1 January 1970EMEA analysis

Jordan: a bridge between continents

Risk management has long been an indispensible factor in industrialisation, economic growth and international trade. And the need for risk management is becoming increasingly eminent in the Middle East North Africa (MENA) region, as multifaceted capital-based growth has gained ground in the form of infrastructure, energy, real estate, natural resource development, urban development and industrial projects. The need to optimise capital usage in the MENA region necessitates considering non-traditional tools for risk management—with captive insurance increasingly considered an option. Indeed, businesses across the region are becoming more receptive to the cost-effective form of risk management that captive insurance can provide—a much-needed risk management tool in today’s restless economic climate, and particularly considering the MENA region’s necessary emphasis on inward investment.

The region would benefit from its own captive insurance industry, which would spare the growing number of mega-projects the inevitability of resorting to overseas captives and exporting funds needed to enhance national and regional growth. Peculiarly, this exportation is happening while the region has the legal and regulatory environment, tax exemptions and reasonable capital requirements necessary to domicile a prosperous captive industry.

Recognising the rising demand for MENA-domiciled captives and the availability of a nationally and regionally conducive insurance environment, Jordan is rapidly evolving to become a regional captive centre. Firstly, there is a steadily growing insurance sector in the Kingdom, which experienced an 11.9 percent increase in gross written premiums for the first half of 2010, compared with the same period in 2009. Projections suggest that the widening range of insurable activities in Jordan will further stimulate this growth. This growth will also buildupon strong results in 2009, a year in which medical insurance premiums grew by 26 percent and takaful premiums grew by 36 percent compared to 2008 levels. Also, the various mega-projects currently underway or in the pipeline—in energy, water, infrastructure, construction, tourism and transportation—bear witness to the validity of these expectations.

The domicile’s strengths, which include low restrictions on the free movement of capital and the level of capital required to establish a captive, have been further aided by modern legislation regulating the work of captive companies, including provisions pertaining to capital and solvency requirements that are guided by a risk-based approach appropriate to the specific nature and scope of captive business.

Three classes of exempt captive companies can be registered in Jordan:

• Single-parent captives, which can write only the risks of their parent and/or its affiliates

• Association captives, which are jointly owned by entities with similar businesses or activities, and can write only those risks emanating from their work

• Diversified captives that are either owned by a single parent or jointly owned, and can write not only the risk of their parent(s) and/or affiliates, but also other entities’ risks up to no more than 20 percent of the captive’s net premiums.

The minimum capital requirements for these three classes are: JOD100,000 (€104,000), JOD500,000 (€520,000) and JOD700,000 (€728,000) respectively. Upon meeting all requirements, it takes around 35 days to issue a captive licence.

2009 also saw the issuance of Instructions of Licensing and Regulating the Business of Captive Manager. Other related legislations are regularlybeing drafted and issued, with regulation relating to protected cell companies expected to be introduced soon.

Captive instructions issued by the Insurance Commission of Jordan (ICJ) include various provisions designed to ensure captives’ adequate performance. These ensure sufficient corporate governance, making captive performance the responsibility of the company’s board of directors even when a captive management company is assigned. The ICJ also includes provisions to ensure that captives apply accounting policies and disclosure requirements in line with International Accounting Standards and International Financial Reporting Standards, which were adopted by the Commission in 2001.

As is the case with traditional insurance companies, the ICJ applies the supervisory ladder as a criterion to assess the profile of captives based on the adequacy of capital, quality of assets, sufficiency of technical capacity, management, liquidity, subsidiaries and affiliate companies.

Finally, and acknowledging the standards of the International Centre for the Settlement of Investment Disputes (ICSID), Jordan has an effective dispute resolution mechanism in the form of an Insurance Dispute Resolution Committee at the ICJ.

The wider regional and national context

These legislative developments are timely, and considered against the backdrop of wider regional circumstances, make prospects for a viable captive domicile in the region a strong likelihood. The insurance sector in the MENA region is rapidly growing, propelled by a sweeping expansion of major enterprises, improved insurance awareness, the revision of national legal and regulatory frameworks, and a tendency towards regional and international co-operation and tax flexibility. Thus,in recent years, annual insurance growth in the region ranged between 15 and 20 percent. However, the combination of low penetration levels of less than one percent of gross domestic product (compared to 7.5 percent globally), changing public attitudes and the growing need for insurance products, all suggest substantial investment opportunities for both conventional and captive insurance.

Takaful insurance growth has also had a significant impact, particularly when one considers that the region accounted for around 50 percent of takaful businesses worldwide in recent years, with a greater contribution expected in the future. Furthermore, socio-economic development has brought a new generation of executives and managers to the fore who are constantly striving for more cost-effective value in their businesses’ insurance allocations. Captive insurance is starting to provide the answer.

In the wider context, Jordan’s population is increasingly responsive to insurance services and boasts a highly qualified workforce that has been pouring into neighbouring insurance markets, while at the same time, retaining enough talented executives to spearhead rapid national growth. The entrepreneurship of these executives is being boosted by further opportunities through the country’s political stability and security, strategic location as a junction linking the Gulf States, the Levant, North Africa, Europe and Asia, and political and economic ties with the countries of these regions. Another distinct strength is a set of official policies emphasising integration with the global economy and the liberalisation of the national financial market. Indicative of this effort is the fact that foreign companies are permitted to 100 percent own local companies.

A closer look at these policies will also show a solid legal system, several bilateral double taxation treaties and anti-money laundering guidelines. These aspects are further enhanced by a well-developed infrastructure, the low cost of starting and maintaining businesses in the Kingdom, and a high standard of living.

The major player in channelling these advantages to the benefit of the insurance sector is the ICJ, which has been credited as being a regulator that is highly responsive to investors. In addition to continuous interaction with parties in the Jordanian insurance sector, the ICJ has been actively involved in upgrading the regional insurance arena to attract global insurance investments. The ICJ assumed a major role in the establishment of the Arab Forum of Insurance Regulatory Commissions (AFIRC) and continues working with supervisory entities in the region to improve insurance supervision standards. The ICJ’s close affiliation with the International Association of Insurance Supervisors (IAIS) has likewise been beneficial to the Jordanian insurance sector.

ICJ’s efforts to provide a conducive environment for regional captives are described by the ICJ’s acting director general, Rana Tahboub, as befitting the natural flow of “our activities and achievements in the past decade”, which initially began as a quest to realise the royal vision of Jordan as a regional insurance hub.

Firas Abd-Alhadi is insurance awareness officer at the Insurance Commission of Jordan. He can be contacted at: fabdelhadi@irc.gov.jo