As a result of demographic changes and a new surge in wealth, the Middle East has shown an increasing interest in mitigating risk through insurance. Despite concerns as to whether insurance accords with Islamic Sharia principles (which has been somewhat addressed by the set up of Takaful operators). Insurance is now being considered a social and economic necessity in the Middle East.
Over the past five years, this has led to an influx of insurance-related businesses operating in the region. This has been particularly heightened by the setting up of offshore jurisdictions in the UAE and Qatar (Dubai International Financial Centre (DIFC) and Qatar Financial Centre (QFC)), which has encouraged international players to set up offices without requiring a local shareholding interest in their companies.
With the insurance market expected to experience growth due to rising demand, there are challenges ahead. Consumer awareness and penetration (both on a corporate and non-corporate level) remain relatively low. Attracting (and retaining) talent to the region, with expertise in particular lines of business, is still a challenge. Recent political unrest has added a new layer of complexity to the insurance landscape.
Underpinning the different insurance markets is the ability of the regulators to facilitate sustainable growth. It is essential that the regulatory regime adapts to deal with change. A more robust regime is needed (signs of which are becoming evident) if the industry is to sustain the growth and successfully meet the region’s socioeconomic needs. While the general outlook for the industry is the same across the region, the regulatory frameworks across the various jurisdictions differ substantially and are evolving at different rates. A common theme across the Middle East is that, while there is clear evidence of an objective to tighten regulation, effective implementation remains to be seen.
This article briefly reviews the regulatory framework in key jurisdictions in the Gulf, as well as providing a brief commentary on how such jurisdictions compare to the UK. It also provides commentary on the development in the region of two particular insurance lines of business.
DIRECTORS AND OFFICERS LIABILITY INSURANCE (D&O) AND POLITICAL RISK COVER
Directors’ duties and liabilities are generally covered by the corporate governance code of each jurisdiction. Since the financial crisis, corporate governance has been on the increase across the world and one feature of this has been the concurrent rise in D&O liability insurance.
Historically, D&O insurance has not been widely purchased in the Middle East, with private companies considering themselves not to be at risk. However, there has recently been a sharp increase in the number of corporate governance-related regulatory and criminal investigations in the region, partly due to the economic climate.
Directors and senior management are finding that they are being called to account for personal actions, which has caused them to focus on personal exposures. The increased awareness that no director or officer is beyond risk, or exempt from litigation or investigation, explains why D&O policies are also on the increase.
Comparatively, in the UK, new legislation including the Bribery Act 2010 and the Corporate Manslaughter and Corporate Homicide Act 2007 have contributed to the rise in D&O policies, because the new rules have heightened directors’ exposure to personal liabilities.
Understandably, there has been a sharp rise in requests for political risk insurance as a result of the recent unrest in the Middle East. Due to this demand, insurers are increasingly providing strikes, riots and civil commotions (SRCC) cover, albeit it at significantly higher rates. There are currently test cases before local courts, particularly in Egypt, on the construction of different SRCC terms and whether the recent events fall within or are excluded under relevant policies. Although there is English authority on the various legal issues that arise from such disputes, such notions will usually be foreign to the judicial systems in this region and are unlikely to be dealt with under local laws.
The Kingdom of Saudi Arabia
Before the introduction of the Co-operative Insurance Regulations 2004 (the 2004 Regulations), the insurance industry in Saudi Arabia was entirely unregulated. Until 2004, businesses and individuals operating in Saudi Arabia were forced to either take out cover overseas or use an unregulated insurer in the knowledge that this would be unenforceable on the grounds of it contravening Sharia law.
The administration and enforcement of the 2004 Regulations falls under the responsibility of the Saudi Arabian Monetary Agency (SAMA) and to carry out insurance-related activities, companies must first register with SAMA.
SAMA is really the driving force behind promoting and striving to achieve a properly regulated insurance market, with its key aims being protection, stability, fairness and transparency. SAMA is continually seeking ways to improve regulations. For example, in 2008 it released several new regulations, including Anti-Money Laundering and Risk Management Regulations. In late 2010 SAMA issued the Regulation of Reinsurance Activities (RRA), aimed at providing guidelines to reinsurance companies and service providers in Saudi Arabia. The RRA touches on such issues as internal controls within a company, appointment of a ‘reinsurance officer’, treaty wordings, ratings of reinsurance companies and securing facultative support. SAMA also issued discussion papers in early 2011 on insurance intermediaries regulation, investment regulation for insurance and reinsurance companies, and online insurance activities regulation, which demonstrates SAMA’s commitment to improve market practice.
