Insurex 2011 witnessed renewed calls for consolidation in an increasingly fragmented regional insurance market, going back to the basics of sound underwriting, adopting global best practices, increased focus on training and local involvement, harmonisation of regulation and product innovation.

Hosted at The Address Hotel Dubai Marina, the eighth annual Insurex conference lived up to its reputation for breadth of content and practical focus – bringing together more than 30 distinguished speakers from across the world to capture the pulse of the Middle East insurance industry and push for change.

Policy brings you a taste of the wide array of topics discussed.

Eng Saleh Bin Rashid Al Dhahiry,  Chairman of the Board for Emirates Insurance Association, delivering the keynote address to open the two-day conference, said insurance companies in the region still have a long way to go and have a responsibility to properly identify risks and find the most appropriate and transparent ways to manage those risks.

They should also learn how insurance capacity to be used and developed for the benefit of the regional industry.

Setting the tone of the conference, Dhahiry said: “Insurance industry requires both growth, innovation, regulation for developing the industry and insurance market in a healthy and sustainable manner, both for the industry itself and the society.”

He also reminded the regulators of their responsibility to play their role judiciously for developing the market in a healthy and sustainable manner.

Speakers after speakers, drawn from CEOs and Managing Directors of leading companies and industry experts from across the region, harped on the challenges facing the regional insurance industry.

The common thread was: There is competition on pricing and companies should go back to sound underwriting, should adopt global best practices, players should not be driven by volume but focus on bottom lines, give much more importance to training and governance and more importantly there is need to increase local involvement.

Deputy Director General of UAE Insurance Authority Fatima Mohammad Al Awadi, was a special guest at the conference.

High profile panel

The conference commenced with a high profile panel discussion to identify challenges facing the regional insurance industry. The panel included Abdul Muttalib Al Jaidi, former CEO of Oman Insurance Company, Patrick Choffel, CEO of Oman Insurance Company, Justin Balcombe, Mena Insurance Leader Ernst & Young, Dr Omer Clark Fisher, CEO of Al Hilal Takaful, and David T Youssef, Managing Director Middle East & Africa, Now Health International and moderated by IrshiedTayeb, Regional Head of Insurance Services Department, BSA.

Abdul Muttalib advised insurance companies to go back to technicalities to cope with international trends and to bring back best practices.

Abdul Muttalib said: “We should challenge ourselves by sticking to the technical rules and principles of doing business. Every body is talking about competition and cutting rates. Who is cutting rates? We ourselves are doing it. We are driving competition, damaging every body. So, the challenge is to go back to technicalities.”

David T Youssef, Managing Director, Middle East & Africa, Now Health International: “We need to get more young people, especially local population, into the industry, give them proper training to move this industry forward to the next level in terms of innovation and corporate governance. If there is profitability in this business, there will be innovation. Then people will want to invest more money into the business. Reformation and segmentation will take the industry forward.”

Technical products

Justin Balcombe: “People need more technical products.  In terms of regulation across the region there is absolute need for harmonisation of regulations. We have different localities with different perspectives of regulation and we have different needs within those localities. So there is a need for common regulatory framework and perhaps Solvency II is one of the mechanisms to a common regulatory framework.

“Growth is definitely happening in strong organisations and the strong will certainly become stronger and there would definitely be segmentation and consolidation in certain parts of this industry.”

Dr Omer, who is an authority on takaful, said takaful companies should encourage young people to take up insurance as a career, develop more products and focus on good corporate governance.

Speakers also called for emphasis on proper training and the need to attract more young people to the industry.

Lax Regulation

SafderJaffer, Managing Director and Consulting Actuary with Milliman, summarized the deliberations thus:

“Discussions were around value proposition of business in a highly competitive market, the competitive nature of business, pricing sensitivities, challenges on the reinsurance front, low penetration and the technical dimensions of corporate governance regulation.

Go back to the basics of sound underwriting  which is the strength of insurance at the first place as the core value rather than relying on investment returns. There was discussion around adopting international trends and global benchmark best practices in our businesses. There was also discussion that we should not be driven by volume but should have our eyes focused on the bottom line. Life insurance needs to move forward into the second layer now and is progressing towards pensions, which is very much lacking in this part of the world. There is the need for some sort of uniformity and harmonization when it comes to regulatory framework.”

The session on regulation and corporate governance analysed the present state of affairs of the industry and the regulatory framework.

