China and governments in the Middle East that are seeking to create world-class financial centers might be using their assets to purchase western insurance operations, a consulting firm predicts.

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

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

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

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

According to Deloitte, insurance markets in the Middle East are often "underserved, fragmented, unsophisticated and undercapitalized," while in China, "the insurance industry is also undercapitalized and faces a severe talent shortage."

The report said that among insurance lines, it is likely that foreign governments will place the greatest importance on reinsurance and commercial property and casualty, followed by life and personal lines.

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

The company said that Yang Chao, the chairman of China Life Insurance, China's largest insurance company, indicated he plans to buy a "strategic stake" in a large insurance company in Europe or North America.

As a sign that the new financial centers will seek to establish themselves as reinsurance hubs, Deloitte noted that the Dubai International Financial Centre in March hosted the World Insurance Forum.

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

The report said Qatar Financial Center has also highlighted the importance of the insurance and reinsurance segments, calling the "insurance segment...one of the vital components of the economic wheel," and found that in March, QFC had "eight risk cover providers (with five in the reinsurance sector) and 12 applications were in different stages of processing."

Despite controversy over foreign buy-ins, Deloitte said it is important for insurance companies to consider how they might potentially benefit from SWF investments, which could provide potentially quick, large-scale capital infusions with few strings attached.

Insurers facing the impact of a collapse in mortgage-sector investments, Deloitte said, may seek to raise capital to shore up their balance sheets, "and a capital infusion from a SWF may just meet those needs."

The report noted that SWFs have long investment horizons and little desire to get involved in the day-to-day management of companies.

"It is also possible that Middle Eastern and Chinese SWF investments may either facilitate the entry of or improve the market position of American and European insurance firms in these emerging markets," Deloitte said.

Special Reports /

Foreign Nations May Target Insurers For Acquisition: Deloitte

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