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The GCC captive insurance industry Edmund O’Sullivan, Chairman, MEED Events. MEED Insight/QFCA seminar, Riyadh, 26 February, 2012 . Captives have become increasingly common. Majority of world’s largest listed companies have captive subsidiaries.

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the gcc captive insurance industry edmund o sullivan chairman meed events

The GCC captive insurance industryEdmund O’Sullivan, Chairman, MEED Events

MEED Insight/QFCA seminar, Riyadh, 26 February, 2012

captives have become increasingly common
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.


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
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
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
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
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
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
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
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
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
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
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.

takaful growth
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 sharia-compliant insurance solutions could act as a catalyst for the establishment of the region’s first self-Takaful.

quantifying the market potential
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.


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
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, or +9714 367 1231