Promoting the Growth and Competitiveness of the Insurance Sector in the Arab World

Transcription

1 CHAPTER 2.4 Promoting the Growth and Competitiveness of the Insurance Sector in the Arab World PETER VAYANOS, Booz Allen Hamilton, Beirut MAHER HAMMOUD, Booz Allen Hamilton, Beirut Insurance is one of the cornerstones of the modern-day financial services sector. In addition to its traditional role of managing risk, the insurance sector promotes longterm savings and serves as a conduit to channel funds from policyholders to investment opportunities, including mortgage lending. As such, a thriving insurance sector is not only evidence of an efficient financial services sector, but it is also a key enabler of a healthy economy. Insurance in the Middle East and North Africa (MENA) region has traditionally lagged in growth and development relative to other elements of the region s financial services sector.this is evidenced by the low level of demand as measured by penetration and density levels, undercapitalized supply, and generally underdeveloped legal and regulatory environments. This paper outlines a set of policy recommendations to be adopted to promote the growth and competitiveness of the insurance sector in the MENA region.we begin by reviewing and assessing the existing state of the insurance sector across the region.thereafter, we examine the key enablers that underpin a successful insurance sector before recommending policy changes to promote the growth and competitiveness of the MENA insurance sector. Review and assessment The locally admitted insurance market of the MENA region is small and underdeveloped. According to the Swiss Re Sigma report and other publicly available information, the total gross premium income of the MENA region amounted to around US$9 billion in 2005.This compares with US$47 billion for the countries of Middle and Eastern Europe, and US$1,177 billion for the initial 15 countries of the European Union (EU). In terms of share of the world market, the MENA region accounted for roughly 0.26 percent in Figure 1 compares the size of the insurance markets of major regions of the world. A measure of the development of an insurance sector is insurance penetration, defined as gross premium income (GPI) as a percentage of gross domestic product (GDP).When comparing the MENA region with other regions of the world, this measure reveals the extent to which the MENA market is underdeveloped. In 2005, the level of insurance penetration in the MENA region was approximately 1 percent, compared with an average of 6 to 9 percent in industrialized countries and 2.5 to 4 percent in emerging markets. Figure 2 compares GPI as a percentage of GDP for major regions of the world. To better understand the insurance sector of the MENA region, we assessed the existing state of the market from a demand-and-supply perspective.this assessment revealed a number of findings that are unique to the region. Although there are differences between countries, these findings are present to a greater or lesser degree in each of the countries of the region. 97

2 Figure 1: Gross premium income by region, 2005 (US$ billion) 1,222 1,241 1,177 North America Western Europe EU15 Central and Eastern Europe 47 9 Middle East and North Africa Source: Swiss Re, 2006b; Bahrain Monetary Agency, 2006j. 98 Figure 2: Gross premium income as a percentage of GDP (2005) 8.97% 8.64% 8.44% 2.66% 1.05% North America EU15 Western Europe Central and Eastern Europe Middle East and North Africa Source: Swiss Re, 2006b; Bahrain Monetary Agency, 2006j.

3 Figure 3: Gross premium income of MENA countries (US$ billions) CAGR (percent) 11.1 Saudi Arabia 19.6 United Arab Emirates 18.1 Kuwait 16.2 Qatar* 12.4 Oman 12.6 Bahrain 7.1 Lebanon 16.0 Jordan 5.5 Egypt Morocco Tunisia Algeria Source: Swiss Re, 2006b; Booz Allen Hamilton analysis. * Qatar CAGR (compound annual growth rate) is for , as 2000 data are not available. 99 The market is growing and has significant potential for future growth The markets of the MENA region, albeit small, are undergoing rapid growth. Many countries in the region experienced double-digit growth between 2004 and Furthermore, this growth has not been limited to the most recent years: between 2000 and 2005, the insurance market in the MENA region grew at a compounded annual growth rate of 12.5 percent. Figure 3 illustrates the size of the market by country for 2004 and 2005, and its growth rates between 2000 and Further growth is expected during the foreseeable future, fueled by a combination of factors, including: Macroeconomic growth. Above-average levels of macroeconomic growth will spur the demand for insurance. In particular, many countries in the region, especially the energy-rich countries of the Gulf, are witnessing large investments in infrastructure and growing trade internationally and across the region. Both of these factors will create strong demand for insurance coverage. Emergence of compulsory insurance classes. The recent introduction of compulsory insurance classes, principally automotive and health insurance, in many countries of the region will drive the demand for insurance on the retail side and make these the largest classes of insurance in the marketplace. By way of example, we estimate that in Saudi Arabia, by 2009, the combined health and automotive market could represent up to 75 percent of the total insurance market of around US$4 billion. Privatization and restructuring of government pensions. Government privatization programs will serve as a catalyst for the development of the insurance sector, since entities that were formerly selfinsured will now require insurance coverage. In the future, the expected restructuring of state pension funds and the reduced role of the state in providing pensions will also lead to rising demand for life insurance and long-term savings products. Growth of financial services. The growth in asset-based financing, such as housing and auto loans, will lead to an increase in the demand for insurance products to mitigate the risks associated with the underlying assets. From a slightly different perspective, the emergence of the capital markets has provided an alternative source of investments for insurance companies. Although the emergence of the capital markets will not in itself drive demand for insurance, the maturing of these markets will provide opportunities for insurance companies to diversify the sources of their investment income.

4 Figure 4: Insurance penetration by country (2005) Insurance penetration (percent) 15 United Kingdom 10 United States Germany Malaysia 5 Spain Lebanon Bahrain Morocco Jordan Tunisia Qatar United Arab Emirates Kuwait Oman Egypt Saudi Arabia 0 Algeria Small (< 1 billion) Medium (1 10 billion) Large (10 1,000 billion) Premium value (US$ billions) Source: Swiss Re, 2006b; Booz Allen Hamilton analysis. 100 Demographics of the region. The population of the MENA region is generally very young. As the population matures, the demand for insurance products will increase. Despite the recent rapid growth of insurance in the region, the market still has significant potential for future growth. As mentioned above, the level of insurance penetration (GPI/GDP) is very low in the region. Figure 4 provides a comparison of the countries of the MENA region with selected other countries and reveals the sector s future growth potential. Another indicator of the potential for future growth is the level of insurance density, measured in terms of GPI per capita. In 2005, the insurance density in the Middle East ranged from US$10 to US$440; this compares with a range of US$40 to US$1,000 in Eastern Europe, US$1,400 to US$5,500 in Western Europe, and US$2,400 to US$2,900 in North America. Figure 5 presents a comparison of insurance density for countries in the MENA region against selected other countries. Life insurance is significantly underdeveloped Life insurance has historically had limited take-up in the region, resulting in an average level of insurance penetration for life insurance in 2005 of around 0.3 percent versus 1.4 percent for general and health insurance.we believe the reasons for this low level of penetration are: Shari a sensitivity. The purchase of life insurance products is strongly influenced by perceptions of whether or not the products are compliant with shari a. Similar to other conventional financial products, life insurance is perceived to have prohibited elements of uncertainty (gharar), gambling (maiser), and interest income (riba). Uncertainty stems from the notion that the outcome of the insurance contract is not known at the time it is created and varies according to the time of death of the insured. Gambling stems from the notion that the insured may gain large amounts (that is, profit) from the insurance coverage if certain events take place. Interest income stems from the notion that the premiums are invested in non-shari a-compliant, interest-bearing instruments. Lack of awareness of life insurance products. A limited awareness of life insurance and its benefits among the citizens of selected countries in the region has limited the take-up of such products. This is partly driven by cultural factors, such as the reliance on the extended family network, and partly by structural factors, such as the provision of generous benefits by the state in the event of death or disability.