Implementation of the 2004 Regulations was subject to delay due to unlicensed insurers operating in Saudi Arabia being given the opportunity to bring their operations into accordance with the requirements of the new regulations and to register with SAMA. SAMA then issued the Insurance Code of Conduct Regulation 2008 (the 2008 Regulation) to bolster the terms of the 2004 Regulations. The 2008 Regulation provided guidance to insurers and reinsurers on resourcing, data protection, conflicts of interest, policy forms, and pre-policy discussions.
To operate an insurance company in Saudi Arabia it must be incorporated there with a minimum paid-up capital of $26.66m for direct insurers and $53.33m for re-insurers. The rules restrict the transfer of shares in that only Saudi nationals can own them.
At least 30% of cover must be obtained by insurers and at least 30% of cover must be reinsured within Saudi Arabia, unless SAMA’s consent is obtained. Once established, insurance companies must employ at least 30% Saudi nationals as their total workforce and this percentage must then increase every year at a rate to be approved by SAMA.
There is a prohibition on branch offices of foreign insurers being set up in Saudi Arabia and on the insurance of assets overseas. Insurance must be offered on a co-operative basis in accordance with Sharia laws.
It is very difficult for insurance companies to operate in Saudi Arabia even with the introduction of the regulations, because there is always a risk that they may conflict with Sharia law. Where there is a conflict between Islamic law and the regulations, Islamic law will always prevail. This could lead to unexpected outcomes for a local insurer and, consequently, its reinsurer.
Saudi Arabia introduced the Corporate Governance Regulation (CGR) 2006 for listed companies, which was intended to strengthen the supervisory functions across the financial sector, following a recognition that regulations needed tightening. The implementation is still in the relatively early stages, but CGR 2006 is generally considered to reflect recognised international practice. There are several recommendations being made to aid better enforcement, including proposals to make compliance with some or all of the regulations mandatory.
The uptake of D&O insurance has been fairly inconsistent across Saudi Arabia, with some considering the risk of being sued in Saudi so minimal that taking up cover is not worthwhile, while others have reacted more positively. The major dispute between the Alghosaibi family and Maan Al-Sanea may, however, demonstrate exactly why D&O cover is critical if Saudi entities are operating internationally.
The introduction of the UAE Insurance Law (Federal Law 6 of 2007) established an Insurance Authority responsible for regulating the insurance industry in the UAE. The previous legislation was over 20 years old and the change in law in 2007 introduced a dedicated regulator for the insurance sector in the UAE for the very first time. Prior to this law, the insurance sector was regulated by the Ministry of Economy.
The Insurance Authority regulates the industry and is responsible, among other things, for:
- formulating and issuing regulations for the insurance industry;
- implementing a code of conduct; and
- approving the licensing of insurance companies.
Other features of the law are that:
- the reinsurance of risks in or from the UAE are not restricted;
- policies should be issued in Arabic and English (the Arabic text prevails in case of conflict); and
- the fact that exclusion clauses need to be brought to the specific attention of the insured by the use of a different colour in the policy wording (otherwise they will be considered void).
The much-anticipated Implementing Regulations to the 2007 Insurance Law were issued in early 2010. These provided further clarity as regards the types of insurance and the nature of insurance company branches, construction of the board of directors, and licensing procedures of local and foreign insurance companies. Further regulations would be welcomed to clarify other areas in the 2007 law, such as the practical effect of the regulation concerning exclusion clauses.
It is understood that a new law will come into effect in May 2011, which will introduce a mandatory requirement for insurance brokers in the UAE to keep their premium collections separately from the bank accounts where they store their operating expenses. This represents significant progress in regulation, as until now, client funds have not benefited from any such protection. The text of this new law is yet to be issued.
In the wake of the financial crisis, a trend in boosting corporate governance is evidenced in the UAE by Ministerial Resolution No (518) of 2009 and 84 of 2010, recently issued by the Ministry of Economy, enhancing governance rules and corporate discipline standards (the Securities and Commodities Authority (SCA) Code). The SCA has responsibility for ensuring compliance. The new laws apply to all companies that have securities listed on a securities market and to their board members.
The purchase of D&O products in the UAE has seen a rise, but not necessarily to the same levels as had been anticipated, particularly in the private sector. This could be due to the fact that many private companies are family owned. Therefore the perception of the risk of claims against the directors or officers of those companies is relatively low. Attitudes are expected to change as awareness of potential exposures for directors and officers increases, and boosting corporate governance is likely to have a direct effect.
