Ali, Abdul Zahra Abdullah

624 Pages·2017·31.9 MB·English

by  Christine Middleton

(i)
INSURANCE DEVELOPMENT IN THE ARAB WORLD :
AN ANALYSIS OF THE RELATIONSHIP BETWEEN AVAILABLE
DOMESTIC RETENTION CAPACITY AND THE FOR
DEMN~D
INTERNATIONAL REINSURANCE.
By
ABDUL ZAHRA ABDULLAH ALl, BSc, HDIP.
* . \
I '
'/
Thesis submitted to
The University of Nottingham
for the Degree of Doctor of Philosophy.
OCTOBER 1984
IMAGING SERVICES NORTH
Boston Spa, Wetherby
West Yorkshire, LS23 7BQ
www.bl.uk
BEST COpy AVAILABLE.
VARIABLE PRINT QUALITY
(ii)
ABSTRACT
This thesis is concerned with an examination of the available
domestic retention capacity and the demand for international reinsur-
ance in the Arab World. The study has been broken down into the
following basic components:
1. The development of the insurance markets of the Arab countries
is traced against the background of the economic, political,
demographic and other changes, including the growth of demand
for insurance, that have occurred in the region over the last
few decades.
2. Insurance legislation and supervision, which varies greatly
throughout the Arab region, is examined in order to identify
the effect it may have on the development of national markets.
3. The market capacity required for the insurance of large risks
and natural hazards is analysed, revealing that normal rein
surance arrangements and local retention capacity can absorb
only a very small proportion of those risks; and that Arab
insurers have a growing need for catastrophe excess of loss
reinsurances.
4. The performance of Arab reinsurance companies and ;:lools as
a means of improving retention capacity is examined based
on data collected from two reinsurance companies and five
pools, to demonstrate how retention capacity can be improved.
5. Finally, a theoretical and empirical investigation is conducted
into the determination of retention limits. Factors relevant
to decisions on fixing retention limits are examined, and
(iii)
the relationship of company objectives to retention limits
and the effect of different forms of reinsurance on the size
of retained premium income are discussed.
The study ends with an analysis of the fire. marine cargo
and motor reinsurance programmes of two Arab insurance companies
to see whether their retention policies are in line with accepted
reinsurance practice or whether they could retain more of their
business for their own account.
The Arab insurance industry is still in its infancy, with
all the attendant inadequacies such a state implies which brings
with it ttvo major problems the inability of retention capacity
of local insurers to respond sufficiently rapidly to changes in
the economies of Arab countries and the heavy reliance on foreign
reinsurance, which in turn leads to low retained premium income.
It is hoped that this thesis will have provided an insight into
ways in which Arab insurers and reinsurers could themselves meet
more of their countries' insurance needs.
(iv)
THIS THESIS IS DEDICATED TO
MY PARENTS AND MY WIFE
***
*
A.Z.A. ALl
OCTOBER 1984
(v)
LIST OF CONTENTS
Page No.
Title. i
Abstract. ii
List of Contents. v
List of Figures. xii
List of Tables. xvi
List of Maps. xxv
Acknowledgements. xxvi
Chapter One : Background to the Study
1.1 Introduction. 1
1.2 Significance of the Study. 1
1.3 Objectives and Methodology. 3
2.4 Chapter Structure. 6
PART ONE Development of the Economies and Insurance
Industries of Arab Countries.
Chapter Two : The Economic Development of the Arab World.
2.1 Introduction. 9
2.2 Population. 9
2.3 Gross Domestic Product (GDP) and ~ts Growth. 13
2.4 The Industrial Sector. 18
2.5 The Agrarian Sector. 24
2.6 Arab Construction Markets. 26
2.7 Transport and Communication 28
2.7.1 Growth in Air Travel and Airports Expansion. 29
2.7.2 Arab Fleet Growth. 30
2.7.3 Telephone and Pipeline Systems. 32
2.8 Trade Sector Growth. 34
2.8.1 Volume of Trade. 34
2.8.2 The Balance of Trade. 37
2.8.3 The Trade Structure. 37
2.9 The Oil Industry. 41
2.9.1 Oil Production and Revenues. 41
2.9.2 Future Prospects. 45
2.9.3 Gas Production and Reserves. 47
2.10 Planning for Development. 49
2.11 Conclusions. 51
Chapter Three : Development of the Insurance Industry
in the Arab World.