Providing an overview, FareedLutfi, Secretary General of Emirates Insurance Association, said: “The insurance industry should adhere to sound corporate governance, particularly in the Mena region, where the insurance industry isunderdeveloped but growing fast.In the Mena region Shari’a  compliant insurance and reinsurance is growing fast and provides an additional incentive for strong standards to be built up quickly.

He also emphasised the need for proper enforcement of regulations.

“Insurers and regulators should realisethat they  do not have an adversarial relationship and should engage in active dialogue which is beneficial for the sector’s sound development.”

On Solvency compliance, Lutfi said Mena insurers have a long way to go on regulatory framework,  let alone Solvency II,  as companies will be required to hold a level of available economic capital, some will struggle to raise additional capital to support volatile lines of underwriting and a traditionally aggressive approach to asset management, and economic and risk-based capital requirements are expected to strengthen an insurer’s resilience in the face of severe market disruptions or catastrophic events.

The compelling benefits to be derived from Solvency II will encourage regulators in the region to act proactively.

Gulf insurers will have to have a new approach of looking at enterprise risk.  This will require a massive change in their product strategy, asset management and capital management, he said.

Success formula

Dr Michael Bitzer, CEO of Daman Insurance, in his presentation, said corporate governance is not just a legal or regulatory issue, but it is critical to the success of a company or business unit.

Citing examples, Dr Bitzer said: “Despite its important role, corporate governance can fail and measures need to be implemented to ensure its success.”

He advised managements to promote a corporate culture wherein constructively challenging the management’s business conduct is seen as healthy and positive. It should represent the interests of different stakeholders to ensure their alignment with the company’s shareholders, employees and the society at large. It should also define management’s remuneration and incentive system in line with corporate values and strategy as well as promote a sound and ethical behavior.

Lisa Kelaart-Courtney, Head of Compliance Advisory Services with Clyde & Co, dwelt on regulatory challenges and the need for risk-based prudential regulation.

She said: “It is the board’s responsibility to ensure that the insurer has appropriate systems and functions for risk management and overall internal controls and to provide oversight to ensure that these systems and the functions that oversee them are operating effectively and as intended.

These systems and functions should cover not only prudential risks but also conduct of business risks.”

She said there is not much coming from the insurance authorities in the region on corporate governance

Richard Burger, Partner at RPC, UK, said: The developed world is going through a rigorous regime of regulation and this region is still moving towards maturiy.  The question was whether what is implemented in the west will it work in the east?  Regulation has to be applied in a proportionate way, he said.

FareedLutfi added:  “The way I see it, if Solvency II is implemented fully, it is bound to have consolidation. On the other hand,  nobody wants to inject fund into the insurance companies any more.  The region needs the right regulation and be implemented religiously.”

Gloomy picture

The session on Reinsurance Challenges and Prospects was thought-provoking.

Michael Gertsch, CEO, Gulf Re, on his part, raised some vital issues challenging the reinsurance market in the region.

He said while GCC economies are picking up following worldwide financial crisis, broader Mena economies are further challenged by political unrest and there is continued desire for growth across all geographies and all product lines.

Listing the present ills, Gertsch said: “The underlying portfolio performance is unsustainable; there is limited product offering; very little product development;  there is hardly any cross-selling and very low public awareness and penetration; heavy dependence on reinsurance and increased competition through international insurance companies.”

Painting a gloomy picture, he said 2011 will be one of the costliest years for the global insurance and reinsurance industry because of the Australian floods, Christchurch Earthquake, Fukushima earthquake and tsunami, US tornadoes and individual risk losses.

Describing it the ‘black hole effect’, he said decreasing rates coupled with reducing deductibles and broadening coverage are a recipe for disaster.

“If the market grows by 9 per cent and insurers want to grow by 15 per cent, the only option is to steal the competition‘s already underperforming business.

“Increasing loss ratios are then being tackled by trying to grow even further. This continuing demand for growth fuels competition, which leads to further deterioration in terms and conditions, which needs to be compensated by more top line growth.”

“The longer this behavior continues the stronger the compounded effect will be and the more effort is required to escape that downward spiral. There is a point of no return…” he cautioned.

Risk management

MazenAbuChakra, MD & Regional Director Life & Health Mena& Cyprus, Gen Re, said: “We need to be improve our risk management capabilities and evaluate the threats and opportunities to our businesses within acceptable risk tolerances.”

“Selecting your reinsurer is not a trivial task, it is not only about price, services and size, you have to evaluate as well other aspects as business strategy, corporate governance, underwriting policy, enterprise risk management and consider key financial indicators, and it is vital to obtain adequate information and interpret it correctly.”

