LONDON, 28 November 2005 -- Insurance, especially Islamic insurance (Takaful), is set to increase dramatically in the Gulf Cooperation Council (GCC) states, especially Saudi Arabia, over the next few years. Governments are rushing to license insurance and Takaful firms to accommodate new policy initiatives such as the introduction of compulsory health and motor car insurance.

In Saudi Arabia alone, some 20 firms are in the process of being licensed, and another ten have lodged applications to the Saudi Arabian Monetary Agency (SAMA), the central bank and effectively the insurance regulator. The government is also allowing foreign insurance companies to open branches in the Kingdom.

With this rush towards insurance cover, is the Saudi government getting the licensing and regulatory processes right? There are many who think not.

Dr Abdalelah Saaty, chairman of the Insurance Committee at the Jeddah Chamber of Commerce & Industry and a senior professor of insurance at King Abdul Aziz University in Jeddah, for instance, is campaigning for the establishment of a separate specialized higher authority to regulate the insurance and Takaful industry in the Kingdom.

This, stresses Dr. Saaty, would crucially speed up the licensing process of would-be insurance companies, given that the current licensing process is a nightmare and involves no less than five departments -- SAMA, the Insurance Council, the Ministry of Commerce & Industry, The Saudi Arabian General Investment Corporation, and the Traffic Department.

There is nothing wrong in the banking authority to also regulate the insurance sector.

This, however, would depend upon the regulatory capacity, organizational governance and human resource capability of the individual regulator. Because mass insurance is a fairly new phenomenon in the Kingdom, and the licensing process being as cumbersome as it is, there are doubts whether SAMA does have the institutional capacity to effectively regulate and license the insurance sector. As such a separate stand alone dedicated insurance regulatory entity would be in a better position to regulate and license the sector, and thus better protect the interests of both individuals and businesses.

The reasons for the above rationale are indeed compelling. The Jeddah Chamber of Commerce expects the Kingdom's insurance market to triple from SR8 billion to SR24 billion within the next 10 years. At present insurance contributes only 0.7 percent of the gross domestic product (GDP) and which is expected to reach 3.7 percent in five years once the companies are licensed and more businesses are insured.

One Takaful operator in Saudi Arabia stresses that the "new Co-operative Insurance Law unfortunately does not distinguish between conventional and Islamic insurance operators thus leading to confusion in the market. Consumers should never be forgotten when considering regulatory arrangements, as ultimately such regulations should primarily be for the protection of the consumer more than the operator."

One Takaful company which got approval in September 2005 from SAMA to set up a Takaful operation in the Kingdom is the Dubai-based International Arab Insurance Company (IAIC). The company recently successfully closed a capital increase exercise in which its capital was increased from 50 million dirhams to a staggering 1 billion dirhams.

The Labuan-incorporated but largely Saudi-owned RUSD Investment Bank, headed by Dr. Saleh Jameel Malaikah, formerly CEO of Al-Tawfeek Company for Investment Funds, in its first major advisory transaction was mandated the lead financial adviser for the transaction which comprised financial advisory on a rights issue to shareholders; an initial public offering (IPO); acquisition activities; and subsequent listing of IAIC on the Dubai Financial Market. The IAIC IPO of 200 million dirhams ($54.5 million), according to Rusd Bank, was oversubscribed eight times. Following the subsequent listing of IAIC on the Dubai Financial Market, the share price of the insurance company settled at a respectable 4.5 dirhams per share.

Not surprisingly, Malaikah is bullish about the bank's ability to attract sizeable mandates, and gave notice, perhaps to competitors, that the success of this first major transaction for RUSD Bank would certainly not only be a measure to develop confidence, but also to enable the bank to perform successfully on major and challenging assignments in the future.

According to RUSD Bank managing director, Naseeruddin Khan, IAIC raised a total of 950 million dirhams to increase its capital to 1 billion dirhams from 50 million dirhams. Of the 950 million dirhams, 200 million dirhams was raised through the IPO, and another 750 million dirhams was raised through a rights issue offered to founding shareholders only. RUSD Bank, according to Khan, enjoys strong institutional support from leading Islamic insurance companies, and is currently working on several similar large corporate advisory transactions.

By Mushtak Parker

© Arab News 2005