3.1 Introduction. 52
3.2 Historical Evolution. 52
3.3 Structure of Arab Insurance Market. 57
3.4 Problems of the Insurance Market. 62
3.5 Continued Activity of the Arab Insurance Market. 63
3.6 Development of Insurance Business. 66
3.7 Premium Expenditure and Insurance Density. 75
(vi)
Chapter Three Contd ... Page No.
3.8 Main Features of the Arab Insurance Market and
its Insurance Business Structure. 95
3.9 Future Development of Arab Insurance Business. 103
3.10 Conclusions. 108
PART TWO : Factors Bearing on the Demand for and Supply of
Underwriting Capacity of Arab Countries.
Chapter Four : Review of Insurance and Reinsurance
Legislation and Supervision in the Arab World.
4.1 Introduction. 110
4.2 The Objective of the Insurance Legislation and
Supervision. III
4.3 State Legislation and Insurance. 112
4.3.1 Regulations Applicable only to Competitive
Markets. 114
4.3.1.1 Commencing Insurance Business. 114
4.3.1.2 The Legal Conditions. 117
4.3.1.3 The Financial Conditions. 118
4.3.2 Regulations Applicable to Both Competitive
and Nationalised Markets. 121
4.3.2.1 Reserving Regulations. 121
4.3.2.2 Investment Regulations. 123
4.3.2.3 Control of Premium Rates. 127
4.3.2.4 Reinsurance Regulation. 130
4.4 Prohibition to Take Out Insurance Abroad. 136
4.5 Regulation for Compulsory Insurance. 139
4.6 Nationalisation of the Insurance and Reinsurance Market. 142
4.7 The Problems of Supervision. 144
4.8 Conclusions. 148
Chapter Five: The Effect of Large Risks on Market Capacity.
5.1 Introduction. 150
5.2 Nature of Large Risk and Branches where they Usually
Emerge. 152
5.2.1 Emergence of Large Risks in the Arab Countries. 152
5.2.2 Continuous Move Towards Large Risks. 156
5.2.3 The Classes of Insurance affected by Large Risks. 163
5.2.4 Catastrophe Size Losses from Large Risks. 170
5.3 Large Risks and their Underwriting Problems. 172
5.3.1 Assessment of Large Risks. 172
5.3.2 Rating of Large Risks. 174
5.3.3 Settlement of Claims Emanating from
Large Risks. 176
5.3.4 Determining Retentions for Large Risks. 176
5.3.5 Insufficient Technical Expertise. 176
5.4 Retention Problems and Reinsurance of Large Risks. 177
5.4.1 Large Risks and Underwriting Capacity. 178
5.4.2 Capacity Suppliers. 180
5.4.3 Reinsurance of Large Risks. 181
(vii)
Chapter Five Contd ... Page No.
5.5 Measures for the Better Handling of Large Risks. 182
5.5.1 The Individual Company Level. 182
5.5.2 Steps at the Level of the Domestic Market. 185
5.5.3 Subregional and Regional Co-operation among
Arab countries. 186
5.5.3.1 National/Regional Reinsurance
Institutions and Pools. 187
5.5.3.2 Regional Co-operation on Joint
Venture Projects and Joint
Placement Abroad. 187
5.5.3.3 Regional Committee for the Assessment
and Rating of Large Risks. 188
5.5.4 Co-operation between the Arab Insurance
Markets and the International Market. 189
5.6 Conclusions. 190
Chapter Six : The Effect of Natural Hazards on the Arab
Insurance Market.
6.1 Introduction. 192
6.2 Flooding. 193
6.2.1 River Channel Flooding. 194
6.2.2 Alluvial Fans. 201
6.2.3 Coastal Flooding. 204
6.2.4 Man-induced Floods. 206
6.2.5 Flood and Insurance. 207
6.2.5.1 Flood Losses. 207
6.2.5.2 Assessment of the Flood Risk
and Losses. 210
6.2.5.2.1 Assessment of the
Flood Risk. 210
6.2.5.2.2 Assessment of Flood
Losses. 212
6.3 Earthquake. 213
6.3.1 Historical Evaluation. 213
6.3.2 Location and Types of Earthquake. 215
6.3.3 Return Period. 216
6.3.4 Assessment of Earthquake Risk. 218
6.3.5 Earthquake Protection. 222
6.4 Salt Weathering. 224
6.4.1 Salt Weathering Processes. 224
6.4.2 Damage due to Salt Weathering. 226
6.4.2.1 General Prospect. 226
6.4.2.2 Buildings made of Stone and Brick. 227
6.4.2.3 Buildings and Structures made of
Concrete. 228
6.4.2.4 Roads. 230
6.4.3 Insurance Application. 231
6.4.3.1 Present Situation. 231
6.4.3.2 Minimizing the Salt Weathering Risk. 232
(viii)
Chapter Six Contd ..• Page No.