Perhaps the biggest distinguishing factor from other jurisdictions worldwide (including the UK, Qatar, Saudi Arabia and the DIFC) is that the regulations do not form part of a wider financial services regulatory body. There can be, therefore, a lack of synergy between the different regulations that are being issued, given that more than one governmental body is involved in regulating the financial sector in the UAE.
The DIFC was established in 2004, with the aim of becoming an offshore financial services hub for the Gulf region and, among others, the world’s five largest insurance companies have established a regional base there. It is a common law jurisdiction, founded on the English system and so it is unsurprising that the DIFC draws on the English regime for guidance. For regulatory reasons the bulk of DIFC insurance activity relates to reinsurance, although there is still scope for direct business.
The regulatory regime in the DIFC comes from several legislative measures taken in the UAE and Dubai, including:
- Article 21 of the UAE Constitution (allowing the UAE to pass a law on financial free zones);
- Federal Law No 8 of 2004 (allowing a financial free zone to be established in any emirate of the UAE);
- Federal Decree No 35 of 2004 (which established the DIFC as a financial free zone in the emirate of Dubai); and
- Dubai Law No 9 of 2004 (which established the scope of the DIFC).
The regulatory framework bears some similarities to the QFC as they are both modelled on the English system. Under both regimes, financial entities (including insurance companies), operating within the DIFC and the QFC, can be 100% foreign owned.
The DIFC regulates contracts of insurance (defined by Article 60(2) of DIFC Law No 5 of 2005), and responsibility for the making and enforcement of regulation rests with the Dubai Financial Services Authority (DFSA). Both insurers and reinsurers have to obtain the DFSA’s approval before they can carry on insurance business in the DIFC and, similar to the UAE and in contrast with Saudi Arabia, the DFSA permits the entry of branches of foreign companies.
Law No 9 of 2004 has been amended (Law No 7) for the first time, unveiling greater corporate governance in the DIFC, with the introduction of a new Higher Board comprising representatives from the DIFC Authority, the Dubai Financial Services Authority and the DIFC courts. The shift represents the focus on compliance, with the highest level of governance, and on transparency. The new law also clarifies the application of Dubai laws to DIFC businesses.
While rumours have been rife that there may be a compulsory introduction of D&O insurance in light of the influx of claims against directors and officers, it is widely considered that this will not materialise in the DIFC because it would undermine the concept of a free market. The focus instead is on increasing awareness.
Insurance companies are regulated by the QFC Regulatory Authority (QFCRA), which is an independent regulatory body established by Article 8 of the QFC law. The QFCRA was established in 2005 and regulates firms that conduct financial services, including insurance-related activities in or from the QFC. The legislation created by the QFCRA is principles-based and, like the DIFC, is modelled closely on the regime used in England.
The regulation in Qatar is robust and risk-based, and the regime is based on international standards and best practice. The regulations are principles-based, with a judicious use of rules where necessary. There is a strong focus on the constant need to tighten and sustain solid regulation, due to the growth the industry is facing, and proposals for change feature regularly.
Only very recently two consultation papers were issued proposing change to the regulatory environment for captive insurers, captive managers and insurance intermediaries, operating in and from the QFC, in a bid to develop a regional hub for captive insurance, which is centred in Qatar. Companies are appreciating that the use of captives is a way of better controlling insurance costs while simultaneously focusing on risk management.
There are no restrictions on insuring risks within Qatar, which is in contrast with the DIFC, where directly insuring risks located within the UAE is prohibited. Another clear difference between the two is that authorised firms in the QFC are fully permitted to conduct insurance business with retail customers, whereas licensed firms in the DIFC are not permitted to do this.
The Qatar Financial Markets Authority enacted a new Corporate Governance Code for public and listed companies in 2009. This reflected the aim of implementing corporate governance principles in place in the developed world for the management of public companies, thereby applying international standards.
The uptake of D&O products has been slow, but the American International Group (based in the QFC’s flagship office) is leading the way in its recognition of the need for writing such specialist policies to appeal to foreign investors.
Insurance regulation in the Middle East is the subject of greater focus. Regulators should ensure that they take steps to create an environment where growth in the market is encouraged at a sustainable rate. In any jurisdiction around the world, there is always the tension between regulation and enforcement – this region is not immune from this struggle.
Despite the fact that insurance regulation in the Middle East is still developing, there are clear signs of international standards being applied, and there is an awareness that an increase in insurance activity demands more robust regulation and enforcement.