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The middle east market grows despite volatility

AIG, other insurers and brokers see opportunities in wide range of industries

By Phil Zinkewicz

On September 12, 2006, the U.S. Embassy in Damascus was attacked by four terrorists described by the Syrian government as Islamic extremists. Three days later, Yemen said its security forces foiled two attacks against oil installations in the country. On September 11, Al-Qaeda’s second in command, Ayman al-Zawahiri, said that Arab Gulf states will continue to be targets of terrorist attacks, according to reports from local television stations, citing a video posted on the Web site of the terror organization’s media branch.

Each day, we read or hear about horrific terrorist atrocities, including suicide bombings that have taken their toll on human lives and property. One might assume that this climate of unrest would discourage commercial activity in the Middle East. Not so. In fact, the opposite is true.

Recently, American International Group (AIG), the world’s largest international insurer, opened a new general insurance unit in the Middle East and South Asia, where terrorism and fire risks are increasing insurance rates while such rates are decreasing elsewhere. Called AIG MEMSA Insurance Co., the insurer includes the New York-based company’s property insurance businesses in 16 markets, stretching from Morocco to Bangladesh and is based in Dubai, United Arab Emirates, according to a Bloomberg report. AIG expects premium income of about $635 million this year and hopes to increase that to $1 billion by 2008, according to the new company’s president, Charles Bouloux.

Nicholas Walsh, AIG’s group senior vice president of foreign general insurance, says that insurance premium rates are rising 12% to 15% annually in Middle East and South Asian markets, compared with an average 9% decline in property premium rates outside the United States in the first half of the year.

“Riot, civil commotion and terrorism have been add-ons to the rates charged, but fire is the leading risk,” Bouloux explains. “Asset insurance in the Middle East has historically been about oil. Now companies and the local economies are diversifying.”

In a recent report, Standard & Poor’s said that Persian Gulf insurance premiums are growing more rapidly than in developed markets as the result of oil-derived wealth, the introduction of compulsory auto and medical insurance in nations such as Saudi Arabia and an expanding appetite for Islamic insurance, or Takaful. While premium volumes in developed markets are growing about 2% to 3% a year, according to S&P, volumes are increasing more than 30% a year in the U.A.E., 17% in Qatar and 5% in Bahrain.

HSBC Holdings has forecasted that the global market for Takaful may grow fivefold by 2015, Bloomberg reports. Bouloux says: “Risks from terrorism and militancy also are increasing demand for coverage. It’s an opportunity for us. People now feel more need to protect their assets.” About 70% of AIG MEMSA’s current business is commercial,; the remainder is consumer and small business, according to Boloux.

Elizabeth Francy Demaret, managing director of the Worldwide Risk Services Group for the Itasca, Illinois-based Arthur J. Gallagher, agrees that there are substantial numbers of U.S. businesses operating throughout the Middle East. “People assume that oil is the only venture coming out of that area of the world, but there are credit card companies, food producers, manufacturers as well as government projects and universities. Businesses operating in the Middle East need to protect their employees and protect their investments. With the exception of workers comp, which is usually national- or state-run, businesses in the Middle East need the full range of coverage associated with businesses in other parts of the world, plus political risk insurance, kidnap/ransom and war risk insurance.”

In addition, Demaret says that companies and universities should have evacuation coverage, as evidenced by recent developments in Lebanon and Israel. “At AJG, we take a position that one of a business’s most valuable assets is the personnel or, in the case of universities, their students. Evacuation cover is extremely important,” she says, although she admits those coverages might be difficult to obtain. “Some countries in the Middle East are more stable than others,” she points out.

Demaret says that most U.S. multinational insurers are operating in the Middle East in one way or another. “Some companies own their operations there, while others strike strategic arrangements with local companies. Then, too, the government is involved in insurance in the Middle East through the Defense Base Act (DBA).”

According to Moody Insurance Worldwide, the DBA was established in 1941 in order to cover workers on military bases outside the United States. The act was amended to include public works contracts with the government for the building of nonmilitary projects such as dams, schools, harbors and roads abroad. A further amendment added a vast array of enterprises revolving around the national security of the United States and its allies. Today, almost any contract with an agency of the U.S. government, for work outside the United States, whether military or not, will likely require DBA coverage.

DBA is a special type of workers compensation insurance to protect employers and contractor employees working on public sector projects outside the United States. Higher benefit levels are provided to eligible workers and the work day is extended to 24 hours per day, which increases the employer’s potential liability for work-related injury, sickness or disease.

Failure to obtain DBA insurance carries stiff penalties. All government contracts contain a provision that requires bidding contractors to obtain necessary insurance. Failure to do so could result in fines and possible loss of contracts. In addition, businesses without DBA coverage are subject to suits under common law.

Jim Walszak, chief operating officer for Rutherfoord International, Inc., in Alexandria, Virginia, says that Rutherfoord is the administrative broker for three DBAs. “Many businesses see the opportunities that exist in the Middle East, but they don’t understand the exposures or the coverages they need,” says Walszak. “Often, we play the role of educator in areas such as evacuation and safety. Because the DBA program is mandated in certain countries, such as Iraq and Afghanistan, there are set rates involved and all must be accepted into the program. The DBA gives access to insurance coverage to small businesses, which might not be able to obtain coverage in the regular marketplace.”

Walszak says that the DBA program includes workers compensation, disability, and evacuation coverage, but that political risk is not covered, nor is business travel and kidnap & ransom. “Companies operating in the Middle East would be wise to purchase those coverages in the regular market,” he says. *

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