The distinguished line up of speakers this year included Anthony Hilton, the financial editor of the London Evening Standard, Paul Mason, Newsnight economics editor and author and Bridget Rosewell, eminent economist, chairperson of Volterra Consulting and a NED on UK’s Network Rail Board of Directors.

This article will focus on Anthony Hilton’s presentation entitled, “Speaking Truth unto Power.” The choice of topic, on the greater governance, awareness open the IRM Risk Leaders’ Conference was appropriateof given the increasing emphasis on risk management at Board level.

Power is not speaking truth unto itself?

Anthony opened his delivery with a question, “is power speaking truth unto itself?”

While one of the governance challenges post-crisis is to put together a balanced Board of Directors perhaps the most difficult task is to change prevailing cultures. The current culture in board – management relations generally translates into, “the people who get ahead are the ones that succeed.  The ones that succeed are the ones that deliver.” The travesty is that no questions are asked if/when results are delivered.

Another concern is that the elevation of accounting to an all-encompassing finance function and the practice of putting a financial value on all aspects of an enterprise.  The reality is that one cannot readily put a price on everything of value. One cannot, for example, put a price tag on societal value. Nor can it easily translate into immediately quantifiable shareholder value.  Value does not necessarily have an immediate price realisation.

Take-home learning points

Synthesizing the learning points from this presentation, the following are the ‘take-home’ learning points from Mr. Hilton’s delivery:

• “We must stop thinking of business as being mechanical. Business is biological”: The increasingly process driven culture whether from viewed from a performance or a compliance angle, seems to neglect that business are more biological than they are mechanical. Businesses are shared by people and they are affected by the actions of people.
• “It is human dimension that make businesses tick”: It is people and not machines that have blown up businesses. A cursory look at history from the recent debacles involving, for example, UBS, SocieteGenerale etc. to earlier episodes such as Independent Insurance plc and Barings Bank reinforces this statement.

• “The real world is one of people, politics, drive and ambition”: This statement brought to mind Gillian Tett’s excellent account the run-up to the financial crisis in her book “Fool’s Gold”. Tett explores, from an anthropological perspective, how a group of people essentially fooled and circumvented regulators and legislators in very much a predator like fashion sometimes in the name of greed, other times in the name of survival and generally in the name of success. This statement also reminded me of an earlier article of mine, “ ERM: Ethical or Mathematical?” (>>>>>)

Consolidating the above, it is immediately apparent that governance and risk management need to be addressed with greater consideration being given to the human factor. Where it does not already exist this will also need to start with risk management being given a voice and the authority to speak truth unto power.

The Author: A Chartered Insurance Practitioner by profession James Portelli is an MSc graduate in Risk Management, a Fellow of the Chartered Insurance Institute and a Fellow of the Institute of risk Management. James has been active in insurance for over 20 years, working in 4 out of the 6 GCC states since 1998. He held senior and/or ExCo positions in underwriting, ERM/internal audit, distribution, business development, strategy, training and consulting.

By James Portelli

In my case, I have the privilege of now being neither a poacher nor a game-keeper; I’m more of the hiker who, when time permits, can stop and observe poachers, hunters and game-keepers. Just as a work of art is admired more by the connoisseur standing at a distance than by the artist, who is generally too close to see the bigger picture, so also I often enjoyed a wider perspective of the insurance markets in the Arabian Gulf by virtue of my past and current roles in training, consulting, risk management and as a service provider. Not that I am a market connoisseur, I hasten to add; If life begins at 40 that means I am still a toddler. Every day brings with it fresh learning opportunities about the insurance market, about varying practices and about the practitioners that drive this. In this article I would like to share some learning snippets with specific reference to insurance broking.

As I sat enjoying a coffee with a seasoned reinsurance broker at DIFC recently, he put forward an interesting statement, “In this market insurance companies only come to us if the account is either too complicated for them to understand, or too difficult for them to place or if they have already unsuccessfully had a go at trying to place it themselves.”

