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We do not expect the GCC to grow at the multiple double digit rates experienced in 2006-2008, but this will give the insurance companies time to adapt to the growing pains some have experienced in the past couple of years.

S&P thinks that there will be some steps to rationalise the number of insurers in the GCC as a real drive to greater economies of scale at the underwriting level become deliverable, through mergers and acquisitions. The move to become “regional champions” rather than “domestic” will continue. In the UAE we shall start to see progress to a more sophisticated insurance supervisory regime for the country.

In North Africa and the Levant, the drivers will be similar, but there are fewer opportunities for market realignments. Islamic insurance (takaful) will continue to grow rapidly, probably more so than the “conventional” market, as insurance demand and penetration deepens.

Takaful will not replace conventional insurance, but will become better positioned as an alternative to all policyholders, both by the specialist companies and increasingly as an adjunct within the conventional sector. In the light of the strong growth in the takaful sector overall, fund members will be starting to expect surplus distributions, where earned, and for investors and participants alike, greater reporting consistency.

The impact of the economic slowdown on premium volumes in 2009 has demonstrated to insurers the need to be more selective in writing/accepting business.

Strong premium growth can in the short term deliver profits, but in the medium/long term may disguise inherently unprofitable business.

What lessons have been learned from 2009 and what do you expect to be (or should be) key areas of focus for Middle East insurers in 2010?

Anandi Nangy-Kotecha
Many companies have come to realise the importance of having a well-diversified investment portfolio by type of investments and by issuer as high counterparty risk can hurt capitalisation. A focus on underwriting has become a priority as investment income is not enough or simply cannot support a steady flow of profits. However, improving underwriting profitability is tricky as price/rate increases are more difficult to be accepted in a competitive environment such as the Middle East.

There is certainly a shift towards implementing improved risk governance measures and increasing awareness of enterprise risk management throughout the various organisational levels. It is imperative that companies can assess the level of risk their capitalisation is supportive of at any given time and although positive steps have been taken in this respect, there is still plenty of work to be done.

Kevin Willis
S&P has highlighted the need for greater coherence in the risk management of MENA region insurers. The published financials for 2008 and 2009 show that although capital adequacy
generally remains a strength for companies, it is very susceptible to asset value fluctuations, and for many companies that level of volatility had not been anticipated or monitored.

Underwriting (or liability) risk management has tended to be placed in the hands of reinsurers, while asset risk management has been viewed as very distinct from liability management.

S&P expects the need for a genuinely coherent approach to asset/liability management to receive a higher profile in 2010 and 2011. This should naturally lead to a more technical approach to monitoring the capital demands and sensitivity of an insurer.

What are strengths and weakness of Middle East insurance companies?

Anandi Nangy-Kotecha
A good portion of companies in the Middle East, mainly from the GCC tend to be well capitalised which helps them face shocks a bit better than some counterparts.

However, and given the limited fixed income opportunities in the region and booming stock market and real estate returns in the past, a number of companies concentrate their investment portfolios on these which are more volatile and illiquid (if non-listed equities or real estate).

In terms of insurance business per se, the main lines retained tend to be motor and medical, while if any specialty lines are written they end up being mostly reinsured/retroceded. So, improvements in underwriting expertise in certain areas could lead to further business retention.

Furthermore, and as mentioned above, underdeveloped or inexistent ERM structures are being either improved or built.

Kevin Willis
Key strengths for MENA firms are:
1. The quality of the underwriting performances, although these can be dependent upon the reinsurance relationships
2. The depth of capital available, usually internally generated, to support the business model, and
3. The liquidity cover over liabilities

For leading companies competitive positions can also be a strength, but this can often be driven by the quality of the relationships with international reinsurers and other partners, and these relationships need serving by the primary insurer.

The most usual weaknesses are in the quality of the investment portfolio, and the management of the risks attached to that portfolio. We have seen massive movements in the values of both equities and real estate across the GCC with consequent impact upon both earnings and capital strength.

A more coherent and focused approach to risk management and its impact on capitalisation would generally be beneficial to companies across the MENA region.

The majority of companies are “manageably small” so we do not expect, or need, to see advanced risk management systems, but the overall approach to the setting of risk appetites and tolerances and their impact on capital demands are a long way behind the leading international and European domestic companies.

Industry risk tends to be a factor of restraint in the ratings, insofar as most of the markets and companies within them are small in absolute terms with regard to both premium volume and asset size. Asset portfolios generally lack geographical diversity and any security monitoring other than for bank counterparty risks.

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