Participating in a panel discussion on n the prospects of reinsurance, IrshiedTayeb, BSA’s Regional Head of Insurance Services Department Mena, said technical results look gloomy.  Investment income is getting diluted as there are fewer avenues for investments. Insurers and reinsurers do not have the luxury of depending on investment income any more. More reinsurers will open offices in the region.

The technology edge

The technology session reminded insurers on the importance of technology as enabler of business agility.

KalpeshDeasi, CEO of Agile Financial Technologies, in his presentation,  said technology has evolved sufficiently to impact the entire insurance value chain.

“Infrastructure should be conducive to enable innovation, insurers should implement new pricing models and they should be able to evolve new user experiences for customers, agents and brokers for new business and client servicing. Technology will enhance channels for interaction with the value chain – brokers, agents, reinsurers, marketplaces, other medium of sales and service.”

Talking of various technology tools, Kalpesh said mobile features for agents and brokers have become a mandatory tool to differentiate and to capture or retain distribution channel resources. The mobile device feature set will enable new applications to lower loss-costs and improve underwriting data.

ZiadArnout, CEO of Hybrid Health Solutions, said health insurers are using IT not only to process claims more efficiently but also to promote evidence-based care, add value to healthcare services and empower consumers through access to information and decision tools.

Better technology and infrastructure will significantly improve the availability and quality of healthcare provision.

“Effectively deploying a combination of established and emerging technologies offers insurers the opportunity to generate increased revenue and streamline their operations,” he said.

Ziad recommended that insurers should prepare for complexity of agile, interoperable IT framework for real-time, customer-driven market.

Growth ahead

Perhaps the most important part of the conference was the session on ‘Growth Strategy, The Road Ahead’.

MarounMourad, CEO, Zurich Middle East General Insurance, in his presentation said it is the time for regional players to seize the opportunity to drive growth further and achieve double-digit growth.

“We are in the part of the world where growth is in the upper single digit and low double digit. Not many regions are experiencing this and I think we can really seize this opportunity to drive growth even further,” he said.

However, to sustain this growth rate he has listed a few key enablers such as proactive regulatory framework.

“First of all, we need to attract investor capital, and for that we should move away from tacit protectionism.  Treat everyone at par, both new entrants and multi-nationals, raise the capital requirements levels, bring in  compulsory insurance laws and tighter control measures. A growing industry needs to be controlled in the areas of consumer protection, compliance, investment regulation and capital preservation.”

“Insurers should be more customer centric and focus on claims servicing and payments and should retain more net premium. Shareholder expectations in the region need to change.  We also need to define the growth strategy through the customers we target, through the proposition we offer and through the pricing approach we follow and customer segment really should be driving our behaviour.”

Disappearing companies

James Portelli, FCII Firm CIP/Coordinator, ME IRM Regional Group’s Network, said a number of smaller companies would disappear (acquired by large groups or dissolved) in anticipation of Solvency II. Aggregation and merger activity will increase to exploit use of capacity.  Retail insurers will continue to be over-supplied by reinsurance and will slide back to pre-crisis, revenue driven strategies.

Insurance companies may suffer more indirectly as a result of a regulatory whiplash than through their own doing, he said.

Years 2011 and 2012 are earmarked as the years of economic resurgence. In most markets one expects insurance strategies will again be revenue-driven from 2012, he said. The market is coming back to the pre-crisis level, he said.

Talking on mergers and acquisitions, Myrna A Barakat, Managing Director of  MBCAPartners, Lebanon,  said the time for M&A continues to be ripe, but the process is as complex as ever and requires increasingly more sophistication.

Pension provisions

Moderated by IrshiedTayeb, the session on private pension provision discussed the reformation of the market to create a multi-pillar pension provision. Robert Grey, General Manager, Bahrain National Life Assurance Company, in his detailed presentation,  advised companies to start early with pension provision while demographics and finances are favourable.  There is scope for integrating healthcare and pension and the GCC should learn lessons from the rest of the world. Employers and employees should combine contributions, and employees should be encouraged to make additional contributions, he suggested.

WiamSalah, Actuarial Director with Legal & General Gulf, said long service expat employees will need retirement benefits and life insurance companies can offer immediate annuities to retirees from private defined benefit plans. Life insurance companies may offer group savings plan for retirement that take the shape of a defined contribution plan with a pre-retirement death benefit and annuity option.

ERM

The last session of Insurex 2011 was on Enterprise Resource Management (ERM). The implementation of Solvency II and IFR4 will impact risk modeling, capital adequacy and the treatment of serves.