5 Figure 5: Insurance density by country (2005) Insurance density (US$) 4,500 3,000 1,500 Spain United Kingdom United States Germany United Arab Emirates Malaysia Bahrain Qatar Tunisia Kuwait Jordan Lebanon Egypt Saudi Arabia Morocco Algeria Oman 0 15,000 30,000 45,000 GDP per capita Source: Swiss Re, 2006b; Booz Allen Hamilton analysis. Absence of life insurance in related financial services. Until recently, there were few related financial products (such as mortgage lending) that stipulated the purchase of life insurance to settle outstanding obligations in the event of the death or disability of the borrower. Emergence of takaful as an alternative to conventional insurance In response to shari a sensitivity, takaful a form of insurance that complies with the principles of shari a emerged as an alternative to conventional insurance. While there is limited information as to the size and penetration of the takaful market, interviews with market participants and the increase in the number of Islamic insurance companies point to rising demand for takaful. Fragmented supply base with a large number of small competitors, limited presence of foreign insurers From a supply perspective, many markets of the MENA region are characterized by a large number of small players when measured by capital employed. Selected countries (including Egypt, Jordan, and Lebanon) have recently introduced legislation to raise the minimum level of capital. However, average levels remain very low when compared with international standards. There is also a limited presence of foreign insurers in the market in terms of market share. Furthermore, many of the international insurers have a narrow focus, particularly on the life side. Intermediary distribution channels remain informal The role of intermediaries in developing markets is important since they not only increase the distribution of products, but also serve as a means to educate customers about products. Across the region, the level of penetration of brokers and agents varies. In the cases of Lebanon and Saudi Arabia, brokers are very active, especially on the corporate side. In other markets, intermediaries are less active and the business is driven through sales forces tied to companies. The informal conditions under which brokers and agents operate, however, are common across the region. There are a number of reasons for these conditions, including: Absence of regulatory frameworks to govern intermediaries. Until recently most countries in the region did not have a regulatory framework to govern the activities of agents and brokers.this in turn undermines the credibility of companies and individuals acting in this capacity. Lack of qualifications, accreditations, and licensing requirements. The absence of these standards undermines the development of intermediaries since there is no way for customers to independently verify the quality of the agent or broker with whom they are dealing. 101

6 102 Bancassurance, or the sale of insurance products through a bank, is a similarly informal channel. Specific challenges facing bancassurance include ensuring adequate training and incentive schemes for bank staff to sell insurance products, implementing systems to facilitate the processing of policies, addressing regulatory issues such as which regulator (banking or insurance) should oversee bancassurance activities, and determining whether conventional banks are able to distribute takaful products. In summary, our assessment has revealed that the market is underdeveloped on both the demand and supply sides.that said, there is significant potential for future growth. Capitalizing on this potential will require regulators and policymakers to address gaps in the underlying enablers of growth. Evaluation of the enablers of growth The development of an insurance market is a function of the underlying enablers of growth, and the existing state of the market is a reflection of the maturity of these enablers.we believe that there are five types of enablers that shape an insurance market (see Table 1). In order to develop policy recommendations to address the underlying enablers (and consequently promote the growth and development of the market), it is necessary to evaluate the maturity of each of these enablers. Since the state of development of the enablers differs by country, it is necessary to perform this evaluation at the country level. Accordingly, we have reviewed these enablers for nine of the major countries within the MENA region.the results of this evaluation are presented in Appendix A and summarized below. Legal framework At the legal and regulatory levels, there is wide variability in the maturity of the frameworks that govern regional insurance markets. Until recently, almost all MENA countries had outdated insurance laws and regulations; some countries had no insurance law at all. Over the past few years, many countries have initiated serious efforts to upgrade their regulatory frameworks, as evidenced by the enactment of new laws.they have strengthened the independence and supervisory capabilities of regulatory entities in line with the core principles of the International Association of Insurance Supervisors (IAIS); they have also issued sector guidance notes covering, for example, governance, market conduct, and risk management. That said, there still remains a wide variation in the comprehensiveness and application of legal frameworks across the region. At one end of the spectrum, Bahrain has a well-established and applied legal framework for insurance activities. In April 2005, Bahrain issued the Insurance Rulebook, which sets out elaborate licensing and operational regulations for both conventional and takaful insurance. A recent report by the Financial Sector Assessment Program (FSAP), a joint venture between the International Monetary Fund and the World Bank, acknowledged the comprehensiveness of this regulatory framework. 1 At the other end of the spectrum are countries such as Kuwait, Qatar, and the United Arab Emirates (UAE), whose regulations are limited. For example, in the United Arab Emirates, regulations do not require companies to adhere to solvency regulations but rather only meet minimum capital requirements. In the case of Qatar, the law lacks adequate legislation that lays out the rights and obligations of parties entering into insurance contracts. The existence of a robust and comprehensive legal framework is one of the core underpinnings of a healthy insurance market. In addition to building the confidence of local market participants, an established legal framework serves to attract international players and, at a regional level, avoid potential regulatory arbitrage. Regulatory bodies Regulatory bodies operate in tandem with legal frameworks. Not surprisingly, the level of maturity of these bodies is a reflection of the underlying laws and regulations. All the countries surveyed in this study have an insurance regulator, although the form of the regulator varies. In some countries, the insurance sector is supervised by an existing financial services regulator, such as the central bank or capital markets authority. In other countries, the sector is supervised by a government ministry. Our assessment did reveal the existence of more than one regulator with overlapping responsibilities in selected countries, which leads to inconsistent application of the regulations, potential confusion in the marketplace, and unnecessary bureaucracy for market participants. For example, in Saudi Arabia there is an overlap in the area of health insurance between the Council of Cooperative Health Insurance (CCHI) and the Saudi Arabian Monetary Agency (SAMA).This is in addition to existing overlaps between SAMA, the Capital Markets Authority (CMA), and the Ministry of Commerce. Similarly, in Lebanon there appears to be duplication between the activities of the Insurance Control Commission and the Directorate of Insurance Affairs of the Ministry of Economy. The comprehensiveness and effectiveness of regulatory processes, especially supervisory processes, varies considerably across the region. As mentioned above, this is a function of the maturity of the underlying legal and regulatory frameworks. Countries such as Bahrain and Jordan, which have well-developed regulatory frameworks, are either applying or developing risk-based supervision processes that comply with the standards of international bodies such as International Association of Insurance Supervisers (IAIS). Other countries, such as Qatar, Kuwait, and the United Arab Emirates, have less-developed supervisory processes that are more administrative in orientation.

