Transcript The GCC captive insurance industry

The GCC captive insurance industry
MEED Insight/QFCA seminar,
Riyadh, 26 February, 2012
Edmund O’Sullivan, Chairman, MEED Events
Captives have become increasingly common
Majority of world’s
largest listed
companies have
captive subsidiaries.
Altogether, there are
more than 5,600
captive insurance firms
globally.
More than 65 per cent
of all Fortune
500 companies have
captive subsidiaries,
while recent estimates
have calculated that
the captive insurance
market has more than
$30bn in annual
premiums and more
than $130bn in assets
globally.
Captives are used by all types of company
And cover all types of risk
Eligibility
There are no restrictions on the type of business that can use a captive – public,
private, family-owned, and even mutual associations all employ captives.
But customarily companies should have a minimum annual premium threshold of
more than $1m. Firms with premiums lower than that would not necessarily benefit
financially from a captive as its operating costs would outweigh the financial
advantages that it would bring.
Companies should also operate a robust balance sheet, be profitable, operate
from a stable base and have a high level of understanding of their risk exposures.
Most importantly the company needs or wants to have a risk management culture.
But so far Middle East take-up has been slow
To date, only
10 regional
companies
have
established
captive
insurance
subsidiaries.
Of those, just
seven are
domiciled in
the GCC itself.
A number of reasons for this
 General lack of insurance awareness, education and sophistication in the
region;
 Low litigation environment compared to elsewhere;
 Lower catastrophe risk than other regions;
 Competitive local insurance market, that keeps premiums down;
 A lack of corporate taxation in the region, that negates some of the tax
advantages that captives can bring;
 Prevalence of absorbing risk in-house through companies’ own insurance
subsidiaries;
 Religious/cultural hesitancy toward insurance is not really a factor
But in short, there is no inherent reason why captive insurance cannot
really take off in the region
Domiciles are doing their best to kick-start the industry
Bahrain, the QFC, and
the DIFC have captive
regulations in place.
They were recently
joined by Jordan.
Many similarities in
regulations, but some
distinct differences
particularly in the
introduction of a Class 4
captive in the QFC
enabling the formation
of non-conventional
captives and the
permissibility of Letters
of Credit to be used as
a form of eligible capital.
The case for GCC captives
While captive insurance has been
slow to take off, conversely this
also means there is plenty of scope
for it to grow. This particularly rings
true, given the relative immaturity of
the insurance sector as a whole in
the region, compared with its
relatively high GDP growth and
high GDP per capita rates.
The Middle East remains relatively
underinsured. The total spent on
insurance in the GCC
is about 1.2 per cent of total GDP,
far lower than the 7-8 per cent
equivalent figure seen in
Europe or the US. Life insurance
accounts for just 12-15 per cent of
insurance spend, compared
with an average of 58 per cent
elsewhere.
Premiums are rising
The relatively low penetration rates tend to
suggest that a certain number of companies
are retaining an undetermined amount of
uninsured risk on their balance sheet. In
most cases, this is due to a lack of
awareness of this ‘trapped’ potential value
and the various options and mechanisms
that this value can be utilised.
However, there is mounting evidence that
this is changing as companies come to terms
with this potential value and premium and
penetration rates grow.
Premiums have been rising significantly over
the past half decade in the region, albeit from
a low base, far outpacing premium growth in
the world as a whole. For instance, between
2005 and 2009, the compound average
growth rate (CAGR) for premiums in the
GCC rose by just over 20 per cent,
compared with a global average of 4.3 per
cent in the same period.
This includes a 30 per cent CAGR for
premiums in Saudi Arabia and 26.4 per cent
and 25 per cent in the UAE and Qatar
respectively
And a set to continue rising
Historical trends elsewhere highlight that captive insurance grows in parallel with the development of the
insurance market as a whole. As the Middle East insurance sector matures and penetration rates increase,
so too is the expectation that interest in captives will gather pace.
