People have used insurance in the past to protect against impact of damages and risks.

In the absence of the social insurance, which Islamic countries shoulder to counter the effect and impact of damage to a nation and its assets, and as the majority of countries relinquished their responsibilities in reinforcing cooperation between their people, there grew the need to look for an alternative that guarantees to protect against damage and loss. This alternative is insurance companies operating in Islamic countries, similar to those commercial insurance companies operating in western countries.

Since the nature of transactions practiced within non-Islamic commercial insurance companies do not comply with provisions of Islamic shariah (and often insure establishments and companies that practice types of business not in compliance with shariah provisions), it became essential to look for an Islamic alternative, one that adopted cooperative insurance principles in its business transactions. Islamic insurance is known as “a collective insurance contract” by virtue of the fact that every contributor pays a specific amount of money as a donation for the purpose of indemnifying other contributions on the basis of solidarity and takaful.

Insurance operations are managed by a specialized company on basis of proxy wakala against a pre-determined charge. The subject of the contract is the commitment by all those insured to bear the risk sustained by another contributor. Thus, it is a contractual relationship based on solidarity and takaful to spread risk.

The role of insurance companies in the Islamic insurance system is to manage insurance operations by way of underwriting and execution since this is beyond the policy holder’s capabilities due to the large number of contributors. The company enters into agreement with the contributors by which it collects insurance premiums and pays incurred indemnity to those who have sustained damages in accordance with the regulations, principles and criteria dedicated for the purpose, in addition to all other operations which are required within the insurance industry. All these duties are performed in its capacity as a proxy wakeel against a predetermined charge. The company promises, in the name, and interest of the contributors, to either indemnify against a great portion of damages and losses sustained or indemnify it totally.

As for insurance premiums which are collected from contributors, it is usually enough to cover operational costs, pay incurred indemnity amounts or allot to all types of technical reserve amounts.

For the purpose of determining the amount of insurance premiums, formal statistical principles are applied for each type of cover. Should the premiums not be enough to meet the liabilities, the deficit will be covered by the shareholders on the basis of al qardh al hasan or  “Good Loan,” and if the company has a reserve balance as a result of insurance premiums profit surplus, the deficit then will be met by that surplus.

Jihad Feitrouni is the general manager of Dubai Islamic Insurance & Reinsurance

The insurance industry in the Middle East has been sitting on the launch pad of great expectations for a very long time. Regulatory changes and the growth of Islamic insurance services are central to suppositions that more customers will flock to insurance around the region. In terms of geography, the main carriers of promise are Saudi Arabia and Syria: two severely underinsured countries which both last year implemented legislation opening significant new spaces for insurance providers.

Saudi Arabia is currently buzzing with an insurance gruenderzeit, at least as far as its stock market. All seven companies that staged initial public offerings in the first quarter of 2007 on the Tadawul bourse were insurers, and they offered $162.3 million worth of shares to Saudi subscribers.

The largest of the seven IPOs was that of Medgulf Insurance, the biggest provider in the kingdom after NCCI, the former monopoly provider that pioneered the move of insurance companies to the Saudi stock market when the state-owned company was privatized to 70% through an IPO. Medgulf, which had previously operated in Saudi Arabia through a Bahraini offshore unit, offered 25% of its shares for $53.3 million in late February. Other shareholders in Medgulf Saudi are the companies of the Medgulf Group from Bahrain and Lebanon (together 35%), Saudi Investment Bank (19%), and 21 other investors, most of them Saudi individuals, who hold between 1% and 2% each.   

Medgulf’s late February IPO was preceded by that of Malath Cooperative Insurance and Reinsurance, which offered shares to investors in a $38 million IPO in early February. By taking 47.5% of its capital to market, Malath conducted the largest IPO in the first quarter of 2007 in terms of percentage offered and was the first of 13 insurance providers to fulfill a mandate to take part of their capital public as one of the conditions under which the 13 firms received licenses from Saudi authorities in 2006.

Saudi market looking bright

In March, the Capital Market Authority in Riyadh directed five insurers to undertake simultaneous initial public offerings at the standard share price of SR10 ($2.7) set by the CMA. Subscription to the stocks was open from March 17 to March 26, and the companies offered shares worth a total of just under $71 million.