7 Table 1: Insurance market enablers ENABLER ROLE SUPPORTING EVIDENCE Legal framework Regulatory bodies Nature of competition Protect the rights of policyholders, regulate the activities of market participants, and ensure the financial health of the sector Oversee and supervise the sector and ensure the enforcement of laws and regulations Drives innovation, competitive pricing, and the adoption of best practices Existence of an insurance law appropriate to existing market conditions Existence of insurance regulations/ implementing guidelines Existence of an insurance regulator Evidence of regulatory processes being applied Evidence of an insurance judicial authority Evidence of foreign insurers and the extent to which foreign ownership is allowed Extent of private- sector involvement market share of private vs. public insurers Extent to which large, well-capitalized insurers exist Skills and training Assess the risks to be insured Provide customers with the appropriate products/services Ensure the availability and development of local skills Availability of skilled professionals Availability of training programs, training institutes, and accreditations Market-led initiatives Drive self-regulation and the development of the industry at the country and regional levels Existence and application of insurance standards Availability of insurance statistics and market data Existence of professional associations Existence of industry-level programs to create awareness Existence of regional forums 103 Source: Booz Allen Hamilton analysis. The effectiveness of a legal and regulatory framework is directly correlated to the existence of regulatory bodies to enforce the law.within the MENA region, there is a need to upgrade the capabilities of selected regulators to ensure comprehensive and consistent enforcement of regulations. The nature of competition The insurance markets of the Middle East are generally competitive.this can be measured by the extent to which foreign insurers are present in the market, the level of state involvement through government-owned firms, and the extent to which the market is fragmented. Over the past few years, countries in the region have lifted restrictions and/or moratoriums on the operations of foreign insurers. As a result, the markets of these countries are now open to foreign insurance companies, which are present to various degrees throughout the region. However, their share of the local market tends to be small; this circumstance can be traced to previous restrictions on market entry, regulations that require insurers to invest a large proportion of premiums in local markets, and the fact that the individual markets of the region may not have been attractive given their small size.with the lifting of restrictions and expected market growth, the level of activity of foreign insurers is expected to grow significantly. Additionally, foreign insurers in many cases have focused exclusively on the life business.this can be ascribed to the fact that local insurers have been less active in this area due to less-developed capabilities and limited demand from nationals owing to shari a implications. International insurers also benefit from the natural affinity of expatriates who are more inclined to purchase life insurance.

8 104 The insurance sector in the Middle East is characterized by a high degree of private-sector involvement. There are notable exceptions, such as Egypt and, until recently, Saudi Arabia. In the case of Egypt, the stateowned insurers command around 75 percent of the non life insurance market and 60 percent of the life insurance market. However, there are moves afoot to consolidate the activities of the state insurers with a view to ultimately privatizing the resulting entities. Although there is significant involvement of the private sector in the insurance industry, this is offset to some extent by a high degree of market fragmentation. In particular, many markets of the MENA region are characterized by a large number of small players when measured by capital employed. There are a number of ramifications of the current low levels of capitalization. At an overall industry level, this results either in insurance being placed directly outside of the region through international brokers or in the practice of fronting, whereby local insurers retain a small portion of the risk and transfer the remaining risk to their international reinsurance partners. As a consequence of the lack of capacity, risk-management and actuarial capabilities in the region remain underdeveloped, resulting in a disproportionate reliance on international reinsurers to assess the risks and provide appropriate pricing guidelines. At an individual company level, low levels of capitalization limit the resources available to build the required capabilities to serve customers efficiently and effectively. Encouraging the formation of large (but not dominant), well-capitalized insurers is vital to the development of the regional insurance sector, since these companies can invest in the capabilities needed to promote growth. In addition, creating the conditions to attract foreign insurers is important to ensure the transfer of skills and best practices to the region. Skills and training Across the region, the insurance sector is characterized by a shortage of skills particularly product development, underwriting, and actuarial skills.the absence of skills clearly affects the development of the sector, specifically in the areas of product innovation, risk assessment, and pricing.this situation is exacerbated by nationalization requirements in some countries, which extend the time required to train and equip staff for key positions, and the availability of highly attractive positions in other areas of the financial services sector. The generally limited number of training institutes and the absence of international accreditations hampers the development of skills. Again, there is wide variability across the region in terms of training facilities. Bahrain stands out by virtue of the Bahrain Institute of Banking and Finance (BIBF), which offers 20 insurance programs including courses in underwriting, risk management, and information technology that meet the requirements of four internationally recognized professional designations. The shortage of skills and limited training facilities are perhaps the greatest impediments to the development of the insurance sector in the region. Market-led initiatives Market-led initiatives refer to initiatives at an industry level that seek to develop the sector as a whole.this includes market standards and the availability of statistics to enable insurers to improve product development and pricing, the existence of industry associations to foster cooperation between industry players, and the existence of industry programs to create awareness among the population of the concept and benefits of insurance. Although these initiatives occur at the country level, our assessment also covered efforts to improve coordination among individual regulators and players at the pan-regional level. Across the region, there is a lack of reliable market data. In the markets that do collect data, the data are neither comprehensive nor sufficiently granular to provide insurers with the necessary insights to improve product development and pricing. Almost all of the region s markets either have an insurance industry association or are in the process of forming such an association.these associations play an important role in promoting the sector by facilitating cooperation between insurance companies and professionals. On the awareness level, there are limited programs in place in the countries of the MENA region. Bahrain and Jordan appear to be the only countries with formal programs in place to promote such awareness. In the case of Bahrain, the Insurance Market Development Committee (IMDC) initiated its first awareness campaign in 2005, which was aimed at increasing insurance penetration using educational messages through a specially created cartoon character, Taamina. In Jordan, the Insurance Commission (IC) has launched an awareness campaign consisting of three phases: introducing the role of the IC, raising awareness of the benefits of insurance, and introducing various insurance products to the public. Similarly, there are limited, if any, programs aimed at raising the profile of the insurance industry and attracting university/college graduates and other professionals. On a regional level, pan-regional cooperation has manifested itself in numerous forums, associations, and standard-setting organizations. Each of these bodies aims to foster the development of the regional insurance sector and promote regulatory coordination. At the regulatory level, the Arab Insurance Regulatory Commission (AIRC) was established in September 2006 with the participation of 12 countries. ARIC s objectives are to provide a forum for Arab insurance commissioners to share expertise and training programs, develop regulatory and supervisory standards,

9 and coordinate their activities with those of international organizations such as the IAIS. At the sector-development level, the General Arab Insurance Federation (GAIF) plays a regional role, with annual recommendations geared toward the development of the insurance markets through initiatives led by the public and private sectors. Finally, regional insurance forums play a positive role by using panels of experts to address issues and emerging trends facing the markets. Key regional forums include the annual Middle East Insurance Forum and, on a Gulf Cooperation Council (GCC) level, the Gulf Insurance Forum, which is organized by the UAE-based Coordination Commission for Gulf Insurance and Reinsurance Companies. However, while there is no shortage of regional bodies, there is limited evidence of coordination among pan-regional bodies, leading to overlapping efforts and diverging priorities. In summary, our evaluation revealed that there are a number of gaps to be addressed at the enabler level. In particular, there is a need to ensure a consistent level of maturity for legal and regulatory frameworks and the concomitant regulatory bodies, as well as to address the shortage of skills in the marketplace. Policy recommendations to promote growth and competitiveness Policymakers in the MENA region have the opportunity to play a central role in unlocking the growth potential of their respective insurance markets.we have identified a set of recommendations to be adopted by policymakers or regulators that builds on our evaluation of growth enablers and takes into account best practices from other markets.the recommendations will not apply in their entirety to all the countries of the region, given the varied state of development of individual markets.therefore, we encourage policymakers to select the recommendations that are most applicable to their respective markets. We have grouped our recommendations within the same framework adopted for the evaluation of growth enablers. Legal framework Enacting a modern legal framework and designating a special judicial authority to handle insurance-related cases are key requirements to enable market development by protecting the rights of policyholders and regulating the activities of market participants. As noted earlier, there is wide variability in the maturity of legal environments across the region, and a number of countries have underdeveloped legal frameworks. Insurance regulators in such countries should seek to upgrade their legal frameworks and ensure that they reflect international best practices, such as the principles of the IAIS. In addition, policymakers should seek to establish a specialized insurance judicial authority to resolve insurance disputes in countries where such an authority does not exist. A modern legal framework should regulate all insurance market participants, including insurance companies, intermediaries, and professionals.the regulations covering insurance companies should address a number of areas, including, among others, licensing, product approval, financial reporting, investments, reinsurance, and solvency margins. In addition, and in line with IAIS principles, the regulations should stipulate the minimum internal capabilities of market players, such as governance and risk management.the regulations covering intermediaries and insurance professionals should entail, at a minimum, qualifications criteria, licensing requirements, and a code of conduct. In countries where there is a rapidly growing demand for takaful insurance, the legal framework should also promulgate adequate legislation to address this form of insurance.there are three main challenges in takaful regulation: capital requirements, corporate governance, and consumer protection from misinterpretation. Although the underlying risk is the same, the risk profiles of conventional and takaful insurers are different because the latter has higher operational risk. It is uncertain whether this leads to increased capital requirements for takaful insurance, especially in the Al-Wakalah structure that is predominant in the Middle East. A sound governance system, including risk management and internal control processes, is crucial for meeting these capital requirements. Furthermore, the regulation has to ensure that the shari a compliance claim of a takaful insurer is valid.to do so, the operations of the shari a board have to be scrutinized by the regulator. There are two different approaches to the regulation of takaful insurance.while some countries have established a special takaful law, others have modified their existing regulatory frameworks and adjusted them to the specific needs of Islamic insurance.whether or not there needs to be a separate takaful regulation should depend on the definition of the term insurance in the conventional regulation. Separate takaful-specific regulation is not required where takaful can be interpreted as a subset of conventional insurance. In implementing a legal framework, countries in the region should start from a compliance-based legal framework that involves setting prescriptive rules and guidelines to be complied with by the market.this is a model that is commonly adopted by newly regulated and underdeveloped markets. In such a model, for example, insurance products are subject to form and rate approval by the regulator prior to being sold in the marketplace. In time, and as the market matures, the regulatory framework can move toward a principle-based model that allows regulated entities more flexibility in meeting regulatory requirements. In contrast to the example 105

