Perhaps more importantly from a political perspective governments would also like to see those local companies work harder to raise levels of awareness of the value of personal insurance to consumers and increase insurance penetration levels.

But there is a reluctance in the fast-growing parts of the GCC such as Qatar at least to resort to enforced retention to generate a healthier local market and prevent the international markets hiving off all the premium. 

Perhaps the sheer pace of the growth in infrastructure projects in places like Qatar means that they simply cannot risk starving local companies and government-backed schemes of the risk capital they need to maintain growth.  

Yasser Albaharna, CEO of leading regional reinsurer Arig, told delegates at the MultaQa conference that was organised by Global Re magazine in partnership with the Qatar Financial Centre (QFC), that he reckons that the GCC insurance market only retains about 50% of its risk overall. 

“We studied net retention rates and it differs by line of business. Motor has a low reinsurance cession rate but it really varies whether it’s property, energy or aviation for which the cession is as high as 96–98%. Energy, whether onshore or offshore, is more than 75%. Motor is 25% maximum, property about 40% and so for the GCC as a whole the average cession rate is about 50%,” he said.

Arig itself is primarily an excess capacity provider and so has a higher retention rate than most in the market. “It does not make sense to trade dollars,” said Mr Albaharna.

He said that reinsurers exist to take volatility and so are particularly active in the capital intensive lines such as energy and aviation. He added that some local insurers and primary buyers naturally take advantage of market conditions because the capacity is simply available at a ‘reasonable’ price. “Overall I would say that property retention is not too low but more could be retained,” he said.

Asked whether he believes there is a lack of confidence in local underwriting standards that helps explain the tendency to transfer the risks Mr Albaharna said he did not believe that this is the key driver. Rather, he said, it is more likely that a basic lack of appreciation of the ‘spectrum of risks’ and opportunistic reinsurance buying is at the root of the problem.

“Now there is more responsibility given to ERM committees that set boundaries and risk appetites. Also don’t forget that for many insurers it is back to basics and time to make a profit on the underwriting side. So I don’t think we have managers who do not understand insurance. But again you do still find abundant reinsurance capacity and you can get general commission out of this and reduce your retention and risk. So it is an opportunistic approach,” said the Arig CEO.

As with most at the conference Mr Albaharna did not sound too keen on the idea of enforced retentions when asked whether the credit rating agencies could spark such a move and feels it should be left to the market to decide strategy.

“The credit rating agencies do not really tell companies what to do. They do not set the retention level. The regulators are more interested in financial stability and are responsible more to the policyholders than the shareholders and so the retention level is left to the board. In my humble opinion we need more board responsibility to define the boundaries,” he said.

One delegate commented from the floor that he does not feel it is the role of regulators or politicians to tell companies how much risk to retain. “All risk has a price and it’s the job of the reinsurer to design a programme that helps to fit the risk appetite of the customer and the reinsurer,” he said.

But another asked whether the regulator should stop insurance companies acting as brokers and perhaps restrict the amount of reinsurance bought.

Mr Albaharna was clear in his response. “Why do so? The main job of the regulator is to protect the interests of the policyholder. This is a free market,” he said.

Emmanuel Clarke, President and CEO of PartnerRe Global, confirmed that the global reinsurers like the GCC region because of the perceived lack of catastrophic risk. 

“This is a very dynamic market because of the large infrastructure projects, and increased insurance penetration and this trend is expected to continue. Local capacity is available and most risk can be placed in this market before it goes to London and other international markets. But over 50% of business is ceded to reinsurers because it is perceived as a low cat zone,” he said. 

Mr Clarke said that it should come as no surprise that the Middle East is attractive to the international insurance and reinsurance market as it seeks to maintain growth against depressed core market conditions in Europe and the US.

“The GCC actually has a higher premium spend per capita than the BRIC countries. You have big sources of premium such as refineries and the large infrastructure projects which deliver ceded premium of about $5bn. Growth in premium in the industrialised markets is not likely to continue, the most dynamic markets will provide the growth such as here,” he said, and this was confirmed later by the presentation given by Robert Hartwig, President of the Insurance Information Institute.

But Mr Clarke reminded delegates that the GCC market is not without its challenges and boards should not expect an easy ride.

“The challenges are that this is a competitive area, rates are considerably below where they should be. Why? First the losses are not bad but the risks are growing. Second it’s strategically attractive and so has seen an inflow of capacity and so the simple laws of supply and demand ensure that rates are kept low. The regional market is small and the mid–sized insurers are acting as traders rather than retaining risks. I believe that consolidation will take place,” he said.

During a press conference hosted by the QFC, one journalist asked if there is a chance of the creation of a new Qatari reinsurer to help raise local retention levels.

Shashank Srivastava, Acting CEO and Chief Strategic Development Officer, responded: “The strategic goal is to increase retention levels, yes. In terms of the model or structure of the market there needs to be further discussion. There is no predisposition towards an entity, this is very much open and time will tell. We would like to see underwriting stay here.”

Kai-Uwe Schanz, Chairman and Principal Partner of Dr. Schanz, Alms & Company and host for the conference, said that the first step is to attract the right talent to the market including underwriters, actuaries and lawyers. From this would emerge a ‘natural evolution’, he said.

Akshay Randeva, Director of Strategic Development at the QFC, pointed out that, as the underlying economy of Qatar matures, so will the insurance market. “As everything develops insurance follows the growth of the economy very closely as business demands it. We are happy to have the large international firms here,” he said.

