The Third Middle East Insurance Forum

1. The Third Middle East Insurance Forum The Opening up of International Insurance Markets: Trends and Consequences Thomas HessSwiss ReChief EconomistHead of Economic Research & Consulting Bahrain, 20 March 2006

2. Agenda • Opening up markets: What does it mean? • Global economic and capital market trends and the Middle East • Insurance in the Middle East • Market opening in the Middle East and its impact • Prospects and conclusions

3. Opening markets: What is it about? The four characteristics of open markets are  Free trade of goods and services ... has been one of the major forces behind the increase of global wealth  Free movement of capital … very important for capital markets in emerging markets to work smoothly and develop  Freedom of establishment ... critical for services  Free movement of labour ... important only in special cases

4. What are the drivers behind opening Technology advanced shipping, railways, cars, airplanes, telephone, internet allowed for cheap international transport, travelling and communication Companies are exploiting these developments  use world markets to sell goods and services buy cheap intermediate products make use of foreign direct investments to produce as cheap as possible Institutions have been created to facilitate and organise international interaction and trade  IMF, OECD, WTO , local, regional organisations and other multilateral institutions organising international relationships

5. Opening markets: What are the concerns? Rich countries  Job losses due to import competition  Fear of dependencies on foreign goods, fear of immigration  State monopolies threatened, subsidised agriculture under pressure  Intellectual capital threatened (Pharma) Developing countries  Cultural issues, lack of preparedness for major changes  Fear of losing control of local financial markets, fear of financial instability and capital outflow  State monopolies under pressure, fear of losing control of local service industries, as strong foreign players penetrate the markets

6. What are the advantages of open markets The welfare advantage of open markets  You can buy everything everywhere  International division of labour increases productivity  Opening markets is the most efficient way to increase competition The results  Cheaper products and more choice, higher purchasing power, more wealth, less poverty, less migration  More stable economy because of broader and deeper financial markets due to opening  More peaceful world? Peace was an important argument forcreation of the European common market

7. Agenda • Opening up markets: What does it mean? • Global economic and capital market trends and the Middle East • Insurance in the Middle East • Market opening in insurance and its impact • Prospects and conclusions

8. The economy • The world economy is entering a mature phase of the business cycle • Growth in 2006 and 2007 will remain solid and inflation is not a major threat • Risk of a recession is remote but rising; oil price increases, US consumption and housing prices are major risks • The ECB and the Bank of Japan will follow the US-Fed tightening; the Bank of England has moved to a neutral stance and is on hold for now

9. Solid growth, higher interest rates Real GDP growth, US, Euro zone, UK and Japan, % Inflation, US, Euro zone, UK and Japan, % Robust growth Inflation under control 3 months interest rates, US, Euro zone, UK and Japan, year-end, % 10 y interest rates, US, Euro zone, UK and Japan, year-end, % Capital market rates go up Policy rates increase Sources: Datastream; Swiss Re Economic Research & Consulting

10. Stock markets rebound Stock markets: USA, Europe, UK and Japan Jan.1995=100 Sources: Datastream, Swiss Re Economic Research & Consulting

11. The Middle East gets richer

12. Regional stock markets have been booming….. until recently Source: ShuaaCapital

13. Growth in the Middle East countries in the last 15 years… Average real GDP growth 1990-2005 (%) Source: Oxford Economic Forecasting

14. ..will continue, it is neededfor coping with population growth Average real GDP growth 2006-2014 (%) Source: Oxford Economic Forecasting

15. Middle East: pros and cons • Middle East a winner of the next decade? • High population growth • Oil will remain expensive and support growth in the regions • Structural issues • High dependency on oil and tourism • Huge differences in wealth within and between countries • Economic and political reforms pending • Still underdeveloped public and social infrastructure in the region • Political tensions

16. Agenda • Opening up markets: What does it mean? • Global economic and capital market trends and the Middle East • Insurance in the Middle East • Market opening in the Middle East and its impact • Prospects and conclusions

17. How does the Middle East compare to other parts of the world? Middle East: Bahrain, Iran, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, United Arab Emirates, Yemen

18. Size of insurance business in the region (2004 figures) Total USD bn 7.0 Non-life USD bn 6.2 Life USD bn 0.8 Source: Swiss Re Economic Research & Consulting

19. Insurance is still underdeveloped Premiums as percentage of GDP, 2003

20. Strong growth in non-life insurance … Average annual non-life premium growth, inflation-adjusted, 2000-2004Premium volume 2004 in squared brackets Source: Swiss Re Economic Research & Consulting

21. … as well as in life insurance Average annual life premium growth, inflation-adjusted, 2000-2004Premium volume 2004 in squared brackets Source: Swiss Re Economic Research & Consulting

22. The S-Curve indicates proves that the Middle East non-life insurance is underdeveloped… Above average insurancepenetration

23. .. and life insurance even more Life insurance penetration All countries below levels which couldbe expected from a country with comparable per capita income

24. What statistics tell us: 30% more non-life insurance possible … below / above S-Curve 2004 premiums as % of GDP • All Gulf States with far below-average insurance penetration • Only Lebanon and Jordan record above average insurance expenditures

25. .. and life insurance can easily double 2004 premiums as % of GDP below / above S-Curve

