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DUBAI — The insurance market in the Middle East and North Africa could grow significantly if the necessary frameworks and initiatives are put in place to promote this growth, according to a new study conducted by Booz Allen Hamilton in conjunction with the World Economic Forum.
The study concludes that the potential for growth is enormous, if the industry receives the necessary support from regulators, policymakers, and other industry participants. In Malaysia, for example, the life insurance market generated premiums of $4.8 billion in 2005 — more than three times those in the entire MENA region. By looking at five key enablers of growth in the insurance industry, the study identified substantive gaps that must be addressed. The first concerns the legal and regulatory frameworks. The report notes that across the MENA region the markets vary widely in their maturity and advocates that where the insurance market is underdeveloped and legal frameworks are weak, they should be upgraded to "reflect international best practices, such as the principles of the International Association of Insurance Supervisors (IAIS)."
The study also calls for the establishment of a specialised insurance judicial authority to resolve insurance disputes as well as the legal framework to support takaful (Shariah-compliant) insurance.
The comprehensiveness and effectiveness of regulatory processes, especially supervisory processes, is another challenge, states the report. While Bahrain and Jordan have significantly upgraded their regulatory processes, Qatar, Kuwait and the UAE, are less developed, for example.
Maher Hammoud, senior associate, Booz Allen Hamilton says: "The empowerment of the regulatory body should be constituted in the legal framework, which should address the body's legal form, ensure its independence, vest appropriate authorities, and clarify any overlapping responsibilities with other governmental entities." Regulators are also encouraged to enhance their capabilities, especially in the area of supervision, including staff and IT.
The second issue is the lack of competition, which hinders the industry's development. The study says the ramifications of the current low levels of capitalisation results either in insurance being placed directly outside the region through international brokers or in the practice of fronting. This means that local insurers retain a small portion of the risk and transfer the remaining risk to their international reinsurance partners.
The lack of capacity also means that risk management and actuarial capabilities remain underdeveloped, "resulting in a disproportionate reliance on international reinsurers to assess the risks and provide appropriate pricing guidelines," said Booz Allen's vice-president Peter Vayanos.
The study recommends that in highly fragmented markets, regulators should investigate the option of increasing capital requirements to stimulate market consolidation and increase the level of risk-retention capacity. This in turn would result in larger local companies with the resources to invest in capabilities, and would also reduce the level of fronting, the study states.
Across the region, Tthe insurance sector also faces a skills shortage, particularly in product development, underwriting, and actuarial skills. Booz Allen therefore stresses the importance of policymakers and regulators promoting and supporting education and training in this sector as well as companies and individuals engaging in it. As the growth of takaful continues to rise, specific training and educational programmes to promote this kind of insurance will become increasingly important.
In the UAE, the insurance sector is estimated to be growing at about 20 per cent per annum, according to some forecasts. The main drivers of growth, said Vayonos, include an explosion in the uptake of private health insurance as it becomes mandatory and the growth in asset-backed products such as homes and cars |