His assertion undoubtedly emanates from experience. However, I would also probably add one more factor to his list. Some reinsurance business also flows through a particular reinsurance broker because someone, somewhere, has a financial interest that it does. I am, of course, not discussing ethics here; I am merely stating a fact. And, when this happens, the other possible factors dim in significance as sometimes even the simplest or most straight forward of cessions goes through a reinsurance broker!

The role of the broker, whether in insurance or reinsurance, is quite specific. A broker needs to add value to the transaction. The value that a broker adds can be synthesized into:

1. Independence: The broker provides a technical view that is independent from that of the insurance or reinsurance carrier. That independence also allows them to provide a perspective that is wider than the risk in question and would also encompass, for example, credit rating, jurisdiction, commercial issues, alternative risk financing options etc.;

1. Intellect: The main benefit of using a broker is to tap into their expertise which a buyer does not normally possess in-house;

1. Innovation: A solution may require some thinking outside the box, such as in the case of non-proportional treaty structuring, event-triggers, priorities and such like. For example, some captive insurance companies that are major global reinsurance players today were born out of the innovative cat bond programmes decades ago of what were then Marsh and McLennan and Guy Carpenter;

1. Integrity: This, of course, is the bedrock of all practitioners be they brokers, underwriters, loss adjustors or insurance managers alike. It is even more pronounced with professions that have to act with greater independence as in the case of the insurance or reinsurance broker.

How prevalent are these factors in the GCC insurance markets? If they are not, who is to blame and what needs to be done?

Independence

While insurance legislation in general reinforces the requirement for brokers to be independent, UAE broker directives went a step further in stating that brokers cannot be simultaneously involved in a transaction as the retail and the reinsurance brokers. Nor can they simultaneously be a client’s broker and consultant. Whilst the logic behind these directives is arguably sound, how much is the spirit of the law being respected? For example, if larger brokers in the GCC have both a retail and reinsurance arm then this places the smaller retail brokers at a tactical disadvantage. Similarly, family ownership or sponsorship of businesses means that in some cases there could be an incestuous Board relationship that translates into a significant portion of business emanating from certain brokers flowing by default to certain specific insurance companies.

In addition to raising questions on internal governance and market specific systemic relevance, these practices highlight a general level of paucity in insurance supervision throughout the region in general. Some would say that I am being kind. In some of these regional jurisdictions insurance supervision is virtually non-existent making the task of internal governance more onerous for the more serious brokers.

Intellect

Having worked in the UAE market specifically on broker business development for a number of years, it fairly evident that the parito rule broadly applies; i.e. 20 per cent of the insurance brokers command approximately 80 per cent of the insurance business. Most of these brokers have their internal think-tanks that support their business functions. There are also SME brokers possessing a strong skills and/or knowledge base. However, one does come across a tale of two cities even in some of the larger brokers that becomes even more prevalent as one works his way down the market echelons. There is a general lack of insurance expertise in the regional insurance markets whether in insurance companies or broking firms.

If one had to look at other markets one notices, for example, products that are designed or white-labelled by brokers and subscribed by insurance companies. This is largely not the case in the gulf retail insurance markets. Some banks profess that they come up with innovative bancassurance products, however these are generally plagiarisms created by the security behind the product and not by the intermediaries themselves.

The lack of expertise is worrying not only from a technical insurance perspective but even more so from a regulatory, compliance or governance perspective. Some markets have been collecting training levies for many years and therefore have no excuse for the lack of intellectual insurance capacity. In contrast, Bahrain has used training levies relatively expediently and this translated in a relatively high Bahraini contingent working in the market with at least a market entry level of insurance and certainly a higher number of qualified locals in senior technical and or managerial positions.

Innovation

This is closely tied to the intellect factor raised earlier.

However, it is not just an issue of lack of expertise that holds back innovation. One must also consider the level of maturity of the insurance markets in question. Contrary to common belief the middle east insurance markets are more aggressive than they are competitive. This is due to a number of reasons including barriers to entry or exit, lack of consumer knowledge, relative lack of substitutes, market patronage or domineering positions of certain companies in their respective markets etc. All of this is often reflected in cut-throat undercutting rather than competition on non-price variables.