26. Quick win compulsory insurance The introduction of new compulsory insurance speeds up market growth • Bahrain: compulsory health insurance for expatriates since 2001 • Saudi Arabia: compulsory health insurance for expatriates since June 2002 which may be extended to national citizens, compulsory motor insurance introduced in November 2003 • UAE: compulsory health insurance for expatriates to be introduced in 2004 • Compulsory professional insurance for several professions had been introduced or is planned in many countries of the region

27. Agenda • Opening up markets: What does it mean? • Global economic and capital market trends and the Middle East • Insurance in the Middle East • Market opening in insurance and its impact • Prospects and conclusions

28. The opening up of insurance is a global trend …. Situation before opening • Insurance traditionally was a local business close to the government, often organised as a cartel, with state monopolies and strict regulations like product and tariff control and investment restrictions • At the same time reinsurance and commercial lines businesses often had already liberal regulation from its beginnings like free cross border trade, free to set prices  origins in the big town fires and shipping, which could not be financed nationally; • Foundation of German reinsurers, Swiss Re and the London market goes back 150 years; there are some primary companies with long tradition in operating internationally; UK, Swiss companies are examples

29. … which intensified since the 90s Trends since the nineties • Insurance became a part of the market economy  in Europe a step was taken 1994 ; similar steps in Japan, other Asia, Latin America and Central and Eastern Europe and also in the Middle East • The extent of liberalisation still differs a lot  state monopolies privileges for local insurers prevailed free border trade in personal lines is still difficult • WTO  has done a good job as a market opener also in insurance;  current round may produce again some progress • Supervision  opening has to be accompanied by strengthening supervision  reinforcement of supervision is missing in many countries

30. The liberalisation trend is also visible in the Middle East • Saudi Arabia: NCCI privatisation, WTO access, foreign ownership is limited to 60% • Lebanon, Bahrain, Jordan: foreign ownership or market entrance not restricted • Iran: foreigners are allowed to hold up to 49% of share capital in a local insurer, private domestic insurers allowed since 2001. Privatisation of the four state-owned insurers still pending. • Clear trend towards strengthening insurance supervision

31. An open international insurance makes sense and works .. Claims from Katrina, Wilma and Rita in USDm (LHS) and in % of shareholder equity (RHS) Source: Swiss Re Corporate Development

32. Economic development / increasing income Ageing population Young population Large conglomerates New start-ups United States Emergence of a middle-income class Reform of old (state-owned) companies FDI/capital outflow Increasing role of services Singapore Increasing home/car ownership Poland Corporate (re)insurance Brazil Rapid industrialisation Growth of personal lines China FDI/capital inflow Credit & Surety Vietnam Motor/property takes off Increasing liability business Protection of start-ups Focus on commercial lines Wealth management Protection products Savings products (with capital guarantee) Insurance market development / increasing penetration … and it is a contribution to economic development

33. Opening also means acquisitions …. Acquired life premiums in life insurance USD bn) Akquirierte Lebenprämien, in USD bn Rest of world North America Europe MCSI World Index, rhs Quelle: Morgan Stanley Capital International Inc. (MSCI), Swiss Re Economic Research & Consulting Source: Morgan Stanley Capital International Inc. (MSCI), Swiss Re Economic Research & Consulting

34. As insurance is back the appetite for … Index: Year-end 1999 = 100 • Capital situation in P&C continued to improve vigorously in 2005 until Katrina hit the industry – Life balance sheets have also further improved • P&C underwriting situation remains favourable; prices will rise substantially in catastrophe related business lines; life industry remains on the recovery path Source: Bloomberg

35. … acquisitions of big international companies has increased The worldwide market share of globals in life insurance increased from 19.8% in 1998 to 28.2% in 2004 28.2% 19.8% Quelle: Swiss Re Economic Research & Consulting

36. Also the Middle East is affected • AIG (Alico): Bahrain, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabiam United Arab Emirates • AXA: Bahrain, Lebanon, Saudi Arabia • Royal & Sun Alliance: Bahrain, Oman, Saudi Arabia, United Arab Emirates • Allianz: Lebanon, United Arab Emirates Market shares still low: • Lebanon: 16% (AXA, Allianz, AIG) non-life, over 50% in life insurance • Bahrain: some 20% (AIG, Royal & SunAlliance, AXA minor share)

37. Agenda • Opening up markets: What does it mean? • Global economic and capital market trends and the Middle East • Insurance in the Middle East • Market opening in insurance and its impact • Prospects and conclusions

38. Expected changes in the corporate landscape • State owned companies will lose importance; foreign companies will gain in importance; less small companies • The Allianzes, AIGs, Generalis will play a bigger role alos in the Middle East • Opening also allows the emergence of strong regional player

39. Consumers will be the winners • There will be choice between attractive strong international players in addition to local players • More competition, pressure on premium rates and costs • Higher efficiency, more professionalism; the whole market will profit from improved know-how • Will we see a boom in life products of whatever form?

40. Conclusions • Insurance in the Middle East is in a phase of change characterised by the introduction of tighter supervision, new compulsory insurance, liberalisation and a market opening • As a result we expect consolidation to speed up and foreign companies to gain market share • The Middle East has a huge insurance gap, which is expected to narrow over time • There is a good chance that the insurance growth in the region will be substantially above international growth over a longer time period