China and governments in the Middle East that are seeking tocreate world-class financial centers might be using their assets topurchase western insurance operations, a consulting firmpredicts.

In its recently published report "Insurance Firms: The MissingLink in the Sovereign Wealth Fund Acquisition Spree," Deloittehighlighted, in addition to China, the operations of the SovereignWealth Funds (SWFs) operated by Abu Dhabi, Dubai and Qatar.

Those SWFs "all have one thing in common: the ambition todevelop world-class financial centers such as New York or London,"Deloitte said.

To date, these SWFs' attraction to financial services firms seemlimited to banks, hedge funds or private-equity funds andexchanges, but not insurance, the consultants found.

However, the report said that "if any of these cities orcountries plans to become a world-class financial center in therange of New York or London, it must necessarily attract a largenumber of insurance and reinsurance companies."

According to Deloitte, insurance markets in the Middle East areoften "underserved, fragmented, unsophisticated andundercapitalized," while in China, "the insurance industry is alsoundercapitalized and faces a severe talent shortage."

The report said that among insurance lines, it is likely thatforeign governments will place the greatest importance onreinsurance and commercial property and casualty, followed by lifeand personal lines.

Deloitte noted that while Middle Eastern SWFs have not indicatedtheir interest in insurance firms, the Chinese, via a proxy, havesignaled their interest.

The company said that Yang Chao, the chairman of China LifeInsurance, China's largest insurance company, indicated he plans tobuy a "strategic stake" in a large insurance company in Europe orNorth America.

As a sign that the new financial centers will seek to establishthemselves as reinsurance hubs, Deloitte noted that the DubaiInternational Financial Centre in March hosted the World InsuranceForum.

DIFC, the report stated, said it intended "to become thereinsurance hub of the Middle East, North Africa, South Asia andLevant," a region in Western Asia.

The report said Qatar Financial Center has also highlighted theimportance of the insurance and reinsurance segments, calling the"insurance segment...one of the vital components of the economicwheel," and found that in March, QFC had "eight risk coverproviders (with five in the reinsurance sector) and 12 applicationswere in different stages of processing."

Despite controversy over foreign buy-ins, Deloitte said it isimportant for insurance companies to consider how they mightpotentially benefit from SWF investments, which could providepotentially quick, large-scale capital infusions with few stringsattached.

Insurers facing the impact of a collapse in mortgage-sectorinvestments, Deloitte said, may seek to raise capital to shore uptheir balance sheets, "and a capital infusion from a SWF may justmeet those needs."

The report noted that SWFs have long investment horizons andlittle desire to get involved in the day-to-day management ofcompanies.

"It is also possible that Middle Eastern and Chinese SWFinvestments may either facilitate the entry of or improve themarket position of American and European insurance firms in theseemerging markets," Deloitte said.