, technically as well as financially. I hope to see in the near future very strong regional insurance and reinsurance companies which are in favor the insurance industry as a whole.”

Abdeen presented more faith in the regional industry and its capabilities, trusting it is on its way to being able to compete in the global market, saying that, “the first step has been done, which is quite interesting, where the insurance companies are capable of writing the risks located or emulated from their region. In the past, most companies had very small retention, and really the business or the risks of high capacity were heavily reinsured. This statement remains correct as we speak at present, but we have seen moves by some local companies to increase their capacity; we have seen companies who decided to set up operations within the Middle East region, which on its own increased the capability of the region to be able, to a certain extent, to write its own business. This is the first step to emerge as an international, global player in the region. So we are still in step one, but as a region, we have come a long way on this.”

In terms of the Saudi market, Nazer thinks that due to the fact all Saudi insurance companies are required to be licensed and publicly listed, that “The Saudi insurance market has quite a mix between local players, regional players and global players.”  To this he added that, “Local companies in general have done quite well.”

It seems performance of the Saudi insurance market, valued at $1.6 billion (in total insurance premium volume), can be accredited to the regionally noted organized regulation frameworks which were recently put into action.  Evidently, Saudi Arabia, as well as the rest of the GCC, will not be able to compete with the global insurance industry until they firmly establish themselves in the region first.

Investing the funds

The issue of where insurance companies are investing their funds is one of great interest. Opinions seem to vary, which may be due to the fact that, according to Malaikah, “Insurance companies are conservative by nature, and do not take very big risks.” 

Concurring with this opionion, Kaissi believes that “Regional insurance companies usually follow wisely a conservative approach to their investment strategies. In the Gulf region for instance, we have witnessed about a year ago a clear shift in investment strategy for some companies divesting from the heavy position they were holding in the equity market to the real estate market after the volatility that was witnessed during the past eighteen months in the stock market. It is anticipated that 45% of the cash available to regional insurance companies is invested in the form of cash deposits and government bonds varying in duration in order to meet their immediate liabilities.”

Kaissi also underlined that “The regulatory framework in certain regional jurisdictions places stringent rules on investment guidelines outside their natural borders.”

Similarly, Malaikah feels that “Most investments are in fixed income instruments, with provisions to invest in equities and in real estate. Unfortunately, we are facing a period now – or at least where currencies are pegged to the US dollar – of negative real interest rate due to dollar weakness, making interest rates below the rate of inflation. This is more exaggerated in the GCC countries. It is really an issue that needs to be addressed. Investments in equities and real estate, albeit in much smaller proportions than fixed income securities, are gaining popularity.”

Nazer’s view on investments in the insurance industry draw parallels to these perspectives. “Investments are mandated by the regulators, where there are very specific criteria that insurance companies must follow, i.e. a breakdown in relation to assets, a breakdown in relation to geographic allocation, etc. Every insurance company would have a different ranking. It depends if you are in a short-tail business or a long-term business, and this is how you would define your asset location and the period that you would want to lock in the investments. In the health insurance industry, it is a short-tail business and it requires payment to hospitals right away, so you need to define your strategy based on your line of insurance,” he said.

In addition, Abdeen believes, “some companies have perhaps over invested in the volatile stock market. In one year there were huge profits, but when the correction movement on the stock market occurred, it had an adverse impact on the investment income. I think multinational companies do invest across the globe, locally and internationally.”

Abdeen firmly feels that “Local companies also invest, [but only] after the regulation processes have been implemented in each country. But in my opinion there should be a balance, a balanced way of investing and regulating because the investment aspect is an important part [of the insurance industry].”

Whilst the insurance industry in the MENA region attempts to strengthen itself and widen its capacity, it undoubtedly faces many challenges.

Oussama Kaissi, General Manager of Abu Dhabi National Takaful, strongly feels that “the insurance industry in the MENA region is facing a magnitude of challenges that require the immediate attention of all concerned entities be it governmental or private enterprise.”

He listed these challenges as “the opening of regional markets to foreign players as per the GATT agreement, changes in regulatory framework, introduction of new corporate governance rules, keeping abreast with technological advancement on the IT side, scarcity of qualified human capital, product development and creation of alternative distribution channels.”

But Kaissi points out that the “greatest challenge we are facing is the scarcity of qualified human capital.  We are in dire need to engage and support our regional insurance institutions and expand their reach across our markets in order to educate and develop our current employees as well as introduce insurance to the masses in order to spread knowledge about our industry and stir interest in the young generation to become the future leaders of our industry.” 