Trying to be innovative under such market conditions may prove to be rather counter-productive. Instead what one witnesses is often a technically frugal import with all the cosmetic frills and bells.

Integrity

This is a relatively hot issue with two significantly sized regional brokers under scrutiny. Although their final straw predicament credit related, the causes leading to default of one financial obligation are generally interwoven into internal governance or practice lapses. Loosely, they transit into lack of integrity in business practices.

Needless to say, the woes of two broking companies should not weigh heavily on the rest of the broking fraternity since many of them exercise reasonably sound internal discipline. But, sadly, from a reputation perspective these incidents do affect the market as a whole.

What may be more worrying is that the default of two brokers may also be indicative that others may have internal issues that need addressing which, however, have not been sufficiently pronounced to result in default.

It also certainly betrays a lapsus that has been highlighted earlier in the article, i.e. the lack of appropriate insurance supervision.

Conclusion

In conclusion, whilst the broking fraternity continues to grow in the middle east, this augurs well in general as it places greater responsibility on insurance companies to improve what they deliver beyond the price at which they deliver it. It should also improve service levels in general as brokers seek to justify their existence in traditionally tacitly protectionist markets were a level of collusion still persists at insurance company level.

The two factors that would significantly improve the quality of these factors are education (consumer, broker and company education) and regulation.

Those who have been around in the industry long enough might see a certain resemblance with the current market environment and where we are heading if the cut-throat competition for less and less profitable business is not brought to a halt. But there is still a great number that are in denial and who believe that growth should be the primary target and that somehow it will all turn out to be alright. But how can it? Prices continue to deteriorate along with the levels of deductibles, therefore increasing the underlying loss ratios at an exponential rate. Accepting an increased number of such accounts will only further accelerate the downward spiral to the point of no return, be it property, motor or medical.

So who’s to blame? The insureds because they are looking to optimize their costs?The insurers and reinsurers because they fear to lose out to the competition?The brokers because they facilitate these developments?Or the investors and financial analysts because stocks will drop if the expected growth is not achieved? It doesn’t matter, really. The fact is that extreme cycle movements – up or down – will always have adverse consequences for some of the parties involved and our industry can only fulfill its role if all parts are achieving profitable technical results.

Reinsurers are usually the first to suffer from an overly competitive environment whilst insurers only look at their net accounts, making themselves believe that they are profitable, even if that’s not the case on a gross basis. But this market still relies heavily on foreign, multinational reinsurance companies who have lost a staggering amount of their capital over the past 12 to 18 months. Reading press statements made by those companies in the past few weeks it is evident that the price for capacity will increase going forward. Exactly when and by how much remains to be seen but believing this will not affect our region as well might turn out to be a bit very optimistic.

There has been a call for a return to technical underwriting for over three years now but there is very little evidence of that actually happening and one wonders if that light at the end of the tunnel is not simply an oncoming train.

Doha Bank Assurance Company executive manager, Manoj Kumar, looks at the role of bancassurance in light of global restructuring.

The recent phenomenon of some large financial conglomerates divesting their insurance activities might suggest a retrograde trend in bancassurance. Giant institutions such as ING, Fortis and UOB of Singapore have segregated their banking and insurance activities and sold off insurance businesses to return to basic banking. Allianz did the reverse and sold off its banking arm, ie Dresdner Bank to Commerzbank, to maintain segregation between banking and insurance activities. Citigroup did it much earlier when they sold off their property and casualty business to St Paul in 2004 and life insurance business to Metlife in 2005.

What does all this mean to bancassurance? Has bancassurance as a viable business proposition suffered in the aftermath of the recent financial crisis? Is it no longer a winning strategy for the banks?

A deeper look actually points to the success of bancassurance as most of these disinvestments and de-mergers have actually helped banks to reinvent themselves under such testing times. Some of the key objectives for banks entering into insurance business have been “spread of risk” and “smoothening of profits”. Banks who divested their insurance portfolio achieved “smoothening of profits” with the sales proceeds while banks who continue to be in the insurance business are meeting the objective of “spread of risk”.

