The high levels of reinsurance activity in the Dubai market follow a regional pattern which saw GCC insurers cede an aggregate 46% of their non-life premium income in 2011, according to the Qatar Financial Centre’s (QFC) “GCC Reinsurance Barometer”. While some of this business is directed towards local firms, the majority is placed with foreign reinsurers in the established reinsurance markets of Europe, such as the UK, Germany and Switzerland, or the specialist hubs which have developed in places like Bermuda. The amount of business ceded by Dubai’s insurers has led to the perception that the local market is primarily a reinsurance one, with domestic operators pursuing the easy profits to be found in “risk-free” reinsurance commissions.
REGULATION: The preponderance of reinsurance activity in the local market is reinforced by a regulatory framework which places few restrictions on its practice. The UAE Federal Law No. 6 of 2007, by which the UAE Insurance Authority presently governs the sector, allows, for example, local firms to cede up to 100% of the risk. The Dubai insurance market, however, differs to that of the rest of the UAE in that it includes the separate civil and commercial legal system of the Dubai International Financial Centre (DIFC).
While the criminal laws of the UAE have an application within its jurisdiction, financial services firms operate in the DIFC solely in accordance with a series of laws covering fundamental areas such as contract, property, company law, employment and insolvency. The Dubai Financial Services Authority (DFSA), responsible for formulating and enforcing financial services regulation within the DIFC, has produced detailed rules that are published in its rulebook, and many of these have a bearing on reinsurance activity.
The most salient difference between the DIFC system and that of the wider UAE as regards insurance activity concerns the disclosure of information by the cedant company. Under the UAE law, insurers offloading business to reinsurers face no disclosure or notification obligations. However, an insurer ceding risk to a reinsurer in the DIFC is obliged by Article 61, Law of Obligations to “disclose to the insurer every fact within his knowledge which would influence the judgement of a prudent insurer in determining the terms and conditions of the contract or in determining whether to enter into the contract of insurance,” and failure to do so may allow a reinsurer to avoid a claim.
REDUCTION IN ACTIVITY: Nevertheless, the regulatory regime which pertains to the Dubai reinsurance market is not an onerous one, and thus any reduction in reinsurance activity is likely to be spurred by other factors. Reinsurance data suggest that such a reduction is already taking place. According to a 2010 report by regional investment bank Alpen Capital, the average ratio of ceded to retained premiums fell from about 61.3% in 2007 to about 56.4% by second-quarter 2009 – a movement it attributes to a greater sophistication and underwriting capacity among local insurers. The QFC’s “GCC Reinsurance Barometer” noted that overall GCC retention levels rose from 47% in 2005 to an estimated 60% in 2011, with the figure for the UAE at 52%.
The slower growth enjoyed by the industry in the wake of the global economic crisis has given further impetus to the argument that retention policies need to be altered if insurers are to remain profitable. The industry consensus, therefore, is that retention rates will continue to rise over coming years. The strengthening of balance sheets that has been a feature of the market over the past year will grant domestic insurers the necessary capacity to bring this about in the short term. The anticipated consolidation of the market will also provide a platform by which insurers will be able to retain more business on their own books. In the meantime, an increasing level of technical expertise within the industry is starting to enable the level of risk management needed to handle this growth safely.
Risk management will still remain a priority in the short term for local insurers, but the desire for increased retention combined with a growing capacity to achieve it suggests this trend will continue in the years ahead.
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