In announcing plans yesterday to set up an underwriting platform within the Dubai International Financial Centre (DIFC) Lloyd’s were at pains to point out that the decision amounted to straightforward economics; securing cost savings from the DIFC through the provision of shared services to the handful of Lloyd’s related businesses already there and a few that might be on the verge of joining. In reaction to the many challenges in fulfilling their Asia strategy, especially China, the Lloyd’s leadership have been publicly down-playing ‘boots-on-the-ground’ international expansion so the sensitivity is understandable. Maybe they should not be so touchy.

Lloyd’s business in the Gulf States, mostly underwritten in London, is highly profitable but is stagnating if not declining in volume even though the regional markets are developing fast. The reason is not so hard to fathom: underwriting capacity and broking expertise, mostly based in Dubai, is rapidly evolving in the key lines of business: oil and gas, construction and terrorism. Increasingly clients in the region have less cause to endure the cost and hassle of placing their business in London when they can achieve the same outcome dealing with people on their doorstep. Lloyd’s should be enthusiastic therefore, not reluctant or apologetic to ‘go local’ in this part of the world.

Yet the hesitance is palpable and the reason is the state of the markets in the Gulf and Middle East region. With virtually no catastrophe exposure present, technically modelled pricing barely exists; reinsurance capacity is abundant and premium rates in many classes of insurance are either in decline or free-fall. Regulation is getting tougher but remains immature by Western standards; poorly capitalised local insurers behave more as intermediaries than risk-taking entities, adding to the pressure on underwriting margins. With no sign of relief in sight from this malaise, London-based underwriters may struggle to build a strong enough business case at this point in the cycle to invest in Dubai. Those that are willing to take the plunge will probably focus on nice areas where their expertise and capacity are more lucratively rewarded. In other words, Dubai looks set to be a ‘slow-burner’ undeserving of the hype that has accompanied such plays in the past.

So a cautious and atypically low-profile period of preparation at Lloyd’s can be expected in the coming weeks and months leading up to the ‘go live’ date in October. Ironic that in a town like Dubai, know for its bling and excess, the arrival of the new underwriting platform may in fact be largely unheralded; deliberately so.