started looking through to who writes what, they will also be interested in who gets paid what. That should eventually create a situation where prices start to firm, because prices have been extremely cheap in the region. But if people start to move towards higher-grade paper and not make their money out of commissions, then logically it’s going to have to go back to return on capital, which is where everybody else is.
AHMED RAJAB: The local markets have found a business model that is basically giving the right return on equity that their shareholders are asking for. And this business model takes care of the fact that their portfolio is highly unbalanced. You have a lot of mega risks. These bring years when the loss ratio on the property side for a single company can be in the region of 20 to 25 percent and other years when it would hit 300 percent, just because they do not have enough small and medium-sized risks. So they have found a business model where they pass most of these large risks to reinsurers, which helps them find the right balance. And if there are no small and medium-sized risks to compensate large losses, then the business model they have created, I believe, will continue, whether they are taking 25 percent, 35 percent or 45 percent commission.
TREVOR OATES: Historically, local insurance companies had limited capital so used pro rata reinsurance as a substitute for capital. From a pro rata reinsurance perspective, one needs to get as much spread and volume across the region as possible to tackle the hourglass shape of most of the profiles. There’s almost been too much emphasis from reinsurers on keeping the business volume rather than dealing with the individual specifics within those treaties. The end result is very low local retentions and a very high amount ceded to international carriers with a relatively high amount of commission. But because of a low loss ratio, reinsurers flatten the spike out of the big hit when it comes with that premium volume. In truth, there is no incentive for the local companies if they can continue to get the product on that basis.
NICK CHARTERIS-BLACK: We will ‘penalise’ them for their dependence on reinsurers on both a quantitative and qualitative basis. So if they seek a better rating, it might be a factor that would drive more local retention.
TIM GRIFFIN: Most people say the rates are cheap, but then most people seem to be making money out of it. I’d be interested to know what the loss ratio is on the $300 million worth of business written from the region into Lloyd’s. Is it cheap if you compare it to the exact same wording on a London risk in a different region? It’s only cheap if the claims end up outstripping the premium. Maybe there’s a different claims culture, so it doesn’t have to be so expensive.
HELEN YATES: Does it affect pricing that the Middle East generally has very low catastrophe exposures?
CHRISTOPHER PLEASANT: I’m sure that does hold pricing down. It’s because so many of these companies have unbalanced accounts that they can take the security from the major European reinsurers and Lloyd’s on a proportional basis and can guarantee a profit. It is almost impossible for them to make a loss other than in exceptional years. But we’ve seen the first
12 | INTELLIGENT INSURER | Middle East Report 2010
company take a deliberate step away from that and to move towards excess of loss (XL), but it still only works for the largest companies, and that’s to do with the size of the portfolios and the spread of risk.
NICK CHARTERIS-BLACK: Presumably, it makes it attractive to all the international reinsurers who are desperate to diversify away from their US business. And anything that is non-cat and non-US becomes very attractive.
CHRISTOPHER PLEASANT: Certainly, there are almost monthly enquiries from companies thinking about going into the Middle East. Some of that is the grass is always greener in territories where you are not currently trading, but I think they see the development prospects in the Middle East, the fact that it’s diversifying within their portfolio and the fact that there is low litigiousness with liability risks.
HELEN YATES: How important is it to have a presence on the ground, and does it matter which centre you choose?
AHMED RAJAB: For the underwriters, it is very important to be near the risks they are underwriting and to have a better assessment of the market, and for the broking side, it is equally important because the market is there and reinsurers are being set up. We are placing less and less business in London and Bermuda, and are using the local markets more and more.
TIM GRIFFIN: If you’re there and the local broker sees you, they’re going to think of you when they want to place a risk. We’ve not been very long in Bahrain, but that’s already starting to happen. From our perspective, it was probably more important to have a local partner—that’s going to be more beneficial than just having somebody on the ground. And you could have somebody sitting in an office in Bahrain, but it’s not going to do you a great deal of good unless you’re on the road quite a lot or on the plane going to Qatar, Abu Dhabi and Saudi Arabia, and travelling in the region to see the brokers, clients and different ceding companies.
AHMED RAJAB: Which centre you choose really depends on the size of the operation—whether you are trying to write medium and large risks or if you’re operating personal line products. The local legislation is also very important and, of course, so is the presence of a workforce.
NICK CHARTERIS-BLACK: Or if it’s attractive enough to expats out there.
AHMED RAJAB: Companies operating in the Middle East are using fewer expats, or expats not necessarily from Europe.
CHRISTOPHER PLEASANT: All three of the main contenders have different aspects to offer. Dubai has been at it for longer, has more infrastructure and is still seen by quite a lot of people as being the main hub. But Qatar and Bahrain have their attractive features as well. Qatar is now developing this electronic trading platform, which means you won’t need to be there, which is slightly counter-intuitive.
AHMED RAJAB: In the DIFC today, you have about 32 insurance companies and brokers registered, and in Qatar about 16 and in Bahrain around 59—so people are already there.
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