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Growth Prospects for Insurance Companies Remain Promising in the Middle East

Posted on May 03, 2013 by Sergio Ulloa ()  | Tags: Health Insurance, insurance comapnies, Middle East, middle east insurance, uae medical insurance

In many ways, the Middle East has become, and is becoming, one of the most exciting regions for economic and financial development.

Dubai is in position to not only have the world's largest Ferris Wheel but also the world's largest mall. In addition to large commercial attractions, Qatar will also be hosting the 2022 World Cup, another feather in the hat for the region that has seen marked instability during the last few years. However, one of the biggest indicators that show the region is in prime position for substantial growth can be found within the insurance industry, particularly in the health insurance sector.

Many analysts anticipate that in the Middle East's Gulf Cooperation Council, also known as the GCC, the insurance industry will see growth of about 20% every year until about 2017. These estimates are based on a new series of mandatory insurances in both the health and motor sectors. Yet as the region's economy continues to expand and investment increases, there will be a need for more comprehensive coverage options.

In the area of medical insurance, there has already been an increasing number of compulsory schemes in countries where economic development has been more rapid, such as Abu Dhabi, the United Arab Emirates and Saudi Arabia. In addition, the Qatari government will soon carry out a plan that would provide medical coverage for all Qatari nationals, and other countries in the region are also working on schemes to improve their healthcare programs. These developments are not only making headlines, but also attracting many of the world's top international health insurance providers, including AXA, Bupa, Aetna, Munich Re and Cigna.

As more projects continue to develop in the region, there has been an increasing number of disputes and a stronger requirement for financial regulators to make sure that investors and developers are adhering to cooperate governance. In light of this, the need for more specialized coverage options has been elevated, allowing some of the industry's largest international players to penetrate the market.

All these factors combined have made the GCC countries attractive for investment opportunities in the insurance industry and for consolidation within the local market. However, despite the growth factors mentioned above, the amount of deals aiding in the consolidation of the local market have not matched investments. Many of the reasons for this are due to the regulatory and legal issues present in the region, which can often make more standard mergers and acquisitions very challenging.

One example of such challenges refers to the UAE insurance market. For the last five years, the UAE has had in place a moratorium on companies and organizations entering the insurance market, affecting both new companies or new branches. Despite the establishment of the new Federal UAE Insurance Authority Board, the moratorium is still in effect.

In addition, the UAE is rare in that they require insurance companies to be listed publicly. Some international health insurers have been able to  overcome the moratorium and develop in the region by merging with a local, established company that already have a number of branches in the country. However, this method can be very challenging and mergers are not always successful for insurers.

Another barrier preventing foreign investment could be the fact that the regulations differ from country to country within the Middle East. At present, there is nothing in place that would authorize an insurance company to operate in all of the GCC nations; each of these countries have different requirements and have different methods of authorizing companies. Furthermore, foreign ownership can even be completely restricted.For example, in most areas in the UAE, excluding the Dubai International Financial Centre, insurance companies are only allowed to have up to 25% foreign ownership, while non-insurance related companies are allowed up to 49% foreign ownership.

Such rules and regulations are important for setting precedents in the region and are important when considering coverage across all of the GCC.  As the regulations currently stand, risks that occur in a GCC country are only able to be covered by a primary insurer that has the proper licensing to be doing business in that country. Yet as individual countries see more and more localized laws and regulations, insurance companies are likely to see increasing issues when offering international policies to multinational companies that require different policies for their employees in the Middle East.

Insurance companies wishing to expand their operations across the Middle East are likely to run into a number of legal issues. While choosing one country to centralize their business could be a solution for insurance companies, outsourcing policies across the different countries within the region could still be a challenge.

Given the roadblocks that exist in the region regarding rules and regulatory issues, international medical insurance companies have had to be creative with their expansion methods in the Middle East. One such way is to use a 'fronting plus' method. This method is meant to help a global insurance company learn from the experience of a local company. One company that has seen success with this method is Avivia by partnering with NGI, a UAE-based insurance company.

While the rest of the UAE is restricted by the moratorium affecting new companies and the amount of foreign ownership allowed, the Dubai International Finance Centre (exempt from the moratorium) has been somewhat of a hub for insurance companies to start and grow their operations.

Another way that insurance companies are penetrating the market is through joint ventures. There are numerous examples of successful joint ventures, including Munich Health's collaboration with the government in Abu Dhabi to create Daman.

The Middle Eastern market has resembled somewhat of a roller coaster over the last four to five years, from having a strong and growing property market to experiencing signifcant low points during the global economic recession that hit in 2008. Despite the instability that the region has seen, there continues to be strong interest and optimism for growth opportunities in the future.

As the region witnesses more development and investment, many analysts expect that insurance companies will see new opportunities to expand operations and develop policies and products that will meet the needs of companies and their employees, as well as match the individual countries different rules and regulations.

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