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Oct 2019

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Is Dubai's regional hub status at risk?

Source: Middle East Insurance Review | Jul 2019

For the first time in DIFC’s 15-year history, more re/insurance entities are leaving the centre than moving in, raising questions about its attractiveness and also serving as a wakeup call for the regulator to evaluate its existing business strategy to maintain its top spot among MENA financial centres.
By Cynthia Ang
 
 
Dubai is seeking to consolidate its growing leadership status in global finance with a combination of initiatives aimed at further developing the financial sector, enhancing investor confidence, improving infrastructure and increasing its ability to tap the latest technologies.
 
At the centre of these efforts is the approval of a new chapter in the development of the DIFC with the launch of DIFC 2.0 in early January this year, which will be completed in several stages. The phased growth plan will triple the scale of the financial hub by 2024, adding a total of 13m square feet of space. The new development will also provide an international focal point for FinTech and innovation, enhancing the centre’s reputation as one the world’s most advanced financial centres.
 
Since the launch of DIFC’s operations in 2004, Dubai has established itself as a reputable and leading financial centre in the MENA region. Dubai is ranked as MENA’s top financial centre, according to the latest Global Financial Centres Index (GFCI) published by consulting firm Z/Yen in March 2019. The emirate climbed three places to number 12, ahead of Casablanca by 10 spots, Abu Dhabi by 14 and Doha by 30, in the index topped by New York, London and Hong Kong. 
 
The GFCI is compiled using 133 metrics, featuring 112 centres globally and interviewing 2,373 respondents. The survey covered issues such as the structure and stability of the business environment, the strength and depth of the local labour market, the quality of infrastructure and a city’s reputation. 
 
Reputational challenges
From a business perspective, Dubai’s attractiveness is its position as the most well-connected transport hub in the Gulf and its clusters of high-rise towers and myriad business zones provide a comfortable, low-tax home for regional and international companies. 
 
However, the DIFC’s reputation has recently taken a hit following the collapse of the region’s largest private equity firm Abraaj Group last year, a slump in the real estate sector, and the Saudi Arabia’s government’s pursuit of UAE-based assets held outside the free zone as part of the crackdown on alleged corruption. 
 
In addition, the increasing number of insurance and reinsurance operations exiting the DIFC has also cast some doubts on the centre’s attractiveness to foreign investors. At least six insurance entities – including Apex Limited, Arig Insurance Management (DIFC), Assicurazioni General SpA Middle East Regional Offices (DIFC Branch), Henner Limited, Partner Reinsurance Europe SE (Dubai branch) and Sovereign Risk Insurance (Dubai) – are being placed under ‘pending dissolution’, according to information published on the DIFC’s public register.
 
Another four entities – Clements (Dubai) Limited, MDC (RE) Insurance Limited, Royal Shield and Talbot Underwriting (MENA) Ltd – are being listed as ‘inactive’. Talbot, which ceased underwriting as of 21 November 2018, said it will continue to underwrite MENA risks, but from its offices in London and Singapore.  
 
Two reinsurers have also cut back their operations. Qatar Re announced last June that it will suspend the writing of all new and renewing facultative business from its branch office in the DIFC, while Aspen Re has dropped facultative business in the region. 
 
What is driving these exits?  
For the first time in the DIFC’s 15-year history, more reinsurers are leaving the financial centre than moving in, said Mr Henri Labat, senior executive officer, International General Insurance Company (Dubai). 
 
“The departures are due to different factors. Poor underwriting results have impacted the profitability of reinsurers in 2017 and 2018 – particularly in property, energy and marine lines in the Middle East. These poor results have led to the exodus of some reinsurers from the MENA region,” Mr Labat said.
 
He also noted that some companies have decided to close down their operations in the DIFC due to less business volume, and terms and conditions becoming too competitive. “Finally, some reinsurers have departed because of the increasing costs of operating out of the DIFC, deciding to continue covering business in the MENA region from other places, such as London or Singapore,” he added. 
 
