The insurance market in the Middle East and North Africa has the potential for significant growth, but only under the right conditions cultivated by regional policymakers and regulators, according to a new study conducted by Booz Allen Hamilton in conjunction with the World Economic Forum.
By looking at five key enablers of growth in the industry – legal frameworks, regulatory bodies and processes, the nature of competition, skills and training, and market-led initiatives – the study identified substantive gaps that should be addressed.
“Our main recommendation is for regulators to take immediate action to conduct an assessment of their country’s insurance sector against these enablers of growth and chart a course that will address the identified gaps, while taking into account local circumstances,” said Peter Vayanos, Vice President, Booz Allen Hamilton, a global management consulting firm with offices throughout the MENA region.
“Our goal with this study is to promote the growth and competitiveness of the insurance industry in the Arab world by identifying the key enablers, assessing them in light of existing market conditions and then offering policy alternatives,” Vayanos added.
A summary of the study’s findings follows below.
Legal frameworks
At the legal and regulatory levels, Booz Allen’s review identified a 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 Until recently, almost all MENA countries had outdated insurance laws and regulations; some countries had no insurance law at all.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. Accordingly, insurance regulators in countries with under-developed legal frameworks 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. Finally, in countries where there is a rapidly growing demand for takaful (Sharia-compliant) insurance, the legal framework should also promulgate adequate legislation to address this form of insurance.
Regulatory bodies and processes
The comprehensiveness and effectiveness of regulatory processes, especially supervisory processes, varies considerably across the region. 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 IAIS. Other countries, such as Qatar, Kuwait, and the United Arab Emirates, have less-developed supervisory processes that are more administrative in orientation.
“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,” said Maher Hammoud, Senior Associate, Booz Allen Hamilton.
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.
Nature of competition
The insurance markets of the Middle East are generally competitive, and 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,” Mr. Vayanos said.
Booz Allen suggests that regulators should seek to further raise the competitive bar through higher capital requirements and the introduction of governance and 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
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.
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. As such, the study proposes that policymakers and regulators act as catalysts in the development of professional knowledge in three ways:
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.
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 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.
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.
Market-led Initiatives
Promoting the involvement of industry-wide 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. 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.
By way of example, Malaysia has been very successful in raising the awareness of life insurance. 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.
A full version of the review, including an analysis by country, is available from Booz Allen upon request.