Osama Abdeen, Vice President of AIG MEMSA, also stressed the need for education; “we are in real need in current times to educate our area, which I feel is crucial. Education is the name of game. Information is power. This region needs this. The industry needs to face up to the real need of developing people from the region, to give the expertise and the technical-how to grow on solid ground. We have seen some institutions here and there, but in my belief there is a great need for investment in the area of human resources within the region, to create the generation who can carry forward the growth of insurance and services in the region.”

Collective effort needed

Abdeen accentuated the need for the industry to come together and create a “collective effort” to create such educational programs.  More challenges faced by the industry arise in terms of risk management.

Saleh Malaikah, CEO of Dubai-based SALAMA Insurance, highlighted that “there is stress in managing the risk, getting the right resources, whether human resources or systems.  To cope with the growth, one must be on the look out for developments in risk management practices in the world today.”  Similarly, Michael Bradford, Senior Reporter for Business Insurance Europe, feels that “the lack of sophisticated risk management among commercial insurance buyers” is a “big concern” in the region. 

“Risk management is a fledgling discipline among companies in the Middle East and risk management services in many cases are provided by insurers and brokers.  I think insurers would like to see risk management as a better-developed discipline in the region. If risks there are properly managed, losses will be controlled and claims kept to a reasonable level,” he said.

Although Malaikah finds that companies in the region are coping well with the situation in the industry, he undoubtedly believes it is filled with issues that need to be dealt with.  According to him, “one of the big challenges is finding the human resources to lead the continuous expansion that is being created.  Continuous expansion in terms of size of premiums, geographic expansion into smaller cities (into the GCC) and more so into the Takaful industry lines of business makes finding qualified human resources a very difficult task.”

Dr. Michael Bitzer, CEO of Daman Health Insurance (Abu Dhabi), agrees that lack of human resources is a significant problem throughout the industry, saying “we have to recruit not only in the region but globally, and we heave to invest in intern training, specifically because in the UAE, Saudi, Qatar you don’t find so many insurance experts in the market. You sometimes have to recruit people from other industries and cross-train them. There is no one available with the skills you need, so you must invest in training them.”

According to Malaikah, “all the new companies that were established in the last two years in Saudi Arabia, UAE, Kuwait, Bahrain and Qatar, are Takaful companies.”  Managing growth of so many new companies creates unavoidable challenges, such as human resource management, leadership, and professionalism.  With the birth of numerous new companies in the last two years, there is a dire need for efficient human resources.  Bitzer similarly states that there is “definitely [a] need [for] more professionals in the industry.”

Corresponding to Malaikah’s and Bitzer’s perspectives, Gamil Osman, Assistant General Manager of Kuwait-based National Takaful Insurance, said that “one of the greatest challenges/concerns that the insurance industry faces – particularly in GCC area – is the increasing number of insurance companies, especially Takaful insurance companies which are growing very fast in recent years.  Accordingly, concentration should be more and more on quality of services provided to the clients.” 

While there has been a kind of ‘baby boom’ of insurance companies in the GCC over the last two years, Ghassan Wazen, Managing Director of ACE Insurance Egypt, finds that “there are not enough” insurance companies in Egypt, and the companies that “can change the market are the local and state owned companies,” as opposed to foreign companies that attempt to alter the market.

Investment issue causes stress

Malaikah also believes that “another area that is causing a lot of stress in the last 2-3 years, is the investment issue.  First of all, we had the equities market crisis in the GCC countries, which started at the end of 2005 and carried on in 2006.”  Thinking he had seen the bottom in 2007, “we have been struck down by the international markets situation with all the recession expectations in the US and the reflection on the world economies.  That is another area of concern for insurance companies [who] rely on two income streams: operational revenue and investment gains.”  Evidently, Malaikah believes “ensuring successful investment is a very important issue for insurance companies.”

Another major issue echoing throughout the insurance industry, as briefly mentioned above, is awareness among the general public or lack thereof.  Many top players in the regional insurance industry are facing great challenges when trying to penetrate their local markets, as awareness levels are almost non-existent.

Wazen believes this is a key problem, as “people are not very interested in insurance.”  Bitzer agrees that “they have to create the awareness amongst the population that insurance is necessary.”  Overall, it seems the MENA population is simply, and unfortunately, not in tune with the implications and benefits of insurance as awareness is not well structured in the region.

Many top players in the region also find that the regulatory frameworks could use a lot of improvement.  Bradford emphasized the industry’s need for proper regulatory processes, but thinks they “appear to be developing in the region as the insurance market matures.” He also added “As insurance penetration widens in the GCC, proper regulation becomes even more important.”