Mr Chakib Abouzaid, GAIF’s secretary general, said, “Since 2005, we have seen many reinsurers coming to DIFC. The successful ones are those which brought with them their existing business and focused on niche products and also because of their proven business model.
 
“Other players decided to withdraw because they entered a very crowded market at a very late stage, when excess capacity and cut-throat competition were rampant. To make matters worse, the economic slowdown since 2016 and the drastic reduction in spending on infrastructure were not favourable for reinsurance business.”
 
It is difficult to identify a single specific theme behind the recent exits, said Mr Peter Hodgins, partner – corporate insurance at Clyde & Co, noting that each of the market participants has given different reasons for their decision to exit from the DIFC.
 
Undoubtedly, market conditions have played a part with the region continuing to be extremely competitive and premium rates for many lines remaining soft, said Mr Hodgins. “In some cases, the decision to exit appears to have been driven by increasing sensitivities to the cost of deploying capital (particularly with enhanced capital requirements in their home markets). In other cases, the decision appears to relate to broader strategic concerns.”
 
Understanding the impact 
Whilst the exits may give potential new entrants pause for thought, “I do not think the recent departures will have a material impact on the reputation of the DIFC in the longer term”, said Mr Hodgins. 
 
The DIFC has worked hard to build a reputation as a steady and responsible financial centre, and the recent departures has not changed that reception, said Mr Labat. “It’s true that the Middle East has faced a slowdown in its economy, which has meant insurers and reinsurers have been fighting hard to retain and improve their market share. 
 
“It has been a shame to see some regional reinsurers facing harsh difficulties, struggling with results, and in some cases, being downgraded or losing ratings altogether. However, the market is already starting to see signs of recovery. For example, the first quarter of 2019 saw some new and important construction projects linked to the energy sector,” he said. 
 
Mr Labat added, “Operating in the DIFC must be approached with a long-term perspective in order to succeed. Short-term and aggressive approaches in terms of underwriting are generally doomed to fail.”
 
There are still successful reinsurers and brokers in the DIFC, said Mr Abouzaid. “Some others should probably revisit their business strategies and look for business in the MENA region indirectly, for example, from Europe or Singapore.”
 
There is no doubt that new entrants need to have a clear strategy for their business in the region and a realistic business plan, said Mr Hodgins. “However, we are seeing continued interest in the establishment of operations in the DIFC and we continue to advise new entrants applying to set up insurance sector entities in the DIFC,” he added. 
 
Market opportunities
Amidst the exits, there are a number of insurance entities which have launched their operations in the DIFC over the last 18 months. These include ACE Insurance Brokers, Berkshire Hathaway Specialty Insurance (BHSI), Gulf Ocean Insurance & Reinsurance Brokers (DIFC) Limited, Kingdom Brokerage Re (DIFC) Ltd, and Newton Underwriting. 
 
Mr Labat said these reinsurers and brokers have spotted that the overall market conditions, including in MENA, are beginning to change and are seeing opportunities for future growth in the region. 
 
One of the most important reinsurers in the world, BHSI, made the move to the DIFC last year, “highlighting that the strategic location of Dubai, as well as the stability and efficiency of the DIFC, is an ideal hub for the company to support economic growth in the region”, he added.
 
In addition, the DIFC has increased its geographic scope over the years. It now accesses business beyond the MENA region. Business from East and sub-Saharan Africa is now being directed into the DIFC, as well as business from the Indian sub-continent and Central Asian countries. 
 
“This business used to be written out of London, Singapore and continental Europe mainly, but the overall change of market conditions (many London underwriters have pulled out of many business lines) together with the emergence of DIFC as a reinsurance hub has changed this,” said Mr Labat. 
 
Regulatory support
While DIFC’s strength as a financial hub has been the result of over a decade’s worth of experience, it should strive to maintain its reputation as a hospitable business environment to be fit for the future. 
 
Regulation is one key aspect, said Mr Labat. “The DFSA, as a regulator for companies operating in DIFC, should continue to be a recognised reference as a regulator. However, it has to avoid creating and building barriers for the business to grow. The financial centre should develop its compliance and regulatory policies in a way that makes the DIFC a compliant environment, while at the same time, remaining an attractive place to work, supporting the growth of the business. 
 