Kevin Willis, Director, Financial Institution Rating Services of Standard & Poor’s, said insurers that fully implement the Solvency II principles are likely to get a strong ERM assessment. Solvency II is expected to raise risk management governance standards, internal control levels, quality of internal models and strategic risk management. The Solvency II requirements are expected to lead to improvements to the overall quality of ERM. GCC insurance supervisors have not developed any ERM targets or requirements for the sector. The lack of severe regional insurance losses also tends to reduce the apparent need for more sophisticated ERM.

Active role

Eight years on, Insurex 2011 is not only firmly established in the Middle East’s insurance calendar but leading the charge for promoting innovation and seizing growth opportunities in this dynamic market.

Thus, Insurex2011 highlighted the increased focus on regulatory development in the region. The global economic crisis has also heightened the importance of corporate governance and the insurance sector as a whole is paying more attention to this although a lot still needs to be achieved in this respect.

“The only relief is that investments have paid us some rewards in 2010, unlike in the case of previous two years when stock markets and real estate investments have eroded much of our capital,” said chief executive of a Dubai-based insurance company.

Though many companies were able to increase their gross insurance premium revenue, a commensurate growth in the bottom-line was missing. In fact, the insurance companies were luckier this time around, as a perceptible improvement was noticed in non-technical areas of activities, especially on the investment side. While some companies were able to improve their investment income during 2010, some others were content with the fall in the investment loss during this period.

The collective interests of the Middle East insurance industry are articulated and protected by organisations such as the General Arab Insurance Federation (GAIF) and the Coordination Commission for Insurance & Reinsurance Companies, with seasoned veterans like Abdel Khaliq Khalil, Ashraf Bseisu and Fareed Lutfi charting the course ahead. Local bodies such as the Bahrain Insurance Association and the Jordan Insurance Federation have a fundamental role to play in developing their respective markets and have been recognised in our list.

Local goliath’s such as Qatar Insurance Company (QIC) and Egypt’s Misr Insurance Company dominate their domestic markets, while more and more insurers such as Gulf Insurance Company (Kuwait) and Arabia Insurance Company (Lebanon) continue to spread their wings and extend their influence beyond the confines of their national borders. The following list identifies managers at the helm of market-leading companies as well as regional champions.

GCC companies (from the UAE in particular) feature heavily in the top-20 list of insurers in the Middle East by gross premiums written, with the top spot in 2009 occupied by QIC, followed by the likes of Oman Insurance (UAE) and Tawuniya (Saudi Arabia).This is reflected in the balance of our list of most influential industry leaders.

We also identify some of the most active re/insurance brokers and Arab reinsurers with extensive operations in the region.

The focus of this list is inevitably Arab insurance companies, although two particularly influential global players have been included. Global reinsurers are not featured. For ease of navigation, most individuals are listed according to their company’s primary country base.

Abdul Khaliq R. Khalil, Secretary General, General Arab Insurance Federation
Abdel Khaliq Khalil is the face and voice of Arab insurance, representing 300 member companies across the MENA region. A veteran of the Iraqi insurance market, he became GAIF secretary general in 1998 and counts CEOs across the region as his personal friends. A true champion of the industry, Khalil continues to drive the evolution of the Arab markets and is currently spearheading the establishment of the Arab Insurance Institute in Syria.

Yassir Albaharna, CEO, Arab Insurance Group (Arig)
In addition to his role as CEO of the largest Arab reinsurance company, Yassir Al Baharna sits on several boards including the Bahrain Insurance Association and Bahrain’s Human Resources Development Fund. A global ambassador for the Arab insurance industry, Albaharna is a member of the board of the International Insurance Society and a prominent advocate for higher best practice.

Ashraf Bseisu, Chairman, Bahrain Insurance Association
Beyond his position as acting CEO of the Solidarity Group, Ashraf Bseisu plays a pivotal role in the development of the industry as chairman of the Bahrain Insurance Association and a board member of several institutions including the GCC Coordination Commission for Insurance & Reinsurance Companies. He served as president of the General Arab Insurance Federation since 1998.

Fareed Lutfi, Secretary General, Emirates Insurance Association
One of the most recognisable figures in the industry, Fareed Lutfi’s wealth of experience stretches from his days at Arig, Alliance and AMAN to his current position as director of insurance services at Dubai Holding and founding board member of the DIFC. Lutfi is the secretary general of the Emirates Insurance Association as well as the GCC Commission for Insurance & Reinsurance Companies.

