Jordan aims to be MENA captive domicile of choice
Every new century brings profound changes, whether these are political, economic or cultural. In the 19th century, there was the industrial revolution and the emergence of the middle class; in the 20th century, there was modernism; and in the 21st century, there is the spread of information and communication technologies. But progress also has its drawbacks, such as the inhumane working conditions of the 19th century and the wars of the 20th century. The financial crisis of this century is bringing about a realisation that prosperity should be rationalised in order to avoid the most grievous consequences that economic changes may bring.
A development firmly of the 21st century, captive insurance is a result of companies’ drive towards financial rationalisation by buying more effective and efficient insurance services. The importance of captive insurance has been amplified by the recent financial crisis, as many have started looking at the aspects of the current financial system that led to this situation and how best to operate going forward.
The insurance sector now finds itself in a delicate position as businesses reassess the value they obtain from their insurance providers against the premiums they pay. Many companies are looking afresh at how to lower their insurance costs and to retain premiums and investment income within the group.
But what goes around here comes around there. The premiums that would have poured into traditional insurance are bound to be invested in another form of risk management—captive insurance.
The level of economic uncertainty that was responsible for inspiring the father of captive insurance, Frederic M. Reiss, to coin the term in the 1950s has increased, making the demand for captive insurance so heightened that there are now more than 10,000 captive providers worldwide.
While the current financial crisis has reiterated the global nature of economic uncertainties, one cannot help but be amazed by the fact that an entire region with total insurance premiums of $17.5 billion (Swiss Re Sigma, 2007) is still almost entirely void of this effective means to better control risks. The Middle East and North Africa (MENA) region lacks a regional domicile for captives. This forced large enterprises to invest in captives overseas, when those investments could have been used to enhance domestic and regional economic growth.
It is not a matter of mere geographical proximity between the corporate and its captive manager that makes a captive centre in MENA a pressing need. The conducive legal and regulatory environment, taxation flexibility and exemptions, reasonable capital requirements and skilled labour force, all make the option of a regional captive domicile serving the increasing mega enterprises in MENA the most rational and cost-effective alternative for all stakeholders.
The case for such a domicile is not only made through multifaceted economic growth, liberalised markets and a revitalised private sector and legal framework. The demand for different forms of risk management has also risen, driven by a growing corporateappreciation of the benefits of captives and the measures to help facilitate their use.
As a result of these developments, the insurance sector in the region is on the rise. Annual growth rates now average between 15 and 20 percent, and are expected to continue growing at high rates in coming years, especially as insurance penetration levels are still relatively low at around one percent. Moreover, the MENA region is expected to play a major role in the growth of the takaful insurance industry, having accounted for around 50 percent of all takaful insurance in the past couple of years.
Another factor making corporations in the MENA region increasingly open to insurance is the emergence of a young generation of managers and executives. They are focusing on getting better value for their business expenditure, which makes them more receptive to insurance services in general and captive insurance in particular.
Jordan—a regional captive centre
For many observers, Jordan stands out as an example of the amalgam of factors that make MENA a perfect place for international insurance and captive insurance businesses.
Deconstructing the factors of Jordan’s success reveals a steady increase in gross written premiums. The 14.1 percent increase from 2007 to 2008 is not an isolated boom, but an episode in a series of developments that have been in the works for the past decade. Premiums are now expected to rise further as a result of expanding the magnitude and range of insurable activities, including medical cover and life assurance.
The horizontal and vertical expansion is well founded. A recent Standard & Poor’s (S&P) report suggested that those premiums represent 2.5 percent of gross domestic product (GDP). This is a substantial slice for insurance in an emerging market country, and it will soon grow bigger with continued GDP growth and Jordanians’ increasing appreciation of insurance.
“Jordanian insurers have the advantage of talking to an already well-informed, potentially interested target market when they seek to sell supplementary forms of cover,” according to the S&P report.
As much as local insurance companies are enjoying that advantageous position, international insurance businesses with an eye on the region will find that Jordan has all the prerequisites necessary for a sustainable regional hub. It has political stability and security, a strategic geographical location between the Gulf States, North Africa, Europe and Asia, and adroit investment in political and economic relationships, all of which provide a strong basis for establishing an attractive insurance haven.
This basis is not merely an outcome of this country’s fortunate geographical placement between several regions. There are a host of man-made interventions, including state-led macroeconomic policies, ongoing integration with the global economy and adherence to free market principles. The process of liberalising the local financial market and advocating regional economicdevelopment means that Jordan is well placed to act as a regional centre for insurance activities.
Such elements are supported by an energetic and empowered population that has for several decades supplied both the Jordanian and neighbouring insurance markets with essential insurance brainpower. This brainpower was cited by S&P as a major strength of the insurance sector: “[W]e observe that the Jordanian insurance sector has managed to retain local talent of all ages and at reasonable salary levels, while still exporting many of its more mobile managers and staff to assist the development of insurance in neighbouring markets.”
Economic decision-makers in Jordan understand that effective captive domiciles require a number of components to be in place. These include qualified executives, access to the region’s markets and liberalised economic policies, alongside regulatory and financial incentives. Thus, the low restrictions on amount and type of capital required, free movement of capital and the regulator’s responsiveness to investors will soon be consummated with new legislations, further reducing the time needed to grant captive approval.
Other advantages include the permissibility of 100 percent foreign ownership of local companies, zero percent tax rate on offshore insurance companies conducting international business and several bilateral double taxation treaties, ensuring that the tax system in Jordan efficiently interacts with tax systems elsewhere.
The driving force behind these innovations is the Insurance Commission (IC) of Jordan, which S&P has described as “widely perceived as one of the more proactive supervisors in the region”. The IC has been functioning as a regulatory workshop in which rules for local insurance practices are crafted in accordance with international standards of solvency, retention, arbitration, corporate governance and capital requirements. This is in addition to the IC’s issuance of anti-money laundering guidelines, and licensing instructions for the regional and representative offices of insurance and reinsurance companies.
The IC draws on an interactive involvement with all the components of the Jordan insurance sector and close ties with regional and international insurance organisations, such as the Arab Forum of Insurance Regulatory Commissions (AFIRC) and the International Association of Insurance Supervisors (IAIS).
These inward and outward efforts are an expression of the IC’s realisation that the low cost of starting and maintaining insurance business in Jordan, stable and efficient legal system, and highquality of lifestyle ought to be followed with a wide spectrum of interventions leading to a sought-after captive domicile in Jordan.
Firas T. Abd-Alhadi is insurance awareness officer at the Insurance Commission of Jordan. He can be contacted at: email@example.com