ING, the Dutch giant, announced disinvestment of its insurance operations to repay the US$14.9bn bailout by the government. The decision was actually thrust upon them by the regulators rather than the sell-off being part of a proactive business initiative to come out of troubled waters. The insurance business was profitable and constituted almost 50 per cent of the balance sheet of the group. Had ING not had the insurance business under their belt, they could well have been following Lehman Brothers’ path.

Allianz/Dresdner Bank group similarly did not abandon bancassurance, it just changed the business model and moved from insurance risk-taking model to distribution model. Allianz sold off Dresdner Bank to Commerzbank in order to acquire a majority stake in the new bank and to gain greater market access to distribute its products through a much larger distribution network. By taking this route, Allianz actually perpetuated bancassurance rather than moving away as any onlooker would think. Bancassurance being a business concept allows for flexibility and creativity and Allianz used it to further their advantage.

Recently, United Overseas Bank of Singapore announced the selling off of its life insurance unit to Prudential. This disinvestment not only fetched huge sums of money to the bank, it also, in return, sealed a 12-year tie up with Prudential to distribute insurance products in Singapore, Thailand and Indonesia. This is yet another example of changing gears in bancassurance and adjusting the business model to suit its requirements.

The economic downturn has made organisations unsure of themselves and financial institutions in particular are forced to redraw their strategies. “Back to basics” slogan is in vogue and extra baggage is being shed. There is no evidence to suggest, however, that objectives and rationale for banks entering into insurance business have undergone any change.

Bancassurance platform provides width to the banks in terms of the offerings it can make to its customers and tie them for a longer period. Bancassurance also provides a hedge between banking and insurance business as deficit at one place may be offset by the earnings at the other place.

A typical bancassurance life cycle starts with the distribution model where banks just sell or distribute insurance products for a fee rather than participate in the risk. Such product offering comes from unrelated insurance companies and hence banks are insulated from the vagaries of the risk- taking business and are assured of a steady fee income. This is in contrast to the risk- taking model where banks participate in the risk and reap benefits accordingly.

Under the current economic confusion, when even the basic banking is under stress, clearly directors and senior managers are playing it safe by reverting back to the distribution model.

The changed equation between banking and insurance businesses under the current circumstances does not indicate any paradigm shift in bancassurance.

Banks across the globe still continue to own insurance subsidiaries and get involved in risk-taking business. Banks who want to play it safe, just distribute products for a fee. Banks still need fee income from the cross sale of insurance products and probably the need for such fee income is more acute now than ever.

Michael Gertsch, chief underwriting officer at Gulf Re, bemoans the downward spiral created by the undercutting of terms and conditions to grow premium volumes.

What keeps you awake at night? Hopefully not your policy wording. But then again, maybe it should.

Many of today’s economical problems have been allocated to the current global financial downturn; it’s being used as an excuse for almost everything. But in some cases the issues actually existed long before the crisis, they were just not that apparent. In a wealthy environment like the one our industry has experienced for a number of years, coverage issues did not need to be followed up vigorously and a lot of goodwill was used in interpreting scope of cover and exclusions. As long as a portfolio delivered positive cashflow, significant investments were made into stock markets and real estate with the resulting returns covering attritional losses easily. And while some reserves were set for large losses, they don’t happen that frequently, leading to a misperception of having enough margins in the original rates that would justify further reductions at the next renewal.

But then the financial downturn started to set in and with that exuberant investment returns disappeared. The profitability of a portfolio, therefore, is now mostly dependant on premium income and loss activity. And while it seems that the deterioration of terms and conditions will continue for some time, there seems to be a trend of looking into coverage issues a little more carefully.