10 106 above, this model would allow insurance products to be sold in the marketplace immediately after the regulatory filing has been completed. Regulators then would have the authority to intervene at their discretion. A critical component of the legal framework is the establishment of minimum capital requirements to give reasonable assurance that policyholders interests will be protected, and capital adequacy requirements (a solvency margin), to ensure that insurers are able to absorb significant unforeseen losses. 2 In setting minimum capital requirements, regulators should consider an appropriate amount based on the characteristics of their markets and the insurance classes being regulated. In the case of solvency margins, regulators are encouraged to adopt risk-sensitive approaches. At present, there are two regimes that govern solvency requirements: Solvency I and Solvency II. Countries in the region can pursue a two-stage plan to adopt risk-sensitive solvency margin requirements. Initially, regulators should adopt an easy-to-apply solvency model (for example, Solvency I) and use collected market data to fine-tune the risk factors applied to premiums or claims by insurance class. Over time, regulators can apply more risk-sensitive formulas (for example, risk-based capital) after developing the requisite internal capabilities (in terms of data availability, advanced staff skills in risk assessment, and understanding of key risks in the marketplace) and after fostering the development of insurers capabilities (especially in terms of risk measurement). In addition to the above, MENA countries that have not established a dedicated insurance judicial authority should do so.this would require a competent judicial authority staffed with experienced insurance staff and legal professionals who have proficient knowledge and expertise in the field of insurance legislation. The chosen judicial authority can be in the form of a special court or committee that deals with insurance disputes and litigations. Such a court should be independent from the regulatory body.the court should aim to build public confidence through efficiency in handling cases, consistency in interpreting the legislation, independence, and fairness. Regulatory bodies An empowered insurance regulator with well-developed capabilities enables market development by ensuring appropriate market oversight and enforcement of enacted laws and regulations. In parallel with upgrading legal frameworks, policymakers in the region should seek to empower their insurance regulatory bodies.the empowerment of the regulatory body should be constituted in the legal framework, which should address the body s legal form, ensure its independence, vest appropriate authorities, and clarify any overlapping responsibilities with other governmental entities. In addition, regulators should seek to enhance their capabilities, especially in the area of supervision (including staff and IT). In upgrading supervisory capabilities, regulators should take into account the guidelines set out as part of the IAIS core principles. In general, there are two approaches to supervision: an audit-based (or data-focused) model, under which the regulator focuses on data collection and ensuring compliance with the rules and requirements; and a riskbased model, under which the regulator focuses on early identification of risk, systematic prioritization of risk to allocate supervisory resources to the highest areas of risk, and timely and proportional intervention to help reduce insolvencies. In practice, most international regulatory regimes fall within these two approaches, with developed markets gravitating toward the risk-based model.the choice of the appropriate supervisory approach should be aligned with the development stage of the regulatory body and the legal framework, insurers risk-management capabilities, the qualifications of insurance professionals, and the stage of development of the overall financial market. From an implementation perspective, MENA countries should devise and pursue a medium-term plan to apply a risk-based supervision approach.the adoption of such an approach consists of building advanced competencies in five integrated areas, which collectively provide the regulator with a risk-based view of the highest-risk insurers and the areas of greatest concern within such insurers.these areas include financial reporting, solvency monitoring, financial analysis, on-site inspection, and market analysis. In addition to the above capabilities, supervisors should design an intervention framework with clear stages that link the legal framework, supervisory approach, supervisory conclusions, enforcement powers, and actions of the regulator under various market events.the stages of intervention serve as a primary tool to ensure the consistency of supervisory actions and, when they are communicated to the market, they set market expectations in terms of supervisory responses under certain conditions. The nature of competition Fostering a competitive environment drives innovation, competitive pricing, and the adoption of best practices, and is a key enabler for the development and growth of insurance markets in the MENA region. The ultimate objective from the standpoint of market growth should be to have a profitable sector adequately serving market demand, with local insurers equipped to withstand the competitive pressures of increasingly liberalized markets. Although the insurance markets in the region are generally competitive, regulators should seek to raise the competitive bar further through higher capital requirements and the introduction of governance and

11 risk-management requirements. In highly fragmented markets, regulators should investigate the option of increasing capital requirements to stimulate market consolidation and increase the level of risk-retention capacity.this in turn would result in larger local companies with the resources to invest in capabilities, and would also reduce the level of fronting. On the governance side, regulators should introduce minimum governance requirements such as the establishment of internal functions (for example, an internal audit), the definition of fit and proper criteria for board members and senior management, the development of policies and procedures manuals, and the formation of an investment policy subject to review and approval by the board. In countries where there is a rapidly growing demand for takaful insurance, regulators should identify, develop, and disseminate risk-management best practices that take into account the contractual relationships of Islamic insurance products. Skills and training Cultivating the growth of a pool of skilled local insurance professionals is paramount to the development of the insurance sector, given the existing acute shortage of skills. Policymakers and regulators should act as catalysts in the development of professional knowledge in three ways: Setting qualification and accreditation requirements for the insurance profession. In general, it is customary to set minimum requirements for insurance professionals that go beyond general educational attainment and include specialized insurance qualifications. Regulators can influence the market in raising the standards of training programs by adopting internationally accredited programs and selectively approving local programs that meet minimum criteria. Organizing specialized training programs. Training programs can be organized by the regulator, the industry itself (such as associations of insurance companies and the companies themselves), and by the private sector as the demand for such training increases. In the absence of market-led training programs, regulators should bridge this gap by organizing accredited training programs through affiliations with specialized training institutions (for example, institutes of banking), general academic institutions (such as universities), or leading training institutions in more developed markets. In countries where the demand for takaful products is growing rapidly, regulators need to ensure the availability of training programs to educate the market on these relatively new products. Encouraging companies to build up the knowledge of their staff. Regulators can require companies to take a more active role in developing the expertise of their employees by mandating training budgets and staff training programs.these programs would be subject to audits by the regulator to ensure companies compliance. As an incentive, regulators can consider subsidizing part of the training budget through a reduction of annual regulatory fees. Market-led initiatives Promoting the involvement of industrywide bodies, whether at a local or regional level, is a valuable enabler for the development of the market by providing forums for the harmonization of standards and activities, and for the sharing of best practices. By definition, market-led initiatives lie outside the boundaries of regulators direct control. Nevertheless, insurance regulators can play a key role in bridging market gaps while stimulating the emergence of more-effective industry-led market development initiatives. In particular, policymakers and regulators can play a valuable role in promoting more active involvement from industry associations, encouraging the adoption of market standards, fostering the availability of granular market statistics, generating consumer awareness of insurance, and raising the profile of the industry to attract new talent. Policymakers and regulators should encourage the formation of industrywide associations as a way to harmonize the representation of market participants. In countries where associations exist, regulators should emphasize the role of the association by channeling regulatory consultation efforts through these bodies or adopting industry standards endorsed by associations. Regulators can also mandate the adoption of internationally accepted accounting standards such as IFRS 4 issued by the International Accounting Standards Board in 2004 to ensure consistent treatment of insurance contracts and appropriate disclosure. Fostering the availability of insurance market data is a requirement for promoting better understanding of the market and supporting informed decision making. By virtue of their access to market data, regulators should support the publication of accurate, consistent, and up-to-date information on the market. Some countries in the region have made significant improvements in this regard; however, the lack of good market data remains a visible weakness in many MENA markets. In addition to sector-level data, granular statistics (for example, pricing, claims, and loss statistics) are required to support product development and pricing. The private sector can fill this gap by collecting and providing such statistics. For example, a private company in the United States the Insurance Service Office (ISO) provides statistical, actuarial, and claims data.the ISO gathers information from insurance companies on 107