CRE asked if it would be wise to force retention by regulation and Mr Srivastava did not rule it out. But he did not sound too keen on the idea. “That is one option,” he responded bluntly. And Dr Schanz said that such a move could prove difficult as Qatar attempts to establish itself as a serious international business centre that needs to abide by international rules such as World Trade Organisation (WTO) agreements.

Mr Srivastava added: “Saudi Arabia has a 30% compulsory retention rate and India has similar rules. But I am not sure if this approach actually leads to growth of local reinsurance markets or whether capacity just dries up. I think it’s a mixed bag. We want to develop a healthy insurance and reinsurance market in Qatar and to do this you need all parts of the value chain and one part of this is the international market. Qatar is not really currently a broker-driven market but it is beginning to happen. The population of Qatar has doubled in the last five to six years but is still relatively small. We want to have a large retail base but at the moment the premium is still dominated by the large infrastructure projects and the focus is on reinsurance.”

And to underline the evolutionary theme Mr Randeva added that local retention levels are gradually rising naturally, albeit from a low base.

During the panel debate on the first day of the conference Walid Sidani, CEO of Abu Dhabi International Insurance Company (Adnic), said that his company at least is striving to constantly increase its risk appetite and does not support regulatory intervention.

“We started on the journey 40 years ago with 38% retention and now we are up to 55% and aiming for 61% in the next few years. I believe that this is a journey that companies should take to self-improvement not by regulation. The regulators should not tell the industry what their risk appetite should be and how to use their capital. But too much is currently ceded,” he said.

Michael Gertsch, CEO of Gulf Re, the reinsurer created in 2008 and jointly backed by Gulf Investment Corporation in Kuwait and Arch Capital in Bermuda, suggested, however, that the market may actually force insurers to rethink their ceding policies.

“We provide balance sheet protection and in this region the trend is very little risk retained and the underwriting business is transferred. It is too dependent upon reinsurance and is vulnerable because the reinsurance and retrocession markets are currently disconnected and retrocession is becoming more expensive and therefore it is becoming more expensive at the reinsurance level,” he pointed out.

Mr Sidani argued, however, that the state of the investment market may force insurers to stick to their strategies: “In the UAE about 65% of the net profit is traditionally from investment income and in the current environment it is simply a question of survival. One cannot expect shrinking investment income to be accounted for by higher risk retention,” he said.

Lukas Mueller, Director – Head Market Underwriter, Middle East and Africa Division, Swiss Re, said that it is important that local insurance companies are true risk carriers to help develop a stable market environment. “Currently many companies are generating commissions by fronting and taking minimal net retentions and this is no way forward. It is not a question of whether the limit should be 5% or 10% but the direction must be upwards,” he said.

But so long as reinsurance remains cheap it will be difficult to change the market.

Farid Chedid, CEO of SEIB Insurance Company, the Qatar-based insurance and reinsurance company, said that the reliance on reinsurance is a fact and pointed out that it always ‘takes two to tango’. That is high quantities of cheap reinsurance make it easy for the local insurers to take the easy route.

“The fact is that for every reinsurer that has withdrawn from this market there are four or five new ones that have arrived to take its place and this is the main problem. Whether the market retention rate is 50% or 60% it’s an arbitrage question. The company has to decide whether it’s better to expose the capital or rely on reinsurance and as long as reinsurance is cheap and readily available the fact is it is not going to change,” he said.

Andreas Pollmann, Head MENA at Munich Re, agreed with Mr Sidani that the investment environment is challenging for all insurers currently and said the focus has to be firmly on underwriting profit and sensible risk-taking. “We expect companies to have their own business and generate a profit from it. The reliance on investment income has gone and so there are increased expectations placed on the core business. But the question is: How fast will companies be able to do this?” he asked.

Mr Chedid added that reliance on reinsurance to transfer losses is not correct. “Some companies do and others see reinsurance companies as strategic partners for the next 20 years. If you are just looking to transfer losses then it won’t last,” he pointed out.

And Mr Sidani added that the idea that insurers are boxed into a corner by the current market conditions is simply not correct, particularly as the underlying GCC insurance market has good growth potential. “This is not mutually exclusive. We decided to grow top and bottom line. It is challenging yes but the level of insurance penetration has to rise and so you have to find new customers to achieve this,” he said.

Mr Pollmann at Munich Re agreed that the growth potential does overshadow some of the negative aspects discussed. “The MENA region has vast potential. By 2030 it will have a population of 500 million and that is 500 million potential insurance buyers. This simple fact attracts insurers and reinsurers. But profits are very top of the list. How to make sure that these 500 million customers benefit from insurance is one of the biggest challenges and opportunities for the industry,” he said.

Mr Mueller at Swiss Re said that overall reinsurers are still making a profit but that the margins are ‘exceptionally thin’. He said that many companies have grown substantially but added that in many cases premium rates are down and the risk values are up. This means that companies have made less profit for taking on more risk.

“Many Middle Eastern countries are not exposed to natural catastrophes whereas around the world of course there have been many catastrophes which have seen treaties fully exhausted. This has led to price increases of 15–50% in some areas. The rising risk exposures also means that reinsurers have to be very selective but the business remains volatile. You have to be very careful when looking at profitability,” he said.

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