I’m covered. Am I not?
Whether it’s our own car insurance or the programmes bought by large corporations, there are certain expectations as to what would be covered under what circumstances and what not. And whilst these expectations exist equally on both, the seller’s as well as the buyer’s side, they can vary in their content quite significantly. From an insured’s perspective this is rather simple: They want to be covered for everything, everywhere against anything, no matter what. The insurer, while agreeing in principle, needs to set a certain framework of when the coverage applies, be it because of restrictions under their own reinsurance treaties or because they consider certain exposures to be unmanageable for accumulation, regulatory or any other reason. But are these views and expectations aligned? Does an insured know that “All Risks” doesn’t mean all risks? Do they understand the potential impact of an average clause? Do they have the exact wording for NMA2918 and do they know what the implications are for them? Yes, it’s a terrorism exclusion clause, but what does it exclude and under which circumstances?

And it’s the same for the reinsurer, whether they are providing facultative or treaty reinsurance. It might be very clear in their own mind what coverage they are granting, especially when subjectivities are applied. But does that really fit the actual requirement a ceding company has? And if not, is the insurer aware of that?

There is a lot of room for mis-interpretation and in our industry that can turn out to be very costly. As profit margins reduce, claims will be checked much more thoroughly for coverage under the policy wording, actual values being affected by a claim versus reported sums insured, and application of deductibles and exclusions. Judging by the amount of arbitration workshops being held in the region over the past few months and the increasing number of legal firms providing such services, the courts will be fairly busy.

Timing is everything
One might think that there’s a bigger probability in sustaining coverage gaps for smaller companies that don’t have in-house professionals analysing the actual policy wordings. But what about the World Trade Center loss? One or two events? Or the broken levies in New Orleans after Hurricane Katrina. Windstorm or flood?

Very basic parts of the policy wording that were not phrased properly and had to be decided in court. In the case of WTC the policy had not even been issued at the time of the loss. Whether these losses could or should have been avoided is a different topic altogether but what could have been prevented is the ambiguity, the significant legal expenses and the delay in making a payment to the insured and recover from reinsurers respectively.

The ideal moment to address all coverage issues is before inception. The introduction of contract certainty in the US, the UK and Europe attempts to address this issue in such a sense that all policy wordings have to be signed by all parties before the start of the policy period.

With insurance market growth of 26 per cent between 2005 and 2008, the region’s insurance sector has made significant progress, but it still has room for improvement, according to Peter Vayanos & Roger Kastoun of Booz & Company.

In the past three years, policy makers and regulatory authorities have made progress in promoting the growth, competitiveness and development of the insurance industry in the Middle East and North Africa (MENA) region. As the industry looks to build on this success, several key challenges will need to be addressed to sustain growth and bring the region in line with developed insur­ance markets around the world, according to a new study by Booz & Company.

The foundation is set
Aided by regulatory authorities’ efforts, the MENA region’s insurance market saw 26 per cent compounded annual growth between 2005 and 2008, which was sur­passed only by Central and Eastern Europe’s 27 per cent growth rate. In 2008, the market in the UAE was the largest in terms of Gross Premium Income (GPI), representing more than US$5bn, followed by Saudi Arabia with US$3.1bn and Morocco with US$2.5bn. Bahrain, Algeria, and the UAE showed the strongest GPI growth rates between 2007 and 2008, at 46 per cent, 45 per cent, and 41 per cent, respectively.

But there is still room for improvement: “The MENA region’s share of the world market accounted for just 0.42 per cent last year. Furthermore, insurance penetration – GPI as a percentage of gross domestic product – remains low in the MENA region,” said Peter Vayanos, a partner at Booz & Company. This ratio grew to 1.08 per cent in 2008 from 1.05 per cent in 2005, but paled in comparison to every other major region of the world.

The MENA region’s progress to date
In 2006, Booz & Company introduced a framework to assess the development of insur­ance in the region, identify gaps, and prescribe a set of policy recommendations to be adopted. The framework was based on five key market “enablers”: a legal frame­work, regulatory bodies, the nature of competition, skills and training, and market-led initiatives. “The industry has made significant progress in addressing these issues, although some critical gaps still exist,” stated Roger Kastoun, a senior associate at Booz & Company.

Legal framework: Having a robust legal framework in place protects the rights of policyholders, regulates the activities of market participants, and ensures the financial health of the sector; several countries have improved or expanded their legal frameworks.