DUBAI

Abdul Muttalib Al Jaidi, CEO, Oman Insurance Company
Abdul Muttalib Mustafa Al Jaidi is CEO of the UAE’s leading insurance company, with gross premiums of AED2.33 billion and net profits of AED189.6 million in 2009. Having risen through the ranks of Oman Insurance Company (OIC) since 1975, Al Jaidi is one of the most recognised figures in the industry and a strong advocate for enhanced professionalism. OIC has ‘A’ (AM  Best) and ‘BBB+’ (S&P) ratings.

Walid Sidani, CEO, Abu Dhabi National Insurance Company
With gross premiums of AED1.55bn, ADNIC is the second largest player in the UAE and by far the leading risk carrier in Abu Dhabi; boasting a “who’s who” of leading clients. Walid Sidani took the helm at ADNIC in March 2009 and has done much to reinvigorate the company’s approach through modernisation and new strategic partnerships. The company holds an “A-” rating from S&P.

Omer Hassan Elamin, Senior Managing Director, Orient Insurance
Omer Elamin is chairman of the Dubai Insurance Group (IBG) and senior managing director of one of the UAE’s largest insurers. Part of the vast Al-Futtaim Group, Orient has seen its conservative underwriting approach yield an “A-” rating from S&P, with gross premiums of more than AED1bn in 2009. Orient saw its net profits grow to AED186m last year.

Nader Qaddumi, General Manager, Al Buhaira National Insurance
A respected industry leader with a long track record in the regional insurance sector, Nader Qaddumi heads Al Buhaira National Insurance, one of the UAE’s top five insurers. Al Buhaira was one of few regional insurers to record a significant net profit rise in 2009 (doubling to AED101m) while gross premiums stood at AED692m.

Dr Michael Bitzer, CEO, Daman
With the backing of Munich Re and the Abu Dhabi government, the National Health Insurance Company (Daman) burst onto the scene in 2006 and is now the leading health insurer in the UAE, with more than 1.8 million members. Under CEO Dr Michael Bitzer’s leadership, Daman has led the way in corporate social responsibility and is poised for regional expansion.

QATAR

Khalifa A Al-Subaey CEO Qatar Insurance Co
Since the mid-1980s, Khalifa A Al-Subaey has headed a regional powerhouse. Qatar Insurance Company’s (QIC) gross premiums reached QAR2.1bn in 2009, while net profits hit QAR532.8m. QIC dominates the Qatari market and has interests in other countries through QIC International and the recently formed Q-Re. With a stable “A” rating (S&P), further expansion is on the cards.

Ian Sangster, CEO, QIC International
A highly respected figure in the industry, Ian Sangster has spearheaded Qatar Insurance Company’s impressive international operations through its subsidiary QIC International (QICI), which is based in the Qatar Financial Centre. QICI’s reach has extended to the Far East and Malta, with the recent creation of Q-Re set to build on this.

Ghazi Kamel Abu Nahl, Group CEO, Qatar General Insurance & Reinsurance
Ghazi Kamel Abu Nahl has cemented his company’s place as the second largest Qatari insurer, with gross premiums of QAR504.5m and net profits of QAR86m in 2009. Qatar General Insurance & Reinsurance has seen its takaful arm bear fruit and is expanding its regional presence through strategic alliances in Algeria, Libya, Syria and Oman.

SAUDI ARABIA

Ali A Al Subaihin, CEO, Tawuniya
Even with the emergence of new players, Tawuniya (The Company for Cooperative Insurance) remains, by far, the undisputed market leader in Saudi Arabia. Under Ali Al Subaihin’s leadership, gross premiums rose more than 50 per cent to SAR4,035m in 2009, while net profit stood at SAR32m. Tawuniya maintains an “A” rating (S&P).

Dr Saleh Malaikah, CEO, SALAMA
Dr Saleh Malaikah has established the Islamic Arab Insurance Company (SALAMA) as one of the largest takaful players in the world, with six direct companies (including offices in the UAE, KSA and Egypt) as well as its Tunisia-based retakaful operation – Best Re. Malaikah is one of the most prominent speakers on the conference circuit; a leading light on Islamic insurance.

With the establishment of the Institute of Risk Management’s (IRM) first UAE chapter, Carolyn Williams, IRM head of thought leadership, discusses the benefits enterprise risk management (ERM) can bring to the region.

Since its birth in 1986, the Institute of Risk Management has led the risk profession by delivering relevant and practical education and related life-long learning. Today we are the biggest provider of enterprise-wide risk education, not only in the UK but increasingly around the world. Although we are based in London, our outlook and team are truly international: the education faculty that oversees our exams includes members from several different countries, we have a growing number of regional groups, particularly in the GCC region, and even our IRM office team of 14 staff come from seven different countries spanning four continents.