12 108 hundreds of millions of policies, including the premiums companies collect and the losses they pay. In the MENA region, regulators should encourage the establishment of such specialized data services organizations and mandate that product pricing decisions be based on relevant market data and statistics. Creating consumer awareness of the advantages of risk coverage provided by insurance products and services is a key enabler to stimulate the demand side. Promoting awareness among retail consumers is particularly important in the GCC countries, where awareness of the benefits of insurance is considered low. Insurance regulators can increase awareness by launching public communication initiatives, publishing educational material, setting up a function to handle inquiries (whether telephone- or Web-based), and encouraging insurance companies to launch informative promotional programs geared at raising consumer knowledge. The programs to raise the level of awareness of life insurance in Malaysia are a good case in point. In 2003 a joint initiative, InsuranceInfo, was launched by Bank Negara (the Central Bank and insurance regulator of Malaysia) and other industry players. InsuranceInfo covers topics such as standard life insurance, annuities, investment-linked insurance plans, and child education plans. InsuranceInfo disseminates this information primarily through its website, as well as through booklets made available in branches of selected insurance companies and articles published in major newspapers.this program has contributed to the development of the life insurance market, which generated premiums of US$4.8 billion in 2005 more than three times those in the entire MENA region. Furthermore, policymakers should seek to promote the industry as a whole to attract talent.this can best be achieved by industry associations targeting university and college graduates through career days, internships in insurance companies, and similar initiatives. At a regional level, it is important that a standardized regulatory and compliance framework exists across the region before attempts are made to create a regional market. As such, policymakers should seek to harmonize the efforts of the many pan-regional bodies to ensure consistent attention on the key issues. Specifically, regional cooperation should focus on promoting financial stability, participating in the global trend toward cooperation and harmonization (for example, Solvency II), improving risk management and corporate governance practices, protecting the integrity of the financial systems from illegal activities, and preventing regulatory arbitrage (that is, offshore entities that seek out the least restrictive regulatory environment from which to operate locally and cross-border). Cooperation among regional insurance regulators would create significant economic advantages for their respective insurance markets. Primarily, active coordination would accelerate the development of a standardized regulatory framework and harmonize the regulatory compliance requirements, which in turn would enhance the attractiveness of the regional insurance market to international insurance groups and facilitate the formation of regional insurers. In addition, active cooperation among insurance regulators would facilitate the transfer of acquired supervisory knowledge and expertise, and improve the efficiency of supervisory activities by avoiding duplication of supervisory efforts across the region. Conclusion The insurance markets of the MENA region show significant potential for future growth. Realizing this growth, however, will require policymakers and regulators to address the existing gaps in the underlying enablers of growth. Specifically, selected countries in the region need to upgrade the existing legal and regulatory frameworks and improve the capabilities of regulators. Similarly, there are opportunities to improve the competitive landscape and thereby drive innovation, competitive pricing, and the adoption of best practices by mandating higher capital levels and introducing governance and riskmanagement requirements. Across the region there is a need to address the skills shortage by introducing minimum qualification levels and fostering internationally accredited training programs. And finally, at a market level, the use of industry associations, improvements in market data, and the introduction of consumer awareness programs will go a long way toward the overall development of the sector. In the end, each country will need to chart its own course and take into account local circumstances.the speed of development of individual insurance markets will be a function of how rapidly policymakers and regulators are able to address the individual enablers of growth. Notes 1 See IMF (2006). 2 AIS core principle number 23. References Al-Bayan Arab Insurers, Reinsurers, and Brokers 2005 Ranking. Al-Bayan Supplement Issue 419. Al-Iktissad Wal-Aamal Group The 3rd Middle East Insurance Forum. Event Calendar. Available at AME Info. 2006a. Qatar Financial Center Authority Announces Senior Appointment. Available at AME Info. 2006b. Qatar Plans Insurance Association. Available at