Regulatory bodies: Regulatory bodies are needed to oversee and supervise the sector, and ensure the enforcement of laws and regulations. Today, the region remains a patchwork of sophisticated and underdeveloped regulatory regimes, with Bahrain leading in terms of regula­tory oversight.

Nature of competition: Innovation, competitive pricing, and the adop­tion of best practices are all natural outcomes when countries welcome free competition in their insurance market. “Today, most MENA countries have more than 20 insurers in operation and are keen on attracting foreign players. Some markets, however, are still dominated by state-owned or partially state-owned companies,” Vayanos commented.

Skills and training: An adequate insurance knowledge base helps assess the risks to be insured, provides cus­tomers with the appropriate products and services, and ensures the avail­ability and development of locally-based skills. Two recent initia­tives have helped to address knowledge gaps: The Gulf Insurance Institute (GII) was established recently in Bahrain. In Qatar, the Qatar Financial Centre (QFC) established a training institute offering accredited courses in several specialist areas, including banking, insurance and wealth management.

Market-led initiatives: A vibrant insurance market should be able to stand on its own two feet, with little government intervention. Some markets have attempted to foster the availability of insurance market data and conduct consumer awareness campaigns to promote a better understanding of the market and help attract talent. Insurance market data, however, is largely unavailable. Similarly, limited coordination among policymakers at the regional level is causing key issues to slip through the cracks.

Booz & Company has identified four critical objectives that regulatory bodies should prioritise to enjoy sustained growth in the coming years: building the talent base, improving public awareness and acceptance of insurance, fostering the development of takaful and coordinating efforts to harmonise insurance mar­kets in the Arab world.

Building talent
“One of the most notable developments in enhancing insurance skills and training in the region was the establishment of the Gulf Insurance Institute (GII) in 2007, which offers accredited insurance certificates and a membership system,” Kastoun stated. Furthermore, the Bahrain Institute of Banking and Finance (BIBF) offers a professional insurance certificate that is administered in more than 11 countries. In 2008, the BIBF launched a new takaful certification programme accredited by the Chartered Insurance Institute (CII), the first such certification in the world.

Michael Gertsch, chief underwriting officer at Gulf Re, bemoans the downward spiral created by the undercutting of terms and conditions to grow premium volumes.

The concept of placing various reinsurance treaties as a bouquet with obligations to participate across all lines is not unique to our region. It was, in fact, common practice in the early stages of all developed markets, be it the US, Europe or the UK. The industry was growing and everyone was happy. Until it all went horribly wrong.

In a growing economy there is a need for supporting lines of business that have an increased loss activity to enable the industry to develop appropriate practices and standards that would, over time, improve the performance of such risks. This works in the beginning as premiums are set accordingly to cover for the increased frequency of events. The result of such contracts, however, is very volatile and in order to secure continuous support more profitable accounts have to be brought into the negotiations to smooth the results for the reinsurers.

As risk management improves, the loss frequency reduces and prices start to fall, therefore increasing the volatility of the bouquet result by reducing the profit margin of the better-performing treaties. As long as the economy keeps growing exponentially, individual large losses can be off-set by the year over year growth across the portfolio. But what happens when the economy slows down or even stalls?

One would expect that the pricing for under performing insurance contracts would be corrected and deductibles increased to maintain a certain large loss loading. Unfortunately the exact opposite is happening. In order to be able to pay for the losses that will incur on the business written in the past year, insurers and reinsurers need to further grow their premium volumes. In an economic slow-down where organic growth is limited at best, this can only be achieved by undercutting terms and conditions even more to lure clients away from the competition. In an environment where all the companies are trying to apply that model, the downwards spiral starts spinning faster and faster. More risk with less return. It’s like surfing in front of a wave – no matter how good you are at it, at some point it will catch up with you.

Cash-flow underwriting is a risky way to manage a portfolio even when interest rates are high, but with the current performance of the financial markets it is simply impossible. We already see insurance tenders for “prestigious” accounts being won on terms and conditions that are not supported by the reinsurance markets. Insurers, therefore, have to either foot part of the bill themselves if they need full reinsurance protection or opt for introducing loss limits and retaining the remaining exposures net.