It is notable that organisations in the Middle East are moving fast towards the adoption of international best practice in enterprise risk management. The oil sector was the earliest employer of risk professionals in the region, starting from concerns with health and safety and process risk management, and moving on into areas of financial risk associated with energy supply. Recruitment consultants in the UK have noted that the energy sector is a significant source of new employment for skilled financial risk experts being made redundant from the banking crisis. Parts of the Middle East, Dubai, Qatar and Abu Dhabi in particular, have sought to diversify their economies away from oil and have established themselves as local centres for finance, tourism and other forms of trade. Financial regulation is being brought into line with international best practice, which includes a focus on the risk management capability of the financial firm. The DIFC and the QFCRA, to give just two examples, are both implementing risk management frameworks within their organisations. Banks and insurance companies are looking to the Basel II requirements in determining their risk management frameworks.

The construction sector has also been keen to adopt risk management techniques to maximise effective project management alongside the control of environmental impact, the availability of human resources and the ups and downs of the economy.

Awareness of broader risk issues, and the interrelationships between them, is also rising across the region. Reputation risk was brought into focus last year when the BBC’s Panorama documentary, shown in the UK, claimed that conditions in labour camps run by one of the large construction companies in UAE were sub-standard. The company strongly rejected these allegations which were nevertheless investigated by the UAE Ministry of Labour. Whatever the truth may be in this particular situation, it marks an increasing expectation of transparency of operations and recognition that risks to reputation (whether justified or not) must be understood and properly managed.

Not surprisingly, we have observed a widespread hunger to learn more about the tools and techniques of enterprise risk management, and how to embed it within an organisation. The Middle East has in recent years been the fastest-growing area internationally for membership of the Institute of Risk Management and provides the largest single group of students and members outside the UK and Ireland, with a mixture of expatriates and locals taking risk management qualifications or joining in professional development activities. Our regional members group started with a single group in Dubai, but has now expanded to a thriving Middle East Network, thanks to the energetic facilitation of James Portelli, fellow of the IRM and head of risk at the Oman Insurance Company. The network now contains active groups in the UAE and Qatar and emerging groups in Bahrain and Saudi Arabia.

Commitment on behalf of both employers and national agencies to raising levels of skills of all types through education and training has resulted in a high level of interest in risk management courses. Providers such as the Gulf Insurance Institute (GII) have started up to meet local training needs. There is also a demand for distance learning which can take place in the student’s own time and in their own home, the IRM’s International Certificate and International Diploma have been designed with this in mind.

The Institute has recently made all course material available over the internet with final examinations taken in person either at the institute’s regular exam centre in Dubai or at special centres which can be set up elsewhere in the region in response to demand.

As well as providing qualifications, the IRM also provides information and ongoing professional development opportunities for its members and for all those interested in risk management. The latest example of this is a guide to the effective implementation of the new ISO31000 Risk Management Principles and Guidelines which is available for free download from the IRM website. The IRM also has a simple risk management standard suitable for firms of all sizes, which is also available for download in 15 languages, including Arabic. Members of the IRM, wherever they are in the world, can also access the institute’s online resource centre which gives them access to a database of risk management articles and web resources.

The benefits of an effectively implemented ERM programme are great, ranging from reduction in losses to significant strategic advantage. The challenges to such a programme in the current climate are also considerable. The first step is to ensure that those within an organisation charged with these responsibilities are properly trained and qualified and that they have access to a strong professional network to keep them abreast of the latest thinking on the subject of risk.

The author of this article, Carolyn Williams MA ACII MIRM, is the head of thought leadership at the Institute of Risk Management. For more information see www.theirm.org.

Policy provides an overview of recent developments from the Middle East’s three established financial centres – Dubai, Qatar and Bahrain – and profiles three regional players who have called them home.

While Bahrain has a long history of serving the Middle East region as a financial centre – particularly when it comes to banking and Islamic finance – the emergence of the Qatar Financial Centre (QFC) and the Dubai International Financial Centre (DIFC) ushered in a new wave of global finance players to the region. All three regulatory jurisdictions, including the Central Bank of Bahrain (CBB), boast sophisticated legal frameworks and have attracted a number of re/insurance companies to the region. Competition between the three centres is healthy, with all three regulators frequently hosting and sponsoring insurance conferences in the region to showcase their offering.