6.5 Sand Movement and Dust Storms. 233
6.5.1 Damages of Sand and Dust Movement. 233
6.5.2 Insurance Cover and Control Measures. 236
6.6 Awareness of and Insurance Coverage of Natural
Hazards. 237
6.7 Evaluation and Accumulation of Risk. 243
6.7.1 Evaluation of Risk. 243
6.7.2 Accumulation of Risk. 245
6.8 Conclusions. 256
Appendix 6.1 Towns and Type of Natural Hazards in the
Arab World. 260
PART THREE Measures for increasing Local and Regional
Retention Capacity, and the Balance of Payments Costs
of Insurance and Reinsurance Imports.
Chapter Seven : Measures to Increase National and Regional
Retention Capacity.
7.1 Introduction. 264
7.2 Formation of Insurance and Reinsurance Pools. 265
7.2.1 Reasons for Setting Up a Pool. 265
7.2.2 Advantages and Disadvantages of Setting Up
a Pool. 267
7.2.3 Types of Pools. 268
7.2.3.1 National Insurance Pool. 268
7.2.3.2 Regional Reinsurance Pool. 270
7.2.3.2.1 Management of Regional
Pools. 270
7.2.3.2.2 Business Cessions to
Regional Pools and
Redistribution to its
Members. 273
7.2.3.2.3 The Experience of the
Arab Reinsurance Pools. 277
7.2.4 Conclusions. 291
7.3 The Formation of Arab Reinsurance Companies. 293
7.4 Conclusions. 318
Chapter Eight International Insurance and Reinsurance
Transactions and their Effects on the Balance
of Payments in the Arab World.
8.1 Introduction. 320
8.2 National and Foreign Insurers' Direct Activities
in the Arab Insurance Market. 322
8.3 Balance of Payments Classification. 324
8.3.1 Current Account Transactions. 324
8.3.2 Capital Account Transactions. 325
(ix)
Chapter Eight Contd ... Page No.
8.4 Impact of International Insurance and
Reinsurance Transactions upon the Balance of Payments. 327
8.4.1 Direct Insurance Transactions. 327
8.4.2 Insurance Operations through Branches,
Agencies and Subsidiaries. 328
8.4.3 Insurance Attached to International Trade. 329
8.4.3.1 Problems Arising from the
Evaluation of Insurance
Transactions of Merchandise. 330
8.4.3.2 Merchandise Insurance within the
Local market. 332
8.4.4 International Reinsurance Transactions. 336
8.4.4.1 Local Insurance Markets and the
International Market. 336
8.4.4.2 Size of Reinsurance Transactions and
its Effect on the Balance of
Payments. 341
8.4.4.3 Balance of Payments Effects on the
Basis of Cash System. 353
8.5 Some Policy Considerations. 357
8.6 Conclusions. 358
Appendix 8.1 Transactions Arising from Insurance Trade in
the Balance of Payments. 361
Appendix 8.2 Transactions Arising from Overseas
Establishments in the Balance of Payments. 362
PART FOUR The Determination of Retention Limits and
Reinsurance Programmes.
Chapter Nine : Factors Relevant to the Determination of
Retention Limits.
9.1 Introduction. 363
9.2 Objectives in Fixing Retention. 364
9.3 Factors to be Considered when Fixing Retentions. 365
9.3.1 The Attitude of Management. 367
9.3.2 The Size of the Company. 367
9.3.3 Premium Income Volume. 368
9.3.4 The Financial Strength of the Company. 369
9.3.5 Premium Rates and Premium Loading. 378
9.3.6 The Cost of Reinsurance. 380
9.3.7 The Claims Experience. 381
9.3.8 Investment Policy. 389
9.3.9 Experience of the Company's Staff. 389
9.4 Characteristics of Class of Business in Relation to
Retentions Per Risk. 390
9.4.1 Marine Cargo Insurance. 390