The Arabian Gulf: unlocking its potential


Ian Sangster

The Arabian Gulf: unlocking its potential

Ian Sangster of Q-Re reports on the development of the Gulf region and expounds its potential as a significant area for future captive growth.

As a reinsurer registered and based in Qatar in the Arabian Gulf I am able to provide a brief overview of the development of the insurance industry within the Gulf Cooperation region, touching upon the opportunities that exist to establish a captive insurance company.

The insurance industry of our region may now be described as entering early adulthood. It is not yet a fully mature industry as for a number of years before the increase in the price of oil in the early 1970s there were limited opportunities for growth. Companies that were established prior to this period were mainly agency operations of uK companies that had expanded throughout the world in the days of empire, protectorates and the like.

They wrote small portfolios of general business, migrating to include construction and erection covers as the relative wealth of the early 1970s oil boom allowed regional countries to begin to develop modern infrastructure and downstream industries. Throughout the 1960s and 1970s a number of local and national insurance companies were established throughout the Arabian Gulf as opportunities arose to establish a nascent domestic and regional insurance industry.

The foreign agencies continued to operate but faced increasing competition from the newly formed ‘national’ insurers. Indeed these national companies were, in a number of countries, given certain exclusive rights such as being the nominated companies able to quote and write government business.

This may have seemed a rather restrictive practice, but it was necessary to provide a measure of protection while the young industry developed expertise and gained a foothold in its domestic market. The foreign companies benefited by being able to provide local reinsurance capacity, supplying both experience and access to sound parental capacity when required. The non-governmental open-market business remained open to all the registered insurance companies.

Over time, the foreign companies who were operating through agents created branches or formed local companies in the various Gulf countries, adding to the strength of the local industry. They were excluded from governmental business in various territories for many years but they did, however, operate side by side with the national insurers and in many ways they complemented one another.

The concept of captive insurance was not known or even discussed at this juncture in the development of the regional insurance industry. The business of the region was focused on the insurance of infrastructural and industrial developments and the development of the direct insurance market.

Regarding regional infrastructural and industrial development, much had to be done throughout the Gulf as the traditional pre-oil boom industries were more of a ‘subsistence’ nature—mainly for local consumption with perhaps some limited regional distribution. Throughout the region little development was taking place within the cities, towns and villages. road networks were scarce, electricity distribution outside the main towns was limited, population growth was relatively slow and without a fair and realistic price for oil production there were limited funds available for development.

The insurance industry therefore developed very slowly and only a few of the companies in the region grew to be of any significant size.

The tipping point for our industry was the quadrupling of oil prices in the early 1970s—a major drama in a world which had, hitherto, been used to buying oil for what were virtually give-away prices.

That one bold act by the Gulf oil-producing countries not only provided a local revenue stream of cash that would result in a regional boom, but triggered a wider cascade of developments throughout other areas of the world where high extraction prices had precluded the development of known oil reserves. This period of history provided the platform for other global industries to develop and drove industrial development.

"Qatar provides a world-destination for captive re/insurance, offering excellent communications, an open-door policy and an offshore tax environment."

The effect on the Gulf region was dramatic in that the funds for development were now available, and there were also significant implications beyond the borders of the region. The oil-producing countries with cash to spend turned to the West and provided opportunities for international construction companies of diverse disciplines, suppliers of technology and specialised services to enter the oil producers’ markets. This initial burst of infrastructural development provided new opportunities for the local insurance industries throughout the region, resulting in a spurt of premium growth.

Throughout the Gulf, road networks were soon snaking through the deserts and tower cranes began to sprout from the sand as hotels, offices, schools and factories were built. The influx of people resulted in soaring residential rentals and the need to construct housing for the growing expatriate population. All of this provided opportunities for the local insurance industry to grow and hone its skills.

The whole economy took on a vibrancy that, despite various dips, very much remains to this day. Certainly there were times when the headlong development process stalled, but the overall economics have been in one direction: upwards.

It was during this period of sustained development that the regional insurance industry recognised its greatest growth potential and began to expand, develop skills, and increase its capacity and capital base to meet the new demands of the growing economies. A number of very large industries emerged. These were, in the main, oil and gas-related in the upstream and downstream areas. Development of downstream industries such as refining, fertilisers, and petrochemicals provided a growing base of insurable assets and contingent growth for the insurance industry.

Power and water generation was, and continues to be, an area undergoing considerable growth. The relatively recent creation of world-class Gulfowned and based airlines has added to the continuing opportunities for the burgeoning insurance industry. There were, of course, local airlines 30 or so years ago, but it is the newer entrants such as Qatar Airways and Emirates that have grabbed headlines around the world.

Gulf captives

During all this growth, as new industrial complexes and glitzy cities sprang up, the captive insurance industry was virtually ignored. The captive names that entered conversation were those of the oil majors who had entered the region to assist the local oil and gas companies to develop their upstream and downstream industries. These were joint venture and production-sharing agreements, and the foreign partners were there to introduce their captives into the equation to insure and reinsure major construction projects and the resulting operational insurance programmes.

Is there a place today in the region for captive insurers? Very much so, I would argue, and indeed one has already been established, named Al Koot. It is the captive insurance company of the state oil company Qatar Petroleum.

In recent years we have seen the development of both the Dubai International Financial Centre (DIFC) and the Qatar Financial Centre (QFC), both of which have had considerable measures of success. QFC has attracted a number of insurers and reinsurers since its formation in 2005. Indeed, it has within its stable Kane, the captive management company, which obviously sees great potential for growth in the region.

The region is now ripe for the establishment of captives. They may, of course, be domiciled and managed in the more traditional centres, but what could be better than a vibrant economy with a long-term industrial—predominantly hydrocarbon-based—complex in which companies may both establish and manage their captives?

Qatar provides a world-class destination for captive re/insurance, offering excellent communications, an open-door policy and an offshore tax environment, together with a first class regulatory regime which is focused on just that—regulation—rather than being distracted by developing a parallel property and retail environment.

Ian Sangster is acting chief executive officer at Q-Re. He can be contacted at:

EMEA, Qatar, Q-Re, captive, insurance

Captive International