Instead of creating economic value and growth, the industry destroys capital at a rate that will ultimately force shareholders to take drastic actions by either down-sizing their operations or selling them. This usually leaves the door wide open for large international insurers that profit from enough diversification across their portfolios to balance these effects and become the dominant parties at a time when the underlying business will start to improve. Do we really want that? Times are changing and the industry needs to change with it if we want the region to become a self dependant and sustainably growing market place.

James Portelli explores the effects of the financial crisis on technical performance.

At a macro level, much is being said about the impact on the insurance industry of the global financial crisis and the subsequent spill-over effect on Dubai.

Industry media is often seemingly oblivious of differentiating factors between insurance and “big brother” banking. As a consequence, predictions are sometimes dished out on a wholesale basis. Prior to listing some potential negative technical consequences for the insurance industry, it is worth delineating insurance from banking, since general market woes may not necessarily be directly applicable to insurance.

Insurers are not banks
R Jones, managing director and chief criteria officer for S&P Middle East drew up the following differentiating factors during the 2009 CRO assembly:
. Insurance companies generally have naturally liquid balance sheets and cash flows except in post insurable risk catastrophe and/or as a result of significant surrender (life assurance) activity
. Insurance companies have typically lower leverage than banks and are less capital market dependent
. Insurance companies pose a much lower systemic threat (in fact virtually negligible in the view of other market experts, such as Jo Oeschlin, Munich Re CRO)
. The insurance sector and its rating have been resilient over the past two years
. There were no rated failures or rescues by the state in insurance within the region
. The S&P insurance downgrades (14 per cent) and negative outlooks (19 per cent) over the period corresponding with the crisis were mostly to do with the economic consequences of the turmoil. Of these, there were also 8 per cent rating upgrades in 2009 and four per cent of outlooks turning positive.

Echoing Lord Levine, chairman of Lloyds, insurance companies may suffer more indirectly as a result of a regulatory whiplash than through their own doing (such as in the case of the introduction of regulation on performance bonuses).

In addition to the above, the financial crisis in the region has been accentuated by other factors that further illustrate that this is more of a banking than insurance crisis namely:
. 70 or so local and international banks are exposed on highly leveraged real estate and/or development companies linked to the Dubai government. This is more of a direct asset risk for banks than it is for insurance companies (who may only be indirectly affected as institutional investors)
. Inadequate loan to value ratios by lending institutions competing for business over a sustained period subject to relatively high inflation. This problem is solely associated with lending institutions and not with insurance companies
. Financial (as opposed to physical) value of wealth given undue importance. Although in line with IFRS convention, one has to counter-weigh this with the fact that the region’s financial markets have yet to reach maturity and this was taking place in a period of prolonged inflation in a region undergoing unprecedented growth. As a consequence, and in hindsight, several transactions from equity to property to their subsequent financing may more often than not have been over-priced. Since pricing in insurance is based purely on physical (and not financial) value insurers were not exposed to this risk
. Ahmad Hamad Al Gosaibi & Co and Al Saad potential exposures. Again this is a purely lending/credit risk to which banks and not insurance companies were primarily exposed
. A deficient demand/supply spiral resulting in a slowdown and/or termination of projects with a consequent reduction in asset (lending) portfolio development for banks in the region. This has a knock-on effect on insurance in terms of lower top line growth, but is also paradoxically a positive factor for insurance companies from a risk management perspective.

What has Dubai really learned from the financial crisis? A question investors are likely to ask Dubai’s government or corporate decision-makers deep into 2010 as they attempt to work off the excesses of the past.

The US$10bn lifeline in December from Abu Dhabi will go some way to help Dubai’s footing into the new year, although it is, in essence, an admission that something went seriously wrong in the UAE’s once irrepressible second city.

But Dubai, in that sense, is no different to governments around the world who will endure the lasting scars of the recession, including years of repair work on their budgets.

It must also be added that the risk from defaults in Dubai is not systemically important on a global level, and, in fact, Dubai World’s financial woes are relatively small given global credit losses.