Growth in the insurance sector as a whole is a function of economic and population growth. With a young
population, high oil prices and booming economies, the GCC is expected to continue its run of high
population and economic growth over the coming half decade. As the population and economies grow, so will
insurance premiums.
And are set to continue rising
Dubai-based investment bank
Alpen Capital forecasts that total
GCC premiums will rise to
close to $37bn in 2015 from $18bn
in 2011, a 20 per cent CAGR over
a five-year period, with non-life
insurance comprising 86 per cent
of the premium total.
Insurance penetration and density
levels are projected to increase
accordingly, with nonlife
penetration anticipated to grow to
1.8 per cent in 2015 from 1.12 per
cent in 2011 and non-life density
rising to $690 from $378 over the
same period.
Infrastructure development is also key
The GCC projects market is
worth more than $1.8 trillion.
In many cases, contractors
and project sponsors in the
region are paying premiums
based on global risk profiles
rather than those specific to the
Middle East. Given the region’s
lower catastrophe, litigation risk
profile and generally lower
construction-related risks,
companies are paying excessive
premiums.
If we look at the companies to
have established captives in the
region, they all have a link to the
projects market. And as the
projects market keeps growing
so too will the incentive to look at
captive structures.
Solvency II
Adopted by the European
Parliament in
2009 after the global
financial crisis, Solvency II
is aimed at strengthening
the solvency and capital
requirements among
insurance firms in the EU.
As a result of the new
requirements, many
captives currently domiciled
in the EU could be
negatively impacted by the
new legislation.
Captives based in Scandinavia, Malta, Luxembourg and Ireland face having to increase their
statutory capital requirements by between 200-500 per cent. Across all impacted domiciles, the
average statutory increase required will be 370 per cent, according to Marsh.
As a result many could be tempted to redomicile to the GCC.
Financial interest cover offers new potential
Other projects and expenditure have yet to be defined. More is likely to be clearer
later in the year.
Especially for large multinationals
Takaful growth
Gross Takaful contributions in the
GCC grew by a CAGR of 45 per
cent between 2005 and 2008, and
by 31 per cent in 2009 alone.
Saudi Arabia is by far the
dominant market in the Takaful
space in the region.
This trend is expected to continue
into 2011, with the GCC forecast
to grow by 31 per cent, with gross
Takaful contributions from the
GCC rising to $8.3bn.
Having proved itself effective, the
continuing development and
increasing popularity of shariacompliant insurance solutions
could act as a catalyst for the
establishment of the region’s first
self-Takaful.
Quantifying the market potential
The compatibility of captive
insurance with all kinds and
sizes of company combined
with an absence of data mean it
is not possible to precisely
quantify the potential for captive
insurance take-up in the region.
But if we take companies by
annual revenue, there are more
than 140 companies with
annual revenues of more than
$500m (and thus implied
annual premiums of at least
$1m).
Quantifying the market potential
If we quantify the market by
number of employees, then
we can see that there at least
250 companies with more
than 5,000 staff, the majority
of them being in the
construction industry.
Conclusion
There are a number of factors that point to a pick-up in the captive insurance
industry in the region
Companies are becoming increasingly aware of the benefits captives can bring as
the market grows in sophistication in light of increasing premiums and the
increasingly multinational nature of regional firms
At the same time domiciles are becoming more receptive to local needs and are
aligning their rules and regulations to meet those requirements
While the growing infrastructure market and issues such as Solvency II will also act
as independent stimuli for captive pick-up
We are still some way off having a critical mass, but interest is growing year-by-year
and the examples set by Dubai Holding, Mubadala and the Global Star PCC will act
as catalysts for accelerated growth.
Over the next 10 years, captive insurance could well become the norm rather than
the exception.
MEED Insight
Thank You
MEED Insight is the research and analysis arm of the MEED group, providing
off-the-shelf reports and bespoke services to customers. It offers tailored
research on a broad range of countries and sectors in the Middle East on
issues such as market sizing and outlook, project overviews and competitor
analysis.
For more information, please contact:
Edward James, Head of MEED Insight, [email protected] or
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