However, to narrowly label the financial centres as fierce competitors vying for the attentions of global financial institutions may be a little too simplistic and overlooks their collective role in raising regulatory standards in the region as a whole. On February 22, 2010, the QFC Regulatory Authority (QFCRA) and the Dubai Financial Services Authority (DFSA) entered into a Memorandum of Understanding (MoU) to share supervisory information with respect to financial firms authorised to operate in the QFC and DIFC.

The MoU was signed on behalf of the DFSA by chief executive, Paul Koster, and Phillip Thorpe, chairman and CEO of the QFC Regulatory Authority, during the fourth GCC Regulators’ Summit, held in Doha. Thorpe welcomed the initiative: “As markets and regulatory jurisdictions are brought closer together in today’s evermore complex financial environment, it is increasingly important that regulators share information and working practices as a means of bolstering their effectiveness. This is especially important in neighbouring jurisdictions where cross border activities are therefore more likely to occur and where regulators are therefore more likely to need to communicate.

“This move marks an important development for both regulators in light of our clear shared interests. I am delighted that we are able to sign this MoU with the DFSA and I anticipate that a closer relationship will significantly benefit both parties,” he added.

The onset of the global financial crisis may have dampened the enthusiasm of global insurance players looking to establish a regional hub but new licenses continue to be issued, with more expected over the coming year. The three financial centres continue to fine-tune their offering and introduce bold new initiatives.

QATAR FINANCIAL CENTRE

One of the most interesting recent initiatives from the QFC Authority was the launch of the ambitious Qatarlyst project last year. Based in Doha and ultimately backed by the Qatari government, Qatarlyst is a web-based system that facilitates trade between insurers, reinsurers and brokers. Its backers boast that it will be the only industry-scale system of its kind to cover the entire transaction process including quotation, placement of risks, negotiation and binding cover, notification and adjustment of claims, plus the recording of accounting information. There are more than 20 registered users of the system to date including: BNI, Qatar Insurance Company, RFIB Insurance Brokers and, most recently, Al Fajer Retakaful.

The QFC has issued licenses in the past year to: Japanese insurer – Mitsui Sumitomo Insurance Company, reinsurance broker – Chedid & Associates Qatar, takaful operators – T’azur Company and Allianz Takaful, plus SEIB Insurance & Reinsurance Company. The number of insurers operating from the QFC is 10 and the number of insurance intermediaries is nine.

The QFC hosts the annual MultaQa Qatar conference in March.

Company focus: Qatar Reinsurance (Q-Re)
Recently licensed by the QFCRA, Q-Re hit the ground running and began operations in January 2010 in time for the renewal season. Q-Re is a subsidiary of Qatar Insurance Company International (QICI) and the Qatar Insurance Company (QIC), with former COO of QICI, Dermot Dick, taking the helm of the new reinsurance entity as CEO.

QICI’s existing global reinsurance book (worth around US$100m in 2009) has been rolled into the new entity and the firm will continue to target Afro-Asian markets in its three core lines – energy, marine and short-tail property. Expansion plans on the horizon include building its existing Singapore portfolio and seeking a European reinsurance licence from the Maltese Financial Services Authority (MFSA).

CENTRAL BANK OF BAHRAIN

The CBB recently became the first regulator in the region to introduce minimum qualification requirements for representatives of insurance companies. To underpin this initiative, the Bahrain Institute of Banking & Finance (BIBF) and the Chartered Insurance Institute (CII) have introduced an internationally recognised qualification (in English and Arabic) with a regional emphasis.

Recent entrants to the market include Legal & General Gulf and Legal & General Gulf Takaful; the two new companies were granted licences to offer life insurance and takaful services. Bahrain is home to six regional reinsurers including Arig and Trust Re.

The CBB hosts the annual Middle East Insurance Forum in February and recently hosted the sixth Gulf Insurance Forum.

Company focus: Hannover Retakaful
Attracting Hannover Re to Bahrain to establish its takaful subsidiary (Hanover Retakaful) in 2006 represented a major coup for the CBB. Hannover Retakaful writes takaful business worldwide in over 70 countries and in all lines of business; treaty and facultative.

In an interview with Policy last year, Tarik Aouad, chief underwriting officer, Hannover ReTakaful, commented on the industry potential: “Personal lines is a natural area of takaful which offers the right type of risk homogeneity that is fundamental for a takaful pooling arrangement. It is worthy to mention that there is a huge potential for family takaful in countries with big Muslim populations such as Indonesia, Egypt and Pakistan.

“However, takaful is also ready to service the shari’a-compliant insurance needs of the increasing number of commercial and industrial risks.”