Resist temptation
You may want to build it, but should you? Real estate developer Nakheel is surely the protagonist in Dubai’s cautionary tale, having overextended itself to the point of defaulting on a US$4.1bn sukuk just when confidence in Islamic financial products was gaining ground.

Its flamboyant palm island development formed the centrepiece of Fortune magazine’s recent “Dumbest moments in business 2009”. Man-made islands were developed in the Persian Gulf “at a time when global wealth had taken a depressionary drubbing”, it says.

Dubai was joined on Fortune’s list by Goldman Sachs CEO, Lloyd Blankfein, who, during a public relations campaign to shore up his firm’s battered image, got a bit carried away in an interview with The Times of London and said he was just a banker “doing God’s work.” All for a cool US$43m a year, his shareholders would be happy to hear.

Timing is everything
Dubai’s habit of announcing serious market-moving news on a Thursday – thus eliminating any momentum the story could pick up during the working week – has also come under fire.

Critics point to Emaar’s decision to cancel its merger with Dubai Holding’s real estate units Dubai Properties, Sama Dubai and Tatweer, which came late on a Thursday.

And Dubai World’s debt “standstill” statement, the most explosive announcement last year, was conveniently made the day before the lengthy Eid holiday.

In a veiled admission shortly after, Dubai’s finance chief Abdul Rahman Al Saleh said: “In Dubai we are not good in publicising what we are doing as much as we are in doing it.”

As Dubai found to its detriment, when public relations are badly managed, investors panic through lack of information. Many will hope that rectifying this flaw will find its way onto the emirate’s to-do list in 2010.

Be careful. Be thrifty.
Dubai’s other lessons from the financial crisis were clearly hidden in plain sight during the Dubai World debacle. The moral being that the global downturn is still an open wound going through the healing process, so don’t do anything to rupture it.

As the economist Nouriel Roubini, who’s known fondly by economy watchers as Dr Doom, said recently: “Although Dubai World’s financing issues are not a surprise and are relatively small given global credit losses, they are a reminder that the vulnerabilities and imbalances that contributed to the credit crunch have not disappeared.”

Therefore, Dubai would do well to remember that because all is not yet well in the global financial system, it should proceed with caution. Some say that the Abu Dhabi bail out will duly clip its wings as far as unsustainable flashy projects are concerned.

Jihad Ghanem and the Chedid Re team consider how rates have reached such uneconomic levels and whether there is a way out.

Insurers across the Middle East waited anxiously for the renewal guidelines of the leading reinsurance market for the treaty renewal of January 1, 2010, especially after a very soft market and severe economic crisis; the end of which is not yet known.

The negative effect of the above can be simply observed from the financial and technical results of the insurance companies for 2008 and the first nine months of 2009 in the Middle East, especially the GCC countries. Equally important, if not more so, is the impact of the financial crisis on the results of the major reinsurance companies.

Accordingly, no one from the industry should disagree with the necessity to rectify the current terms and conditions of the insurance market in the Middle East and to return to the basics. Such a correction, if it occurs, will be of benefit to all players in the region, with the exception, of course, to the policyholders. These insurance buyers got used to bargain rates and succeeded during the past years to minimise their insurance costs to an absolute minimum; to levels much lower than their initial insurance budgets. This left lots of money on the table, from the insurer perspective, and that was during a period of prosperity and booming economy. However, with today’s crisis and lack of cash, it becomes much more difficult to convince those policyholders of the need to increase their insurance costs back to their initial budgets that were set in the past. Such an increase might exceed 300 per cent in certain cases in order to reach back to the technical prices that are considered adequate to the reinsurers.

Who is to blame?
At first, one tends to blame the leading reinsurers for reaching such soft market conditions by allowing high automatic capacities to the insurers with low retentions – as low as five per cent – and providing a gearing effect to insurers through high commissions on highly unbalanced proportional treaties; in addition to other factors such as the capacity to write facultative inward business with a vast territorial scope, extending way beyond the original location of the insurer.