“This is a difficult balance to reach, and can be sometimes be a challenge in a working environment where regulation has increased over the years. Some other regulators have been able to find a good balance, such as the Bermuda Monetary Authority, which has been able to uphold and maintain its regulatory regime, while at the same time introducing initiatives to help businesses grow,” he said.
 
Mr Hodgins said there needs to be two focuses for the regulatory bodies in the DIFC. First, it needs to continue to ensure that financial services entities can be established in a timely, predictable and cost-effective manner. For example, he said “uncertainties arising from a change in policy (as has recently been the case with regard to the categorisation of certain long-term insurances) or because of the impact of onshore regulatory developments (as has recently been the case with the new Funds Protocol) can impact on the predictability of operations in the centre and have the potential to deter new entrants”. 
 
Second, the ongoing costs for business in the DIFC need to be manageable. He explained, “A significant component of this is the cost of office space in the centre which remains some of the most expensive in the UAE. It is hoped that the announced expansion of the DIFC will assist in this regard. However, I would also like to see some new initiatives to create efficiencies for business in the DIFC. For example, blockchain technology could be used to significantly decrease AML costs by providing market-wide access to client data. The DIFC reinsurance market would appear an obvious starting point for such an initiative given that the cedants and reinsurance brokers are all regulated entities.” 
 
On the other hand, Mr Abouzaid believed that “DFSA should decide on a moratorium not to issue new licences for a certain time to allow existing reinsurers to expand. Alternatively, it could impose strict requirements for newcomers in terms of existing business and ability to generate enough premium to sustain their expenses. In the past, business plans presented to DIFC were not always realistic”.
 
Reinsurance business is a long-term commitment, “so newcomers should not expect to see positive returns within five to seven years”, he added.
 
Still leading the way
Dubai’s strength as a regional financial centre has so far been impressive. DIFC recorded 437 new business registrations in 2018, the highest since its inception in 2004, bringing the total number of active registered companies to 2,137. Of these, 625 were financial firms including close to 90 re/insurance entities. The centre also achieved strong financial performance with net profit growing by 11% to $88m last year.
 
As part of its 2024 strategy, DIFC aims to be home to 1,000 active domiciled financial firms and have 50,000 working professionals.
 
In comparison, Casablanca Finance City (CFC), DIFC’s closest competitor in terms of global financial centres ranking, is home to 157 companies, including 41 financial services firms. At Abu Dhabi Global Market (ADGM), there are 75 financial services firms, including four re/insurance companies. The Qatar Financial Centre (QFC) saw the number of firms registered on its platform reach 605 in December 2018, with over 90 local and global financial services firms. In Saudi Arabia, the largest economy in the Middle East, its 17m square feet King Abdullah Financial District is still under construction after almost a decade. 
 
With more than 2,000 registered and 550 regulated entities, DIFC is still MENA’s top financial centre – a position QFC, CFC, ADGM or Bahrain could not overtake easily, said Mr Abouzaid. “Other regional centres have their own specific approaches, for example, the CFC targets companies looking to expand in Africa.”
 
Mr Labat said the DIFC will be watching over other emerging financial hubs with interest, but it is unlikely to feel threatened by any of them just yet. He added, “In fact, the DIFC is viewed as a global role model for financial hubs and the fledgling financial centres such as the Astana International Financial Centre (AIFC), the CFC and the QFC.”
 
“I very much doubt that another financial centre will emerge as a meaningful challenger to the DIFC any time soon. Certainly from the insurance perspective, the DIFC has a critical mass in terms of the number of market participants and quality of service providers, which far exceeds the other regional financial centres at the current time,” said Mr Hodgins.   
 
For now at least, the emirate looks set to maintain its status as the region’s preeminent hub while other cities are mounting efforts to develop their financial centres in their bid to one day ‘dethrone’ Dubai. M 
 
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