Kane Chronicles (Comment): Building momentum in the Middle East

Shaun Brook

Building momentum in the Middle East

2012 is set to be an important year for the development of the Middle East captive insurance market, explains Shaun Brook

Kane has built a strong presence in the Middle East. What were the initial reasons for entering the region?

We saw significant opportunity given the strong growth in assets and investment in infrastructure that had been witnessed in the Middle East. While insurance penetration was still relatively low, we were also seeing a rise in the awareness of insurance as a mechanism for risk transfer. Given the associated increase in insurable risk, we therefore viewed the region as primed to benefit from the introduction of self insurance – particularly given the fact that many organisations were already retaining significant risks on their balance sheet.

Government legislation was also serving to raise the profile of insurance in the region. For example, in a number of regions in the Middle East compulsory healthcare insurance had been introduced, forcing the issue onto the corporate agenda.

We therefore established our first operation in 2008, when we opened our office in Bahrain. This was quickly followed by operations in Dubai in 2009 and Qatar in 2010. Our strategy was always based around building a multi-domicile platform in the region. Furthermore, we sought to bring together a team of insurance professionals which encompassed both local market understanding and international expertise.

Is 2012 the year when we’re going to see the Middle East captive market take-off? Can you tell us what is in the pipeline?

In our view, we would expect to see strong captive activity over the next 12 months. However, it wouldn’t be fair to say that 2012 will be a 'defining year' – it is our opinion that it will take up to three more years for the sector to really take off.

The building blocks are most definitely in place and given the fact that the region is one of the few growth economies in today's recession-dominated world it is only a matter of time before the Middle East establishes a strong presence in the captive arena. However, we have to acknowledge that this will not happen overnight. So I think we've got to be realistic and say that the next three years are going to be the defining period.

In terms of what's in the pipeline for 2012, we are currently conducting a series of feasibility studies and our goal is to establish a number of PCCs over the next 12 months. There will be some self-retained medical schemes set up in response to the compulsory healthcare insurance legislation that I mentioned earlier. We are also seeing strong interest from some of the larger family businesses in the region in setting up captives to retain their risks, while some energy companies are looking into the benefits of redomiciling existing captives or setting up a second or third captive in the Middle East to look after their local risks.

How would you say the market in the Middle East is now developing?

One development we are now seeing is that reinsurers are looking for more direct relationships with the major accounts in the region. They are encouraging insureds to take greater responsibility for their risk management strategies and wanting to see evidence of a greater willingness on the part of these organisations to work in partnership with the re/insurance market.

A key factor therefore that is driving a more proactive approach to risk management is this move by reinsurers to select only the better quality risks in the region. This is clearly demonstrating to corporates the value of effective risk management and they are taking this on board. As this risk management momentum builds, organisations will find themselves in a stronger position to push for more favourable terms, and a better and wider scope of cover, and be able to negotiate more on a facultative basis than a treaty basis. So it will be the corporates themselves that will be in a position to dictate how the market develops moving forward.

A further driver is the education of the next generation of business owners. As this generation start to take the reins of family businesses they are bringing with them new approaches to the overall management of the organisation that are based on different values than those espoused by previous generations.

Another point I would make is that, while the recession has had a relatively limited financial impact on the Middle East, the downturn has served to focus the mind of corporates on how they run their particular business. Furthermore, where companies are taking on further equity, shareholders are demanding a better understanding of the company's governance structure.

How well understood is the captive concept in the market and how is that developing?

The general concept of self retention is very well understood. For a long time, companies in the Middle East have retained the majority of their risks. However, most of these risks have not been effectively ring-fenced, measured or priced. It is only relatively recently that organisations have become aware of the benefits afforded by taking greater control of these risks through the use of a captive structure.

Since our entry into the region, one of our primary aims has been to demonstrate the advantages of placing these risks into a captive, rather than simply being retained on the balance sheet. As a result of these efforts, there is now much greater awareness of the risk management, insurance coverage and financial benefits that such a vehicle can generate.

At the same time we have been building relationships with organisations in the Middle East and gaining a complete understanding of their risk profile so that we are ideally positioned to provide them with tailored risk transfer solutions.

Strong economic growth is predicted in many GCC countries at a time when many Western economies are stagnating. How do you envisage these dynamics influencing the composition of the global captive market?

While I do not expect to see the Middle East competing with some of the more mature US domiciles, particularly due to time zone differences, I would say that for global companies moving their risks further East, the region will become an increasingly attractive domicile given its central location. Its appeal will grow for those organisations with operations in markets such as India and China.

Looking at Middle East corporations, a number of these already have captives in other domiciles. But as the captive legislation in the region matures so we will see those risk managers overseeing risk in the MENA region increasingly considering the Middle East as a suitable domicile for the management of that risk. So rather than having a central risk management function in the US or Guernsey, they are considering retaining some of their risks locally.

With many anticipating that Solvency II will result in changes to collateral requirements for captives in Europe, do you think this will serve to promote the benefits of domiciling or re-domiciling in the Middle East?

There is a possibility that, from a regulatory arbitrage perspective, Solvency II might result in more organisations considering the Middle East as a captive domicile. European companies may look for alternative domiciles if things simply become too difficult under Solvency II. However, at this stage there is still much uncertainty as to the impact of the directive on the captive sector, so this is very much a watching brief.

Shaun Brook, Managing Director, Europe and the Middle East
Email: shaun.brook@kane-group.com