13 Bahrain Institute of Banking and Finance. Available at Bahrain Monetary Agency. 2006a. AAOIFI Standard on Takaful. The Insurance and Takaful Review11: b. Bahrain Financial System Robust. The Insurance Review 9: c. Bahraini Market Posts Health Growth in 05. The Insurance Review 10: d. BMA Rules on Takaful Unique. The Insurance Review 8: e. Campaign to Promote Insurance. The Insurance Review 4: f. CBB Succeeds BMA. The Insurance and Takaful Review 11: g. CII Academy in Bahrain. The Insurance Review 10: h. Progress on Takaful Association. The Insurance Review 10: i. Rulebook in Its Final Stages. The Insurance Review 4: j. Local Firms Post Strong Gains. The Insurance Review 10:2. Bakri, A. The Law and Practice of Insurance in the State of Qatar. The Law Offices of Sultan M. Al-Abdulla Advocates and Legal Consultants. Available at Articles/qtr.htm. Bank Muscat Oman: Insurance Sector. Sector Snapshot, July. Business Monitor International. 2006a. Saudi Arabia Insurance Report Q Industry Reports and Forecast Series. London: Business Monitor International b. United Arab Emirates Insurance Report Q Industry Reports and Forecast Series. London: Business Monitor International. Central Bank of Bahrain. Market Review Available at eviewbahrain_2005_english.pdf.. Available at cbb.complinet.com/cbb/microsite/index.html. Co-ordination Commission for Gulf Insurance & Reinsurance Companies The Third Annual Gulf Insurance Forum. Available at Donabie, I Kuwait s Climb to the Top. Zawya Article. Available at ZAWYA Egyptian Insurance Supervisory Authority. No date. EISA at a Glance. Available at Monthly Publications. Available at Emirates Institute for Banking and Financial Studies. No date. Insurance Diploma Program. Available at Emirates Insurance Association. No date. Available at FIRST Initiative Review and Drafting of a New Insurance Law. FIRST Projects. Available at Ghobril, N. and S. Hawa The Insurance Sector in Lebanon: Overview and Outlook. Lebanon: Saradar Investment House. Gulf Business Insurance Industry Gathering Momentum. Zawya Article. Available at Gulf News Report on the Insurance Sector Business in the United Arab Emirates for Gulf News. Available at archive.gulfnews.com/articles/06/11/12/ html Insurance Federation of Egypt. About Us. Available at Insurance Info. What Is the Consumer Education Program? Available at 10&ac=15#15. IAIS (International Association of Insurance Supervisors) Insurance Core Principles and Methodology. Available at IMF (International Monetary Fund) Kuwait: Financial System Stability Assessment, including Reports on the Observance of Standards and Codes. Financial Sector Assessment Program (FSAP). Available at Kingdom of Bahrain: Financial System Stability Assessment, including Reports on the Observance of Standards and Codes. Financial System Stability Assessment, Financial Sector Assessment Program (FSAP). Washington, DC: IMF. Jordan Insurance Commission. 2006a. Establishing the Arab Insurance Regulatory Commissions Forum. Press Release. Available at b. A Step Forward to Enhance Insurance Regulation. Press Release. Available at c. Insurance Business in Jordan: Financial Report Annual Report. Available at Jordinvest Takaful Insurance in the UAE. Sector Report. Amman: Jordinvest. Kamunpoori, H Omani Firms Dominate Insurance Sector. Oman Observer. Available at Kuwait Ministry of Commerce and Industry. Insurance Department. Available at Lebanon Ministry of Economy and Trade. Insurance. Available at Life Insurance Association of Malaysia Life is Precious, Take Care. Insurance News and Events. Available at Lloyd s Key Findings: Bridging the Gulf Available at 82B04D01E732/0/ReportMiddleEastSep06.pdf. Oman Economic Review Insurance Poised for Rapid Growth. Zawya Article. Available at Oman Capital Market Authority Insurance Sector News. Insurance Quarterly Bulletin 3. Oxford Business Group. 2006a. Time to Take Risks. Emerging Jordan 2006: b. Riding a Wave of Growth. Emerging Dubai 2006: Qatar Ministry of Foreign Affairs. Insurance Companies. Available at Qatar Embassy. Insurance Sector. Available at Saudi Arabian Monetary Agency. Insurance. Available at Swiss Re. 2006a. Solvency II: An Integrated Risk Approach for European Supervisors. Sigma. Zurich: Swiss Reinsurance Company b. World Insurance in Sigma. Zurich: Swiss Reinsurance Company. Thompson, J Risk Based Supervision of the Insurance Companies: An Introduction. Paper prepared for the World Bank. USAID. Economic Growth Program in Egypt. Available at _id=1. 109

14 Appendix A: Country Evaluation of Enablers The evaluation of growth enablers at a country level was based on publicly available information. In evaluating the enablers, we adopted the following symbols to reflect the performance of each enabler: 0 Nonexistent 1 Below-average performance/underdeveloped 2 Average performance/basic development level 3 Above-average performance/intermediate development level 4 High performance/advanced development level A special court has been established to settle insurance disputes: the Committee for Resolution of Insurance Disputes & Violations. Overall, as a new regulatory body, ISD is in the process of building up its supervisory capabilities and is expected to become fully operational in Nature of competition 1 There are more than 70 insurers in the market, all of which are in the private sector except for the stateowned National Company for Cooperative Insurance (NCCI). 110 SAUDI ARABIA Legal framework 2 Until recently the Saudi insurance market was unregulated. In 2002 the Cooperative Heath Insurance Law was enacted, which sets mandatory health insurance requirements for expatriates. An independent government body, the Council of Cooperative Health Insurance (CCHI), was established to regulate the health insurance market. In 2003 the Cooperative Insurance Companies Law was enacted, which requires all insurance companies to operate under the Shari a-compliant Takaful insurance model. The insurance law is complemented by the implementing regulations. In October 2006, the Council of Ministers approved the licenses of 13 insurance companies under the new law. At present the market is in a transition phase whereby existing players are allowed to operate under a grace period ending in the first quarter of At that point, insurers must either have a license or exit the market. Overall the insurance legal framework in Saudi Arabia is in its early stages and has yet to be fully implemented and tested. Regulatory bodies 1 The Saudi Arabian Monetary Authority (SAMA) has been entrusted with regulating the insurance sector. SAMA has established a dedicated unit, the Insurance Supervision Directorate (ISD), to carry out its regulatory and supervisory mandate. At present there is an overlap with respect to health insurance between CCHI and SAMA; this is expected to be clarified in NCCI dominates the market with over 35 percent of market share, focusing mainly on general insurance. This dominance will come under pressure as newly licensed companies will be able to tap public-sector business, which was traditionally accessible only to NCCI. The majority of existing insurers are based in other countries, mostly Bahrain. In addition, most have low capitalization, relying extensively on reinsuring a significant portion of their risk portfolios. The recently enacted insurance laws and regulations are expected to stimulate market consolidation (by setting high capital requirements) and foster the development of improved insurers risk-management capabilities (by limiting reinsurance levels). As a result of the new legal framework, which allows foreign insurers to operate in Saudi Arabia, several multinational companies have applied for licenses to establish a local presence. This is expected to bring in international expertise and raise the competitive playing field to a new level. Skills and training 1 There is a significant shortage of skills within the industry, and the Saudization requirements mandated by the new law are likely to compound this situation. At present, there are limited training programs available. The Institute of Banking offers some insurance training, but the programs are not accredited. Market-led initiatives 1 At present, the market lacks reliable market statistics, professional associations, and consumer awareness programs needed to develop the market at an overall level.

15 Appendix A: Country Evaluation of Enablers (cont d.) UNITED ARAB EMIRATES (UAE) Legal framework 1 The UAE insurance market is regulated by the 1984 federal law on Insurance Companies and Agents and Executive Regulation, issued by the Ministry of Commerce. The existing legal framework is in need of significant upgrading in light of the evolution and rapid growth of the insurance market. For example, the regulations do not require insurance companies to adhere to solvency margins but only to meet a minimum capital requirement. In addition, the regulations require insurers to invest in the local market without putting clear limitations on risks and asset classes. The market is competitive with several large local companies in the market. The largest 10 insurers account for around 50 percent of market premiums. Skills and training 2 There is a shortage of qualified staff, especially among nationals. The law requires that 15 percent of total staff be nationals; at present it is only 6.2 percent. To support Emiratization, the Supreme Insurance Committee and National Human Resource Development Committee in the insurance sector are implementing a number of insurance training programs to develop the capabilities of nationals. The United Arab Emirates has initiated work to upgrade the regulatory framework. A special committee, the UAE Insurance Committee, is entrusted with developing and proposing the regulations for the insurance sector. There is no dedicated insurance judicial authority in the United Arab Emirates. Overall, the insurance legal framework in the United Arab Emirates has significant limitations that are expected to be addressed in the planned regulations. Regulatory bodies 1 The sector is regulated by the Insurance Companies Division of the Ministry of Economy. Existing supervisory processes are undermined by the underdeveloped regulatory framework. In line with the new regulatory framework, an insurance commissioner position is expected to be established in Overall, the capabilities of the regulatory body are underdeveloped as a result of the gaps in the existing regulations. The regulator s capabilities are expected to be enhanced through the establishment of a commissioner post and the updating of the legal framework. Nature of competition 2 There are 49 insurers serving the UAE market, including 5 foreign insurers. Overall, local insurers are privately held although several large players are partially state-owned. Local companies hold around 75 percent of the non life insurance market, while foreign insurers are more focused on life insurance. Recently, some foreign insurers have announced their intention to focus on expanding their non life insurance business. The Emirates Institute of Banking and Financial Studies also offers a one-year insurance diploma program. Market-led initiatives 2 The Ministry of Economy publishes high-level market data. However, there is a significant shortage of granular statistics that would improve the understanding of market performance and profitability. The Emirates Insurance Association (EIA) plays an industrywide role in promoting the insurance sector by facilitating cooperation between insurance companies, setting standards, providing training to insurance professionals, and promoting insurance awareness. The Coordination Commission for Gulf Insurance and Reinsurance Companies is a UAE-based entity that promotes coordination among GCC insurance companies. BAHRAIN Legal framework 4 In an effort to strengthen its position as a center for Islamic finance operations (including takaful and re-takaful), Bahrain issued the Insurance Rulebook in April The rulebook sets out elaborate licensing and operational regulations for both conventional and takaful insurance. A recent report by the Financial Sector Assessment Program (FASP), a joint venture between the International Monetary Fund and the World Bank, acknowledged the comprehensiveness of this regulatory framework. Overall, Bahrain s insurance legal framework is well developed and is one of the most-established legal frameworks in the region. 111

