International insurers seeking a bigger share of the potentially lucrative Gulf market need to adapt quickly to regulatory changes and tap into growth areas like Islamic finance or risk being muscled out of consolidation.
With a penetration rate of around one percent of gross domestic product (GDP), the overall Middle Eastern insurance sector lags mature markets but its enormous growth potential has already attracted global heavyweights such as AXA and Allianz.
However, the sector’s regulatory framework is transforming rapidly and some multinationals remain cautious in developing their Islamic product offering, giving domestic competitors such as Abu Dhabi National Insurance Company, Saudi’s Tawuniya and Qatar Insurance Company the chance to build a dominant position.
Analysts expect the sharia-compliant insurance sector, or takaful, to grow nearly 15 percent annually in the next five years and exceed $7 billion in premium income. Other estimates show that assuming a fairly conservative growth in GDP, if the penetration rate increases to 3 percent the overall market will be 6-10 times larger in the next 10 years.
Foreign insurers have discovered the region in recent years, lured by its large population and the untapped potential, but with 180 firms jostling for space in the market, they need to get their acts together.
“Global players need to fuel their growth and the way they can do this is to increase the premium income coming from the fast-growing regions, and the Gulf and the Mideast is definitely one of them,” said Philippe De Backer, a partner at Bain & Company, a global consulting firm.
“For them the challenge is access, the ability to find a balanced deal with a local partner, being on the ball as soon as the regulatory environment changes and new segments open up,” said De Backer.
They are also likely to come up against determined local competition. “A number of local insurers have been gearing up for the challenge of competing with the international market. There is evidence that a number of local insurers are positioning themselves where they are seeing off the competition from the multinationals,” said Wayne Jones, a partner at law firm Clyde & Co.
Insurance in the Middle East is mostly centered on property and casualty (P&C), while the life and savings segment remains underdeveloped, partly due to lack of government incentives for clients.
Within insurance, the life segment and takaful in particular holds the biggest potential in the region. Premium income in life insurance in Saudi Arabia, for example, soared 61 percent last year, boosted by strong demand for sharia-compliant products, while non-life grew 25 percent according to Swiss Re’s “World insurance in 2009” report.
The study added that sharia-compliant products will drive future growth in the region. Enforcement of current regulation, more legal requirements for health and P&C insurance, as well as compulsory pension schemes will also boost the insurance sector, analysts said.
The high number of insurance companies is expected to fall as the authorities raise the capital requirements for insurers, and put in place laws to cover takaful, bancassurance and third-party administrators.
Bain’s de Backer said that in the next three to five years, the insurance landscape would feature a handful of regional universal insurers, one to two local insurers per country and a handful of companies focused on a single segment like health.
Insurers such as AXA and Friends Provident, now part of the British group Resolution, currently don’t offer any takaful products, but have said they are considering it.
“Before we would consider developing a takaful offering we would undertake extensive research and due diligence and would only launch if we can add real value to this market segment,” said Friends Provident’s regional head Matt Waterfield.
Local competitors, led by Saudi’s Tawuniya, have already made inroads in the takaful segment and are undisputed market leaders.
Foreign insurers may bring scale to any consolidation, but face an uphill struggle against local firms in key areas such as takaful, and a soft launch through local tie-ups may be the solution.
“(Given) the fundamental differences between the two models, there is need for joint ventures and collaboration in a nascent segment where even the regulation is not up to date,” said Amine Bentaleb, associate director and portfolio manager at Arqaam Capital.
(Editing by Sitaraman Shankar)
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