Special Reports

A New Era Of Consolidation?

RSA’s acquisition of Al-Ahlia, Oman’s third-largest insurer, may signal the start of a new wave of long-sought-after M&A activity in the Middle East insurance sector.

The acquisition of Al-Ahlia by RSA represents not only a major shake-up of the Omani insurance market, but a relatively unique occurrence in the recent history of the Middle East insurance industry. Calls for consolidation across the region’s fragmented and highly competitive markets have gone unheeded for some time, but M&A activity is expected over the coming years.

According to Clyde & Co, the legal firm involved in the Omani acquisition, further consolidation in the region is on the cards. James O’Shea, Clyde & Co’s senior corporate insurance partner in the region, said: “The RSA acquisition further confirms Clyde & Co’s view that the Middle East region has now become a priority for investment by global insurance and reinsurance players. We believe that the coming years will see a major wave of consolidation and M & A activity in the sector as the industry seeks to capitalise on the potential created by the growth in the market for more sophisticated insurance services in both the retail and the commercial insurance sectors.”

The last major M&A transaction to be announced in the region was the merger of three of Egypt’s state-owned insurance companies: Egypt Re, Al Chark Insurance and Misr Insurance. The integration process is still ongoing and has not been without teething problems.

Otherwise, there has been virtually no sign of consolidation in the region to date. On the contrary, the past three years have witnessed the establishment of a plethora of new insurers; most of which have been takaful operators. There are more than 350 insurance companies operating across the Middle East and North African markets that collectively generated little more than US$20bn in gross written premiums in 2008. This equates to less than half the total premium volume of Belgium.

This is symptomatic of the MENA region’s under-penetrated and highly fragmented markets – a point emphasised by Fig 1, which highlights high concentrations of insurance companies in relation to population size and premium volume.

There is a general consensus across the industry that consolidation is needed. A survey of delegates attending the General Arab Insurance Federation (GAIF) conference in Bahrain two years ago (see Fig 2) revealed that 82 per cent of respondents agreed that there were too many companies operating in the MENA region. An overwhelming 95 per cent supported M&A activity. A panel of industry leaders at the GAIF conference acknowledged that the high number of smaller companies was stretching the limited regional skills pool, and that this would be acutely felt in Saudi Arabia, leading to additional calls for consolidation.

So what has held back M&A activity in the region? The ownership and management structure of many companies (marked by a number of smaller, family run businesses) is frequently cited as a major obstacle. Entrenched management teams, cultural factors and limited transparency make it difficult to get discussions off the ground. Furthermore, the widely divergent regulatory regimes in the region make cross-border acquisitions difficult.

However, regulatory harmonisation is a long-term objective of the Arab Forum of Insurance Regulatory Commissions (AFIRC). In a recent interview with Policy magazine, AFIRC chairman Dr Bassel Hindawi, said: “I’m focusing intently on harmonisation because I believe the Arab insurance industry is quite fragmented with many small and local players. We need to see more Pan-Arab players.

“For this to happen we need to pave the way to facilitate the process and encourage the Arab insurance companies to expand regionally. Having harmonised rules will make it easier to facilitate this process.”

“I am totally for merger and acquisitions for consolidation, but while we need to let market forces play out, we still need to encourage the industry in that direction.

I think fragmentation is really undermining the development of the industry. As much as it is growing nicely, it could be much more. What we need to look at is not only quantity but quality. For example, if there is a new player coming into the market, what is the value added? Those coming in only to provide the traditional lines of business may find certain markets already saturated with such providers.

“We need to encourage innovation in specialised lines of insurance and, in the process, push for more and more consolidation. Perhaps what is related is the capability of the insurers to retain risk. I think fragmentation is contributing to low retention of risk. Insurance companies will not be able to grow and develop significantly if they do not become true risk underwriters with proper risk retention models,” Hindawi added.

Before Dr Hindawi’s long-term vision can be realised, it will be the harsh economic realities of the market that may drive M&A activity in the medium term. The vulnerability of the cash-flow underwriting model has been exposed with the evaporation of easy investment income and smaller players may find that they will not survive alone.

However, it remains to be seen whether RSA’s acquisition of Al Ahlia signals the beginning of a new era of consolidation but conditions are ripe and the industry is in need of a shake-up.