16 112 Appendix A: Country Evaluation of Enablers (cont d.) Regulatory bodies 3 Since 2002, the insurance sector has been regulated by the Bahrain Monetary Agency (BMA). In September 2006, the BMA was succeeded by the Bahrain Central Bank (BCB) which is mandated with carrying out the activities previously undertaken by the BMA, but with stronger operational independence and wider enforcement powers. A recent FASP report indicated that prudential supervision is generally effective. However, the report also highlighted the limited resources available to the BCB to implement the supervisory activities promulgated under the Rulebook. Overall, the regulator is experienced and appears to have well-developed capabilities. Nature of competition 3 As of 2005, there were 19 insurance companies serving the local market, comprising 11 that are locally incorporated as well as 8 branches of foreign insurers. The market is led by private-sector insurers. Local insurers dominate the non life insurance market with 87 percent market share, whereas foreign insurers dominate the life insurance market with 82 percent market share. There are three local large insurance players controlling 45 percent of the market. The largest insurer is Bahrain National Insurance with 22 percent market share. Next are the Bahrain Kuwait Insurance Company and Gulf Union Insurance and Reinsurance, with market shares of 12 percent and 10 percent respectively. Skills and training 3 Bahraini nationals account for 63 percent of the insurance workforce, one of the highest figures in the GCC. The Bahrain Institute of Banking and Finance (BIBF) offers 20 insurance programs, including courses in underwriting, risk management, and information technology that meet the requirements of four internationally recognized professional designations. These designations are: Associate of Risk Management of the American Institute for Chartered Property Casualty Underwriters (USA); Associate of the Chartered Insurance Institute (UK); Certificate in IT for Insurance Professionals (UK); and the Professional Insurance Certificate, which is jointly awarded by UK s Chartered Insurance Institute and BIBF. In 2006, BIBF signed an agreement with London-based Chartered Insurance Institute (CII) to be the exclusive provider of CII training courses in the Middle East. Market-led initiatives 4 Bahrain is reinforcing its role as a leading center for takaful by fostering the development of industry associations and professional organizations. For example, the Bahrain-based International Takaful Association (ITA) is currently being formed. It aims to play a leading role in promoting the takaful industry, encouraging cooperation among members of the association and educating the public about the unique features and benefits of takaful. Another example is the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), which is responsible for developing standards for the international Islamic finance industry, including takaful. The Bahrain Insurance Association (BIA) plays an industrywide role in developing the sector. For example, the BIA facilitated the Insurance Rulebook public consultation process by putting in place industry teams that liaised with the BMA to finalize draft modules of the Rulebook. In 2003, the BMA established the Insurance Market Development Committee (IMDC) to undertake programs to raise awareness about insurance in the market and enhance the image of the Bahrain insurance industry at an international level. In 2005, IMDC initiated its first awareness campaign aimed at increasing insurance penetration using educational messages through a specially created cartoon character, Taamina. QATAR Legal framework 1 Qatar enacted an insurance law in 1966 that has not been amended since. The existing law lacks adequate legislation laying out the rights and obligations of parties entering into insurance contracts. An effort is underway to issue a new insurance law in the near future. Overall, the insurance legal framework in Qatar has serious limitations that are expected to be addressed by the new insurance law.

17 Appendix A: Country Evaluation of Enablers (cont d.) Regulatory body 1 The market is regulated by the Ministry of Economy. The regulator s capabilities are undermined by the existing legal framework. Nature of competition 3 There are nine companies serving the market, comprising five local companies and four foreign insurers. The market is led by the private sector. The market is largely dominated by the few local insurers. The two largest companies, Qatar Insurance and Qatar General Insurance & Reinsurance, hold around 45 percent and 20 percent of market premiums respectively. Foreign insurers represent a fraction of the marketplace and are estimated to command less than 5 percent market share. OMAN Legal framework 3 Insurance companies in Oman are governed by the insurance law issued by Royal decree in The law has been updated in 1987, 1995, and In addition to the law, the sector is governed by regulations, guidelines, and instruction papers issued by the regulator. These cover corporate governance, code of conduct, and reinsurance management strategies. The regulations were significantly upgraded following the collapse of a local insurance company in In 2006, the regulator announced a major update of the insurance law and executive regulations. The draft law and regulations have been sent to insurance companies for their feedback prior to final approval. Overall, the legal framework in Oman has been upgraded in recent years, and is undergoing an extensive review to better reflect international best practices and address regulatory gaps. Overall, competition from foreign insurers is expected to remain low and be limited to life insurance, given the strong position of local firms and the relatively small market size. In 2004, the government amended the Foreign Capital Investment Law to allow foreign investment in the insurance sector. However, it is not clear whether multinational insurers will be attracted, given the size and competitive characteristics of the local market. Skills and training 1 At present, there is a significant shortage of skills in the marketplace, and only a few insurance training programs are available. Market-led initiatives 1 At present, there is a lack of adequate market data and no existing insurance industrywide entities or professional associations. However, Qatar has indicated plans to set up an association of insurance companies. The Qatar Financial Center is indirectly leading the effort to foster the development of the insurance sector. For example, as part of its efforts to establish itself as a regional financial center, it has mandated a senior officer with the role of raising awareness of the Middle East s improved regulatory environment and identifying higher standards for the insurance industry. Regulatory bodies 2 The sector is regulated by the Capital Markets Authority (CMA). The CMA is in the process of implementing the IAIS core principle of supervision. Nature of competition 2 There are 17 insurance companies serving the market, comprising 9 local insurers and 8 foreign players. The market is led by the private sector. The market is largely dominated by local companies, which collectively command 80 percent market share. There are three large local insurers in the market. Dhofar Insurance is the largest insurer with 30 percent market share, followed by ONIC and Oman United Insurance, each holding around 15 percent market share. Overall the market is characterized by overcapacity, which has spurred price competition and negatively affected sector profitability. Recently a few multinationals, which previously operated in the market through agency agreements, entered the market through joint ventures with local partners. 113

