22/03/2010

By Lynn Strongin Dodds

In the boom era the Gulf Cooperation Council region, above all Dubai, was a hub of activity. Billions of dollars poured into infrastructure, hotels and office developments. The financial crisis had an impact but it was Dubai's debt restructuring that slammed on the brakes. Nonethless, insurers remain confident that economic growth will regain its momentum - albeit at a slower rate.
Peter Jakszentis, head of property underwriting Middle East/Africa at Munich Re says: "The Arabian marketplace has been one of the most dynamic and although we have definitely seen a slowdown in activity, with several deals being put on hold, there is still development. The difference going forward is that there will be a greater focus on the objectives, risk and capital management frameworks."
Lukas Mueller, head of client management for the Middle East and Turkey at Swiss Re, adds: "The impact of the financial and Dubai debt crises have been severe because so many projects, which were the main engine of growth, have stalled. This along with the collapsed prices of real estate, which many insurers invested in, will impact on companies' balance sheets. However, while the GCC has been affected by the crisis compared to the Western world it is still expected to show decent growth levels of 2%-5%."
His view is shared by David Jones, managing director of professional liabil-ity at Markel International: "Projects were pulled but insurers did not lose money because for example, professional indemnity claims arise from negligence - and as these buildings were never completed, there were no design flaws or architectural issues. Also, the Middle East is not a litigious region and developers have not sued."

A slowing engine
The pace of construction started to slow long before Dubai World shocked markets last November with a debt payment standstill. Developers felt the pinch in the aftershocks of the crunch, as production cuts and weak oil prices squeezed GDP growth in economies such as Saudi Arabia and United Arab Emirates (UAE).
The picture today is brighter. The International Monetary Fund (IMF) expects growth of 4% in 2010, up from 2.2% in 2009, with Qatar and Saudi Arabia leading the way as oil prices rally. They had already regained a level of $80 a barrel last November and the IMF predicts about $75 in 2010, from $62 in 2009. The UAE is likely to experience slower recovery, growing just 2.4% partly due to Dubai's difficulties.
Sheik Khalifa al-Nahyan, the oil-rich ruler of Abu Dhabi, provided a $10bn bailout to Dubai's flagship company to plug the refinancing gap for this year, while restructuring of the total debt burden is negotiated. Estimates are that the city owes creditors about $80bn, but a report by regional investment bank EFG-Hermes suggests a figure near $170bn.
In terms of how this translates into construction, data from the Middle East Economic Digest show around $623.9bn worth of projects on hold, but any upturn could prompt clients to restart schemes. A further $505.8bn worth of projects across the region are at prequalification, bidding or engineering, procurement and construction (EPC) stages.
Energy is likely to be to the fore across the six Gulf States with nearly $100bn worth of projects slated to be awarded this year. Despite Dubai's woes, the UAE is top of the spending charts with $216.3bn of overall projects going ahead. State-run energy companies are expected to bestow around $18bn worth of contracts in the first half of 2010.
In a cost-conscious environment well-structured projects, with long-term planning and strong sponsors, will secure finance. This may explain why industry participants expect public-private partnerships (PPP) to feature more prominently in key infrastructure projects All eyes are on the development of Abu Dhabi's first road PPP - a $2.7bn project to build a 327 kilometre-long highway from Mafraq to Ghweifat. The emirate has a 51% stake and plans to replicate this model on other deals, while bankers predict three or four more projects will be announced this year. Government backing will make lenders more comfortable and willing to back such deals.
Paul Knowles, managing director of Jardine Lloyd Thompson, says: "The Mafraq-Ghweifat project will be a litmus test for PPPs. If successful, other projects will flow through as governments look to deliver social and commercial infrastructure in the most cost effective way. As for insurance, power and energy PPPs require international finance as well as global insurance companies with experience in this area. However, there will be a mixture of local and international insurance firms active in this area."
As for insuring large projects the Burj Dubai tower (now renamed the Burj Khalifa, to thank the Sheik) provides a good example. Regional firm Oman Insurance wrote a construction all-risk programme for developer Emaar Properties for what is, at 2,717 feet, the world's tallest building. When cover expired last July, Oman Insurance retained 15%, or $225m of a $1.5bn exposure, reinsuring the rest in the international market with Munich Re as the lead. Jakszentis says that a main component of the group's offering is its risk management advisory services. "We have a long history and experience of working closely with project managers on risk management, as the last thing they want is reputational damage if something goes wrong. This, for example, could involve ensuring there are the right water lines for an automatic sprinkler system in case of fire."
Mueller says construction all risk policies will remain key for major projects. "Developers will typically take out such policies during the building phase, but once the project is completed the risks will transfer to property and operational policies. A major challenge is building a sustainable business model. It's a competitive market and pressure on rates has been high as the market attracts an increasing number of international players." Looking ahead, he sees "significant potential for property and casualty
insurance as penetration in the region is only 1.5%, against 3-4% in emerging markets.

Takaful takes off
Takaful, or sharia-compliant insurance is also gaining momentum, although Jones says it is mainly for personal coverage and provided by domestic firms. A growing band of western insurers is establishing sharia-compliant/takaful operations to compete with established Islamic insurers.
Takaful is seen as a product with appeal to all, from individual Muslims to large corporations. Conceived as a form of mutual assistance and risk-sharing, takaful came second after Islamic retail loans as the products with most potential revenues in a survey of the financial services industry by accountancy firm BDO.
There are hopes the market will grow overall in Muslim countries, as takaful takes a greater share. Figures are scarce, but Fitch estimates that some $2.6bn of Islamic insurance was sold worldwide in 2006, while HSBC's Islamic banking arm, HSBC Amanah, reckons in 2008 the Saudi market alone was worth SR10.9bn ($2.6bn), from SR8.6bn in 2007. Swiss Re's research shows only 4%, or $1.7bn, out of $45bn of insurance sold in Muslim countries in 2007 was sharia-compliant. But takaful is growing, albeit from a small base, at more than double the rate of the conventional market.

Lynn Strongin Dodds is a freelance contributor to Risk Management Professional

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