Still, Bradford feels that “it is a challenge for a region that is seeing unprecedented growth and wealth that brings about the need for insurance. As insurers increasingly establish operations in the Middle East, regulators are responding by modernizing regulations. Commercial insurers are not voicing any major complaints with the regulatory process and generally seem to think it is on the right track. Most insurers welcome modernized regulation because it helps ensure a stable marketplace.”

Bitzer even thinks that “The greatest challenges is supervising authorities; I think in the GCC there is a significant improvement, but when you talk about MENA there is the need for even more professional supervising authorities. The insurance penetration of these markets is very low, and some classes such as life insurance are almost neglected.”

 Wazen reiterated the significant need for structural innovations throughout the industry. “There is a lot of work to do in terms of regulations, legislations, and finding people who are skilled to sell insurance,” he said, adding that, “unfortunately, in my opinion, this is another problem,” as it is “very difficult to find exceptionally skilled individuals in this region to sell insurance.”

In terms of the health insurance market, Tal Nazer, CEO of BUPA Arabia for Cooperative Insurance Company in Saudi Arabia, finds that “one of the main challenges is having enough hospital capacity in Saudi Arabia” in order to “absorb the volume.” There seems to be a shortage of hospitals and medical resources throughout the region, and thus the health insurance sector is suffering from this.

Clearly, there are many challenges that the insurance industry faces at present. It seems there is much progress to be made, and just how to solve these concerns is an issue all on its own. 

Possible solutions to concerns

Since its inception in 1964, the General Arab Insurance Federation (GAIF) attempts to better regulate the insurance industry throughout the Middle East.  Its main goal is to meliorate and encourage inter-Arab communication amongst the insurance sectors, as well as to develop the industry overall.  The federation is composed of 20 Arab member states, as well as 268 insurance companies within them.  At the beginning of 2008, GAIF held its annual conference and concluded that the regional insurance industry needed to “further modernize, depoliticize, and integrate more both regionally and globally.”

Another institution that guides the insurance industry towards improvement is the Dubai International Financial Centre (DIFC), designed by the emirate’s government “for the benefit of the UAE and the wider region as a whole. Its remit is to create a regional capital market, offering investors and issuers of capital world-class regulations and standards. Its hallmarks are: integrity, transparency, and efficiency.” Alongside GAIF, the DIFC may provide advice and frameworks for the regional insurance industry to function to its best potential.

EFG-Hermes believes the solution to low penetration levels of the MENA region is, in some cases, “as simple as greater codification of the law, and bringing business practices in line with international standards.”  In addition to changing the institutional framework, “addressing customer needs through provision of religiously acceptable Takaful and Family Takaful will also increase penetration.”

Kaissi is sure that the industry issues “can be resolved by joining forces between the local governments and the insurance industry in order to create a level playing field for local and international players by the way of encouraging M&A and placing tough entry requirements on multinationals so their entry to the market will not stir an all out open competition but introduction of added value in services and products.”

In terms of solving awareness issues, Osman believes that “each insurance company spares no efforts in increasing the awareness of insurance.  From my point of view, the insurance unions and associations in different markets can play an important role in increasing the awareness of insurance, which will be useful for each local market as a whole.”

Abdeen’s opinion draws a parallel on this, by explaining how the industry should make a “collective effort” in raising awareness across the region, as “it’s worth the investment.”  The most substantial way to raise awareness is through education programs.  Abdeen feels “it is of extreme importance at the family level, school level, university level, and government policy level,” so it can “enhance the education of the generation in a focused approach,” in order to be able “to build areas of growth for years to come.”

For example, AIG provides training programs people they believe possess “leadership potential” so they can become “the leaders of tomorrow,” according to Abdeen.  He went even further, proposing that education “should be a country policy supported by the industry.  This is the investment you really need, because investment is not only in money, investment is in people; they are making it happen.  We need more of that.”

Distributing awareness comes at a price though, as Kaissi noted that “to spread awareness in any given market is a very expensive proposition.”  Like Abdeen, he also believes “governments, civil societies and insurance industry should play their socially intended role in spreading insurance awareness. But, it should be mentioned that due to the disparity in the standards of living in our region, some governments should play a more active role in providing the basic insurance covers to their citizens.”

Undoubtedly the demographics of the MENA region provide continuous challenges to solving major concerns in the insurance industry.

New market trends

Trends throughout the regional insurance industry are reflective of some of the major challenges faced by the industry.  For example, one major problem is the lack of proper regulatory frameworks, but now creating efficient regulating guides is emerging as a new trend across the industry.

Regulation as a trend is gaining popularity and importance throughout the regional insurance industry.  Bitzer finds that “regulators are becoming more and more professional, and they are learning from international benchmarks.” 