18 114 Appendix A: Country Evaluation of Enablers (cont d.) Skills and training 2 There is a significant shortage of skills within the industry; Omanization requirements mandated by the law compound this situation. There are no specialized insurance institutes offering training programs in Oman. In response, the CMA is playing a key role in identifying training needs and organizing training programs to build the skills of nationals by coordinating training workshops with local and international academic and training institutes. Market-led initiatives 2 The CMA is leading the effort in setting and fostering the adoption of sectorwide best practices through the introduction of guideline papers covering, for example, corporate governance, code of conduct, and reinsurance strategies. Market data are available mainly through CMA s publications. In late 2006, the Oman Insurance Association was under formation. KUWAIT Legal framework 1 The insurance law in Kuwait was enacted in In 2004, FSAP commented on the weaknesses of the existing law and recommended, as a priority, the need to enact a new law. Overall, the legal framework in Kuwait has significant limitations. A new framework is required to address existing limitations. Regulatory body 1 The sector is regulated by the Insurance Department within the Ministry of Commerce and Industry. An informal review conducted in 2004 to assess the observance of IAIS core principles indicated that the existing regulations and supervision lacked key elements of a modern supervisory regime. The existing supervisory processes are mostly focused on administrative work (such as licensing) in addition to ensuring the insurers compliance with the regulations. Overall, the existing regulator s capabilities are undermined by the current legal framework. Nature of competition 3 The market is served by a total of 21 companies, of which 11 are local companies and 10 are branches of foreign insurers. he market is led by the private sector. The market is largely dominated by local companies, which hold over 85 percent of market share, including four large players that hold over 60 percent of the market. Gulf Insurance Company holds the largest market share of 25 percent. Competition from foreign insurers has been limited by regulatory restrictions. However, this restriction was relaxed in November 2003, and the sector has so far attracted a number of foreign insurers. Skills and training 1 At present, there is a significant shortage of skills in the marketplace, and only a few insurance training programs are available. Market-led initiatives 1 At present, only limited market data are available on insurance activities in the country. In 2006, the Insurance Companies Union was established, with seven local companies as members. LEBANON Legal framework 1 The insurance sector is governed by the Insurance Law issued in The sector was substantially unregulated until the issuance of an amendment law in 1999 following the bankruptcy of three companies. However, the law remains rudimentary, particularly in the area of solvency requirements; these are fixed at 10 percent of gross premiums. In addition, there is a lack of regulatory guidelines for the sector. In 2004, the Ministry of Economy and Trade prepared a draft insurance law and regulations that raise the regulatory framework to international best practices and conform to IAIS core principles. The draft law and regulations are pending review and ratification by the government.

19 Appendix A: Country Evaluation of Enablers (cont d.) The National Council of Insurance Companies (NCIC) is an advisory body entrusted with proposing sector regulations and reviewing license applications. NCIC is chaired by the Minister of Economy and Trade and consists of 11 other members from the public and private sectors. Overall, the existing legal framework in Lebanon is underdeveloped. A new and improved draft law and regulations have been prepared, taking into account international best practices; however, it is not clear whether or when they will be implemented. Skills and training 1 There is a lack of accredited local insurance training programs. Nevertheless, there are a number of training courses and workshops that are occasionally organized by professional organizations. Market-led initiatives 2 Consumer awareness of insurance is among the highest in the region, as evidenced by high insurance penetration rates. Regulatory bodies 1 The insurance sector is regulated by the Insurance Control Commission (ICC), which was created in 1999 as an independent entity reporting directly to the Minister of Economy and Trade. There is an overlap and duplication of regulatory activities between the activities conducted by the ICC and the Directorate of Insurance Affairs, which is a department within the Ministry of Economy and Trade. The Insurance Arbitration Council, which is similar to a small claims court, was set up to handle claims disputes of less than US$50,000, which account for 90 percent of total claims. Overall, the regulator has basic supervisory capabilities that are mainly focused on ensuring compliance with applicable regulations and close monitoring of distressed companies. Nature of competition 1 The market is highly fragmented, with more than 60 privately owned insurers. The majority of the insurers operating in the market are incorporated in Lebanon. However, several foreign insurance companies are present in the market through strategic partnerships with local companies. The largest 10 insurance companies hold 65 percent market share in terms of premiums. Only one large company exists, MedGulf, with 27 percent market share, followed by nine medium-sized companies each holding between 3 to 5 percent market share. There is a lack of reliable data to support analysis of market performance. The Association of Lebanese Insurance Companies (ACAL) is active in representing the interests of insurance companies. The Lebanese Insurance Brokers Syndicate (LIBS) was set up in 1993 to promote the brokerage profession, raise the awareness of the role of brokers, and improve professional standards. The Lebanese Actuarial Association (LAA) was set up in The LAA is a member of the International Association of Actuaries (IAA). JORDAN Legal framework 3 The insurance sector is governed by the Insurance Regulatory Act of In 2004, the insurance regulator announced its intention to draft new and more exhaustive legislation that improves the consistency of judicial interpretation of insurance contracts and better reflects existing market practices. The law is complemented by a set of regulations and instructions papers, issued by the regulator, covering a wide range of topics including financial and technical issues, corporate governance, and market conduct in line with IAIS core principles. Overall, the legal framework is developed according to international standards. Ongoing efforts continue to further strengthen the legal framework and address existing regulatory gaps. 115

20 Appendix A: Country Evaluation of Enablers (cont d.) Regulatory bodies 3 The Insurance Commission (IC) was set up in 1999 as an independent body to regulate and supervise the insurance sector. Since its establishment, the IC has played a leading role in driving and reshaping the sector. The IC set up an internal Settlement and Inquiries department to handle inquiries and act as the first line in handling disputes through mediation. Insurance disputes are handled by the Committee for Resolving Insurance Disputes. Overall, although a relatively young regulator, the IC has made significant progress in developing its capabilities in line with the core principles of the IAIS. EGYPT Legal framework 2 The insurance sector is regulated by the Insurance Supervisory and Control Act Number 10 issued in 1981, Act Number 91 of 1995, and Act Number 156 of The Supreme Council of Insurance was established in 1981 with the objective of discussing and approving sector-related policies. The Council is chaired by the regulator and includes representatives from the public sector, private sector, and academic institutions. Overall, the insurance legal framework in Egypt has limitations. It is not clear whether there are plans to upgrade the existing legal framework. 116 Nature of competition 2 There are 26 insurance companies in the local market; all but one foreign life insurer are locally incorporated. No single insurer has more than 10 percent market share, with the largest 10 companies holding around 60 percent of the market. The non life insurance market, which represents 90 percent of total market premiums, is dominated by local insurers. The life market is dominated by one foreign company, American Life, which has 53 percent market share. Skills and training 2 The IC has announced a plan to foster the development of local expertise through training programs, and has been active in organizing training forums and seminars in coordination with leading local, regional, and international organizations. Market-led initiatives 2 IC annual reports contain detailed market data and analysis, which facilitate a good understanding of the market. In addition, the IC is active in conducting market studies and surveys. The Jordanian Insurance Federation (JIF) is an active organization representing the interests of insurance companies. The IC launched an awareness campaign consisting of three phases: introducing the role of the IC, raising awareness of the benefits of insurance, and introducing various insurance products to the public. Regulatory bodies 2 The Egyptian Insurance Supervisory Authority (EISA) was set up in 1981 as an independent entity reporting to the Ministry of Investment. EISA is entrusted with regulating the insurance sector in addition to government insurance funds, cooperative societies, and private insurance funds. EISA established the Dispute Settlement Committee to speed up the resolution of disputes outside of the court system. Overall, starting from an initial focus on ensuring insurers compliance, EISA has started a number of efforts to strengthen its risk-supervision capabilities in line with international practices. Nature of competition 1 There are 20 insurance companies in the market. The market is dominated by the state-owned insurers that command 75 percent of the non life insurance market and 60 percent of the life insurance market. In particular, the state-owned Misr Insurance alone commands a market share of 44 percent and 29 percent of the non life and life insurance markets, respectively. In addition to local companies, there are more than 600 private insurance funds (a form of pension fund) in the market, accounting for 56 percent of life insurance premiums and 30 percent of total insurance premiums. In recent years, foreign players focused exclusively on life insurance have emerged; this is expected to lead to the overall development of the market and a reduction of the state s dominance.