The five firms that conducted subscription in March were relatively small, offering between $8.3 million and $21.4 million in shares representing between 31% and 40% of their respective capitals for subscription periods that ended on March 26. The companies coming to market are SABB Takaful, and cooperative insurance companies Saudi United, Saudi IAIC, Saudi Fransi and Arabian Shield.

Subscription rates for the five March IPOs were not yet announced when Executive went to print. But the two earlier IPOs got the warm welcome of high demand for their share offerings. Malath reported subscription coverage of 499%, worth $189.4 million. Medgulf reported that its offer attracted subscription requests from 1.4 million persons and demand for shares reached $209 million, or a 400% subscription rate.

The high subscription rates to the two offerings may be indicative that the rulings of Islamic scholars in support of mutual insurance are having more influence than opposing views circulating in Saudi Arabia, which still maintain that all insurance is a game of chance, and thus objectionable under the ban against activities that entail elements of uncertainty and gambling, as well as taking interest from investment portfolios.

While the oversubscription figures signal that the Saudi retail investors regard insurance companies as primary market opportunities that are acceptable under the investors’ religious standards, one cannot easily surmise that the financial attractiveness of insurance IPOs with CMA-mandated issue pricing is a guarantee for the companies’ success in either the retail insurance market or on the bourse.

According to estimates quoted frequently in discussions on the Saudi insurance market, the insurance sector is estimated to value about $2 billion and to have a potential to grow to $4 to $6 billion over the next five-to-ten years (without much adjustment of these estimates in the past two years). This is a minute percentage of the country’s economy, especially when considering that GDP increased to $347.4 million in 2006 and per capita GDP (measured in purchasing power parity) has been growing at rates of more than 5% in 2006 and is expected to grow by another 5% in 2007.

The reasons for optimism on Saudi insurance sector performance in the coming years arise concretely from motor and health insurance requirements, which have become mandatory, and, in general terms, from the kingdom’s economic development and its population growth. There is little evidence to suggest that optimism on the growth of insurance awareness among retail customers and in media, or on vast expansion of insurance sector expertise and human capital, has a strong base. 

While the creation of an insurance sector is seen as an important addition to the financial industry and equity markets of Saudi Arabia, it also seems unlikely that the sector’s arrival will provide a large short-term contribution to widening the institutional investment market or set new milestones in corporate governance. Examples of insurance sectors in other GCC markets over the past few years show them as holding significantly less importance than most other sectors which financial analysts track through sector indices.  

Syrian market grows, too

Just as regulatory forces have been setting the pace for insurance development in Saudi Arabia, authorities in Syria have been infusing a spark of opportunity into their country’s outlook for creating a sustainable insurance industry.  Since last year, insurance firms have received license approvals and started setting up shop in Damascus.

In March, Noor Takaful, a shariah-compliant insurer in Syria whose founding partners include a Kuwaiti-Pakistani insurance joint venture and Jordanian companies, said it would complete a public offering for $15.03 million, or 50.1% of its capital before the end of last month. Similarly, Kuwait-affiliated Syrian insurance company Al Aqeelah Takaful told Executive that it plans an $18.74 million offering for 51% of its capital before the end of spring. Managers at Noor and Al Aqeelah said the firms intend to start operations in April and August, respectively.

The lust for public offerings of financial companies in Syria rests on the foundation of heightened readiness by Syrian authorities to issues operator licenses to insurance providers and is nurtured by tax incentives, which offer firms a 10 percentage point lower tax bracket if they solicit capital participation from the public.

Lebanese insurance firms have been participating in prying open the Syrian market. Arope, a member of the Blom Bank Group, started operations in Damascus in July of last year. While it is too early to look at results of the venture, said Fateh Bekdache, Arope’s general manager in Lebanon, the experience of building something where no private sector insurance existed previously is intriguing. “The start is bumpy,” he said, “simply because it is a new law and a new sector. But it is extremely interesting to start something.”

Like BSO Bank, the Syrian bank linked to the Blom Group, Arope Syria chose to undertake a public offering that brought it tax benefits, which Bekdache cited at a rate of 15% of local taxes instead of 25% of local taxes for companies that prefer a private ownership structure without public offering.

