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Is The Market Hardening?

However, the above treaty structures were historically the norm in the Middle East markets, although they never led to a deterioration to the extent we have witnessed during the past three years. What is the reason? The leading reinsurers have shifted from the basics due to severe competition, coupled by their instructions to benefit from the outstanding economic growth in the Gulf and Middle East in general: thus aiming to write more business, increasing the top line and cash flow, widening the moat and using it to produce exceptional investment returns that will cover the technical losses, if any, and still produce high return on equity that pleases the shareholders.

With such incentives, the Middle East insurance market was a target, not only for the traditional reinsurers, but for a lot of fresh capital and new capacities coming to the area, giving the insurers bargaining power to obtain the best terms.

Can we simply blame the insurers for taking advantage from the offered capacities in the market to the extent that the principle of utmost good faith and the concept of win-win situations have been seriously overlooked on different occasions, although unintentionally? We must admit that the insurance companies are also under heavy pressure from shareholders to maximise their returns for the same reasons that are driving the behaviour of reinsurers. Accordingly, the management of many insurers in the gulf region found themselves facing very tough competition locally and had to go beyond norms in order to secure new business on one hand and defending the existing accounts on the other. This led to further deterioration in terms, but still with enough capacities to support their quotes, either directly or frequently through the help of reinsurance brokers. With the financial crisis, the danger in such market conditions is the increased moral hazard, the lack of cash, coupled with a steep decrease of profitable lines such as engineering and marine cargo business – the lines of business that were still at least supporting the losses under other lines such as property and hull.

Putting the house in order
How to put the market in order? Nobody denies that all players in the insurance industry will benefit from a hardening market. However, when and how? When talking to leaders of the industry we always hear the argument that a major catastrophic loss is needed in the region (but hopefully without human casualties) for the market to correct itself. It seems that cyclone Gonu was not enough and not even “felt” by the neighbouring countries. Of course, what has been overlooked and maybe not expected was such a sudden global economic turmoil, the ultimate effect of which and the expected ending date are not yet known, but only open to speculations from leading economists and financial experts (ie the same people who were encouraging investors to buy shares in the same sectors that are facing the difficulties now). So, while waiting for the big insurance loss, we obtained a more severe and global financial loss. What is next?

Returning the order to the market starts by first surpassing our “egos”, refraining from putting the blame on each other, acknowledging the mistakes committed by all parties of the industry, from retail brokers to insurers to reinsurance brokers, reinsurers, and most importantly regulators, which unfortunately still do not exist and are at least not effective in certain countries in the Middle East. Once that is done, if ever, the insurance sector should start moving in the reverse direction, towards a healthier industry.

Status quo at renewals
In reality, we currently find a persistence of soft market conditions in the direct insurance sector while hardening signs are expected and implemented by the reinsurance market. Thus, the two forces of the industry are currently pulling in opposite directions, which makes us believe that at least for the renewal of January 1, 2009, we are going to witness no major improvements, but also no further deterioration. This should result in mostly a standstill position with renewal on expiring conditions, generally speaking, of course. We are all looking forward to a more rational 2010, hoping to witness again green figures and percentages, noting that a steep increase in rates and deductibles is needed among other improvements in policy wordings and conditions to bring the insurance industry back to the technical levels of previous golden years.

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