Abeen echoed Bitzer’s view, adding that the “new trend of framework regulation is a very important one because it creates a framework for healthy growth and creation of innovate products and so on.”

Further, Abdeen believes the industry has “witnessed a lot of changes in the last 3-4 years in terms of regulation.  However, this trend has not yet achieved the desired objective, because if the intention of this region is to become a global player, there should be more consistency and more organization of the regulation across all countries so it makes it easier for regional players to cross borders and to create a strong, solid, insurance market to cater for the needs of the region.”

Also regarding regulation, Abdeen trusts that “brokers play a major role not only in creating the business, but to increase the awareness, and to provide their clients with the best cover at the best price.  That area also needs to be more regulated, to enhance regulations in order to ensure more professionalism and delivery, and that on its own also will elevate the market to the next level that we all hope to reach.”

Clearly, the better regulated the market, the more appeal it gains to outside investors and other industries as well.

With good regulation, international players may find more interest in the regional insurance market.  Bitzer put forth that “more international players come or they take a share in local companies,” especially if regulatory frameworks are well established.

Abdeen reiterated this fact, adding that proper regulatory frameworks “attract foreign interest in the insurance industry.”  For example, “Bahrain has done an outstanding job in creating specific regulation, monitoring solvency margins based on risk assessments, and so on.”

The opening of the DIFC creates regional hubs operating out of Dubai.  Then there is the QFC (Qatar Financial Centre), which is moving towards allowing operations, and has already started. AIG used the mechanisms of the QFC to attract foreign interest, expertise, and capacity from the international market.  Also, the Kuwaiti and Jordanian markets have opened up for newcomers.  On the latter, Abdeen remarked that  “Jordan for some time has had very specific and good requirements of regulation, allowing people to enter the market and also an attempt to organize the market in terms of direct reinsurance, approved securities, and so on.”

One trend highlighted by reporter Bradford is the role of captive insurers.  “There is increasing talk of the use of captive insurers in the region, although the concept is yet to take off.  As commercial insurance buyers become more and more sophisticated, they will begin to understand the benefits of this form of self-insurance.  It may take a while, but it is probably inevitable that captives will become a more common alternative to the traditional market in the Middle East,” he said.

Another trend is that health insurance gaining importance, “especially here in the GCC,” Bitzer stated.  In regard to Saudi Arabia Nazer underlined that “the insurance industry is still a small industry in Saudi, but it is growing quite rapidly.  There are plenty of insurance companies in the market, so there might be an overcapacity of companies in the insurance market in Saudi Arabia.” 

Better services

According to Nazer, “the trend is going to be on competing providing better services to the customer, because the market is extremely competitive.  In the health insurance market, the product is standardized by the regulator; so the only way insurance companies are going to be able to compete is to provide customers through service.  You have one of two options: either winning business through better service, or winning business through pricing which could be a dangerous strategy to have.”

Some industry leaders define the presence of Takaful to be a trend in the market. According to Malaikah, “Family Takaful is the biggest area, for historically Muslims in this part of the world – and at large around the globe – have been shying away from insurance because of the widely held belief that it is not shariah compliant.”  Malaikah believes that with Takaful being fully sharia-compliant, the trend of Takaful and Family Takaful is and will continue to be, very popular in the market.  In contrast, Bitzer said that “Takaful is nothing new,” as “it is similar to cooperative and mutual insurance companies which we have in Europe and other markets since decades [ago].”

According to Kaissi, “we cannot speak of the trends in the regional insurance industry in isolation from the trends in the global and regional reinsurance industry.  The reinsurance industry is more heavily capitalized than ever and we are witnessing the creation of new companies, which will be providing more capacity to the local and regional markets.”

On the other hand, he pointed out that there are many new direct companies that are being established in several markets in the region, i.e. UAE, Kuwait, Syria, KSA, Bahrain, Egypt and Jordan.  In his view, “This influx of new players is due to the increase in oil prices and associated boom in construction which has attracted an inflow of foreign investments.  Building on that, we now have many players in any single market leading to the following trends; low level of capitalization, fierce competition, no consideration for minimum levels of technicalities, more fragmented markets and weak product mix.”

Abdeen similarly credits new trends to the booming economy and the new wealth component emerging in the Middle East. “Personal wealth on its own has “increased the demand for high limit of life insurance, covering the first home, second home, third home, etc. of those high networks. And also, we do a lot of imports in the Middle East.”

According to Abdeen, because of the increase of economy, and the surge of oil prices there is an increased demand for insurance throughout the region. “So, you see that imports have increased dramatically for the region to cater to its needs, to cater for the new projects, to cater for the personal wealth; that on its own has also increased the demand for marine cargo, transit risks, and so on.”