Trends » afaq

A Captive market

afaq — Thu, 10 Jul 2008 11:17:05 +0000

Khalid A. Mohomed is fascinated by insurance. His days of training in the UK and the United States, and working as a risk management practitioner in the US in the 1980s make him something of a local authority on the subject. But Mohomed, who now works as a director at Dubai-based Dana Insurance Brokers, is surprised that something as useful as captive insurance has failed to capture the imagination of businesses in the Middle East.

This, in spite of the region’s asset boom – which is creating large physical assets that command huge insurance premiums. It provides a great environment for the growth of captive insurance, which consists of limited-purpose insurance companies established solely to finance risks for their parent corporations. They ensure some or all of the corporate risks remain within a group, and save profits that would normally be paid to a commercial insurer. A captive firm can effectively build up a fund to deal with flush years, and it’s usually more tax-efficient to do this through a captive than directly on the firm’s balance sheet. Captives also mean a reduction in the company’s dependence on commercial insurance.

“Captives are a risk management tool and not really an insurance mechanism,” Mohomed says, “even though when captives are formed to look after hazardous risks, then [they are] a form of self-insurance.” From another perspective, a captive is a legal accounting gimmick to save taxes. As a risk management tool, it’s useful to transfer risk from the corporate body to an outside funding mechanism.

“When you work on the balance sheet” in the United States, where corporate taxes hover around 50 percent, Mohomed explains, “you take your income and expenditure and then on the balance you work on the net profit before tax. But if you increase your outgo and reduce income, the profit goes down and you pay lesser taxes. To do just that, major corporations form their own captive insurance companies and register them mostly in a little island called Bermuda.”

This is where 29 percent of the world’s captives are based. Worldwide, the number of captives increased from 3,361 in 1997 to 5,119 in 2007, with Bermuda holding the most at 958 captive firms. With Dubai becoming a financial services hub, it should have by now become the first choice for the region’s captive insurers. But despite realizing their potential, captives haven’t been widely adopted.

Here We Go Again

afaq — Tue, 08 Jul 2008 13:25:21 +0000

Just as the weather was getting hot, it happened again. After a 10-week lull, on June 4, another round of bread riots broke out in Egypt. Not in Cairo this time, but in the town of El-Burullus on the Mediterranean coast. The local governor provided the spark when he decided to distribute subsidized flour through bakeries rather than selling it directly to citizens of the small fishing community. Angered by the move and squeezed by rising food prices, an estimated 8,000 protesters took to the streets, blockading an important highway with rubble and

burning tires.

Protesters also took to the net. As is now the norm, independent Egyptian media and opposition bloggers teamed up to broadcast the bloody details of the state crackdown that followed. Twitter feeds, blog posts and YouTube videos all chronicled the affair in a level of detail unheard of even a few years ago. The independent daily Almasry Alyoum reported that security forces shot tear gas canisters into shops and homes, detained pregnant women, beat children, and fired on crowds with rubber bullets.

The same day his men were cracking heads in Burullus, Hosni Mubarak was in Rome addressing a UN conference on food security. The Egyptian president’s speech was particularly bland, even by his own high standards; he urged blaming no one in particular and proposed additional conferences to discuss the situation. While Mubarak’s speech was getting top billing in state media, news of the riots began to break, providing a reality check on government protestations that the crisis was under control.

Claims that the situation was in hand seemed plausible at the time. After a first round of bread riots in March, Mubarak ordered the army to fire up their ovens and bake more. Hastily painted bread distribution kiosks eased the pressure in some of the worst areas, where deadly fights in the queues were becoming regular occurrences. The trade ministry also slashed import duties and froze exports of several key foodstuffs.

These measures reduced the immediacy of the crisis, but the twin challenges of spiking food prices and an antiquated food subsidy scheme were never dealt with. Instead, officials cast about for magic bullet policies to cut corruption and get more bread into the hands of restless citizens.

Crude Awakening

afaq — Sun, 06 Jul 2008 14:22:43 +0000

Buoyancy and optimism are not words readily associated with Iraq, but there is a feeling this summer could mark a turning point in the country’s fortunes with major developments involving land, sea and air.

The IMF is slating 8 percent growth in 2008. More than three-quarters of business owners expect the economy to significantly grow over the next two years and 84 percent of business leaders believe security is better now than the previous year, according to a study by the Center for International Private Enterprise. Over 70 percent of Iraqi companies are open to working with international companies, expressing the belief that international trade and economic openness would improve their businesses and Iraq’s economy in general, the study adds.

An extra 125,000 barrels per day (bpd) of northern Kirkuk crude was earmarked in June, which would lift overall shipments to a post-war record. The country hopes to boost exports of Kirkuk and Basra Light from the south to about 2.1 million bpd, up from a previous peak of around 1.93 million bpd in February. Exports of crude oil to Turkey from the Kirkuk oil fields have grown to 430,000 bpd, the most since 2003.

With all that, Iraq oil revenues could top $70 billion this year if oil prices stay high and there are no output disruptions. In all, the taps could be pumping out 2.9 million bpd by the end of this year. New data suggest its oil reserves could exceed Saudi Arabia’s and be the world’s largest.

This increase in the black stuff means increased trading activity in the south, symptomatic of growing commercial ties between Iraq and Middle Eastern neighbors. In one week in May alone, 10 international cargo ships of various tonnages and a tanker called at Umm Qasr, Iraq’s only port. There has been a continued upsurge in seaborne cargo deliveries following a cease fire between the army and militia units, brokered by Iran in May.

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afaq — Sun, 06 Jul 2008 08:00:05 +0000

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