Adir, the insurance daughter of Byblos Bank Group and France’s Assurances Banque Populaire, opted for private ownership in its Syrian venture, which last month received a preliminary license from Syrian authorities and expects to be up and running within six months.

According to Jean Hleiss, Adir’s assistant general manager, the new company will start operating with a $25 million capital and offer general and life insurance products in Syria under the name Adonis Insurance Syria.

Although the Syrian insurance market has been a favorite topic of expansion dreams among Lebanese insurance companies for years, the difficult situation of the Lebanese economy and its repercussions on the insurance sector seem to have somewhat stifled the eagerness for going cross-border. Bank-affiliated firms like Arope and Adir appear to have advantages in venturing east because they are part of groups with deep pockets and have greater access to working capital than standalone operators.

Additionally, having a bank in Syria enhances efficiencies, because the Syrian Insurance Supervisory Commission and the central bank gave “full approval to run insurance operations in the branches of banks,” Bekdache said. Thus, in addition to its head office in Damascus and an office in Aleppo, Arope Syria can base employees in the branch network of BSO and sell its insurance products there.

Lebanon not a fertile growth area

Meanwhile, in Lebanon, insurance growth prospects are faint, at least in the short run. The sector did not take direct hits during the war in July and August of 2006, said Max Zaccar, chairman of Commercial Insurance. “The Lebanese insurance sector was not affected negatively by the war, in terms of premium income,” Zaccar told Executive, adding that marine and transport insurance lines saw small growth in premiums because of greater insurance needs in the summer, and that payment morale among insurance clients actually improved.

Despite the war and political troubles at the end of the year, 2006 was better for Lebanon’s insurers than 2005, added Bekdache. He attributed last year’s satisfactory performance to very good business in the first half and a few good months immediately after the end of the Israeli war.

But for 2007, things are a lot murkier. The main problem is that Lebanese businesses are not making new decisions, because they are waiting for political progress to materialize. Under the circumstances, which include cash flow problems in many companies and private households, “the insurance sector has no new business and companies are fighting over what is there, competing with reduced prices to take slices of business from one another,” Zaccar said.

He added that local insurers also continue to be in a clinch with the Ministry of Economy, over the ministry’s plan to legally mandate insurers to structure companies separately for life and general business, and meet $10 million capital requirements that would only make sense with much more substantial premium incomes than the providers can muster in Lebanon’s $600 million premiums-strong market.   

GCC feeling the pinch

GCC insurance companies felt pressure in 2006, mostly from the downturn in returns for their investment portfolios. As many of the sector companies are highly capitalized and have concentrated on their investment portfolios for the good profits they had in 2005, shifting focus to increase underwriting income quickly does not seem to be an easy path, given that the maturing of regional insurance markets has been following the mantra of the snail, despite all sector talk about rapidly growing insurance industries in countries such as Bahrain and Qatar.

Islamic insurance products will add to the widening of the market, but also in this segment, hype over fast gains and limitless potentials has not been substantiated by the equivalent growth of underwriting activities. In Oman, for example, insurance penetration—the ratio of insurance premiums to GDP—has remained below 1% and the share of life insurance has stagnated below 15% of all premiums, according to a study by BankMuscat.

In all GCC markets, most of the underwriting, moreover, is concentrated in motor and health insurance, exactly the two coverage areas which have more risk and less reward to offer than most other insurance activities. Takaful family and takaful life products, which assist households in creating wealth, may provide a way into greater presence of the benefits that responsible insurance offers to a country, but even by one optimistic scenario for Saudi takaful life insurance growth, premiums would pass the $1 billion mark only by 2015.

The founding wave of new insurance companies thus seems to be the most positive development in regional insurance affairs for the time being. Add to this that multinational insurance firms have shown interest in the market and that a player like Allianz—the world’s number two in the insurance sector—has taken a license to establish a takaful unit in Bahrain. Lebanon also just might harvest some further gains from the interest of multinational players, as the local affiliate of a big international firm is rumored to be in negotiations to buy another firm with several branches in the Middle East, in order to broaden the multinational’s access to the region’s markets.