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The Middle East, buoyed by the petrodollar and foreign investment, is booming. Gulf Coast countries, including Bahrain, Qatar, Saudi Arabia and United Arab Emirates states such as Dubai, have become hugely attractive to investors, international companies and property developers that are eager to ride the wave of money flowing into the region.
A combination of a relatively stable political scene, a low natural catastrophe profile and large amounts of investment have contributed to a soft insurance market for property managers and owners in the region.
But according to experts, there are some local factors that may raise challenges. "The region is economically strong, and relatively politically stable," said Hugo Gibbs, partner with London-based Oxygen Insurance Brokers Ltd. "Terrorism poses a minor threat in the region," he said. "Of the GCC, several countries have experienced some isolated incidents, yet only Saudi Arabia appears to have had any real problems. U.S. and British personnel and interests, if any, would appear to be the main focus of attacks."
And Robert Humphreys, executive director-natural resources and construction of Aon Ltd. in London, a unit of Chicago-based Aon Corp., agreed that political risk isn't really an issue for property owners, occupiers and managers: "Political risk? The locals don't buy that and it's certainly not an issue for them," he said.
However, Dubai-based Steve Bonynge, managing director of HSBC Insurance Brokers Middle East Ltd., warns that political risk exposures may become more of an issue, "as activity spreads throughout the Middle East into North Africa and Yemen."
The natural catastrophe profile also is relatively low. There is a fault line that runs through southern Iran (as well as Israel and southern Jordan), which has led to small tremors in Dubai.
But this fault line passes through parts of Ras Al Khaymah (part of the UAE) and Oman, where, as Mr. Bonynge pointed out, "a number of prestigious developments are planned, and therefore earthquake risks will need to be factored into any insurance project."
But "because there's increasing capital chasing the existing premiums for property, there has been a general softening of the market, so it's fairly competitive," said Mr. Gibbs.
But there are, of course, challenges for those buying insurance for construction projects and properties. And it is perhaps the pace and sophistication of property developments that is precipitating these risks. Perhaps the two greatest challenges are posed by the shortage of skilled laborers and contractors and technological problems arising from complex construction projects.
There is a consensus that there is no real shortage of basic laborers, but the lack of skilled contractors at the supervisory level has meant "a general fallout in the quality of the building product, as people without the right skills are being tasked with jobs that are beyond them," said Nicholas Maclean, managing director for the Middle East at CB Richard Ellis Ltd.
With ambitious projects in the pipeline, HSBC's Mr. Bonynge said, "quality control and the employment of a skilled project management team are critical. And the shortage means that there is the possible adverse publicity and liability for death or injury to contractors working long shifts in difficult conditions. As projects become delayed and the pressure on contractors intensifies to complete projects on time, errors may result which could have catastrophic consequences on build quality and accidents."
Mr. Gibbs noted that one of the reasons there is a dearth of skilled labor is the growth of the economy in India. "The issue is being exacerbated by the return of many Indian expatriates, who have traditionally filled the technical management jobs, to the improved working conditions and salaries of the subcontinent," he said.
The absence of skilled contractors is throwing the security of the ambitious construction projects into question. Messrs. Gibbs and Bonynge both pointed to the dangers of building on reclaimed land as one of the biggest property risks.
"Building on reclaimed land or sand generally presents challenges in managing the design and structural risk during construction, particularly when you consider the high-rise nature of many of the projects. Typically, wording and rating are dictated by the available capacity in the international reinsurance market," said Mr. Bonynge. He added that high-rise buildings raise even more insurance challenges, as there are concerns about the ability of emergency services to respond in the event of a fire, for example.
Mr. Gibbs said that the reclamation projects, involving the extraction of sand and rock from inland and dumping it in the Gulf, increase the risk of subsidence and flooding. "The majority of projects are office/retail, hotel and residential builds, which do not pose technical difficulties, but the well-publicized reclamation projects, however, can give rise to issues of subsidence and flooding. International insurers and reinsurers are aware of these risks and factor the exposures into the products on offer," he said.
Risks in buying habits
Another challenge for both developers and occupiers is where and how to buy insurance. Mr. Gibbs said that because of the size of the regional insurance market, there is capacity to insure most buildings. "The capacity locally in the GCC region is far more competitive than it is in Europe, for example," he said.
But there is a tendency among those insuring large construction projects, developments and buildings to cut costs by buying several single insurance packages rather than one combined program in the international market. "They demarcate deals into several small parts. It's cheaper to insure 20 $100 million projects locally, than one $2 billion project internationally. But there are potential risks through accumulation in this way--if there is a sitewide catastrophe, for example," said Mr. Gibbs. "And with 20 different policies, no two policies are going to respond in exactly the same way."
And this tendency creates a challenge for the insurance industry itself. "Technical rates are low generally in the region and the practice of spreading risk among local insurers (is) common," said Mr. Bonynge.
This practice may be driven, at least in part, by whether insurance can be bought on an "admitted or nonadmitted" basis. Darren Munday, a fellow of the Institute of Risk Management and risk manager for an international financial services group, says "sometimes local regulators restrict the basis on which insurance can be bought." And this can mean that limits are imposed on the level of indemnity by the local regulators or that the policies can be restrictive in terms of cover.
Beyond this, the challenges for those buying insurance to protect their buildings and their employees are much the same as would be experienced in Europe and the United States. Those involved in managing property risks in the Mideast Gulf Coast region need to be aware of how the ravenous appetite for growth may backfire, experts said.