DUBAI INTERNATIONAL FINANCIAL CENTRE

The Dubai Financial Services Authority continues to support and host a full range of specialist events including the Islamic Financial Services Board’s (IFSB) fifth seminar on the future regulation of takaful in February and the inaugural World Space Risk Forum in March. Like the other financial centres, but perhaps even more so, the DFSA is proactively seeking to encourage and host more captive insurance companies. Arguably its biggest coup to date was the hosting of the World Insurance Forum in 2008.

Recently authorised entrants to the DIFC include: Gulf Re, Allianz Risk Transfer AG (ART). Zurich Insurance Company, a subsidiary of Zurich Financial Services Group, was granted a new licence that allowed the company to expand its activities and conduct general insurance operations from the DIFC. This brought the centre’s insurance cluster to 31, including some of the world’s largest international names.

Company focus: QBE Insurance (Dubai)
QBE Insurance received a licence from the DFSA to open an office in the Dubai International Financial Centre last year. The office is headed by Khalil Eid, who serves as general manager and senior executive officer of QBE Insurance Europe (Dubai Branch).

The firm’s offering in this region is structured around eight product-focused underwriting divisions: casualty, reinsurance, property, motor, marine & energy, specialty, and aviation.

Dr Omar Clark Fisher explores the alignment of corporate governance and company performance in relation to takaful companies, while calling for a far more active role for policyholders in the decision-making process.

Corporate governance and company performance

From board rooms to regulators’ offices and to stock exchange trading floors, the global debate marches on: does good corporate governance enhance stock prices and/or shareholder value? While research studies are by no means conclusive, evidence is mounting up that better corporate governance leads to better future financial and stock performance. According to the Policy Brief published by the Hawkamah Institute for Corporate Governance, “In its September 2005 report, ‘The Irresistible Case for Corporate Governance,’ the International Finance Corporation (IFC) asserts that sound corporate governance increases company valuations by 20-30 per cent in developing markets and leads to higher credit ratings and a corresponding improvement in access to finance.”

A Wilshire Report in July 2009 documented statistically the positive impact of good corporate governance on share prices of 139 public companies that the California Public Employees’ Retirement System (CalPERS) invested in beginning in 1987 and thereafter insisted they adopt corporate governance policies and best practices. Compared to a benchmark return on cumulative basis, average companies invested into by CalPERS yielded three per cent per annum higher, or a five-year excess return of 15.3 per cent. Significantly, Wilshire found that institutional investment by CalPERS and the upgrading of corporate governance led within one year to “targeted poorly performing companies to underperform by only 1.5 per cent vs. a massive 23.6 per cent underperformance just one year prior.”

Another finding of the Hawkamah Institute is that: “Shari’a-compliant insurance companies need to explain clearly the relationship between the policyholders’ fund and the operating company. In particular, shareholders need to know what their obligations will be to support the policyholders’ fund in the event that the fund faces financial difficulties. Disclosure should focus on the legal relationship between the two entities, and also disclose any regulations to which the takaful firm is subject, which may affect the flow of funds between the two entities.”

Dr John Lee, executive director at KPMG, commented in June 2009 on Exposure Draft No 8 from the International Financial Services Board (IFSB) of Malaysia regarding corporate governance for takaful companies: “Because of structure of Islamic finance, the need for transparency is even greater than perhaps in conventional. The fact that participants have a direct stake in some of these transactions, I think that’s why there’s so much emphasis on the need for transparency. So who’s looking after the interests of policyholders? Some would argue that perhaps it’s the shari’a board…but a lot of the role of the shari’a board has been confined to product development areas as opposed to looking at broader issues such as fairness to policyholders.”

Although worldwide there are four variations of the basic system of takaful, the Islamic alternative to conventional insurance, common elements are apparent. Succinctly put, these are:

. Insureds make contributions (often called “tabar’ru or donations) rather then
pay premiums
. Core essence is mutual assistance to needy members of the group (or ta’awun)
. Risk-sharing among members (form of joint indemnification) rather than risk transfer
. Avoidance of prohibited elements such as al maisir (form of gambling), al gharar (uncertainty and deception) and al riba (interest or forbidden types of commercial gain)
. Separation of ownership interests of policyholders (members) from shareholders
. Use of Shari’a compliant agreements in all activities – including investment of contributions and share capital
. Excess funds resulting from annual operations – called surplus not profits – legally belongs solely to policyholders (who after all contributed the risk capital) and not to shareholders, as is featured by stock insurance companies.

Based on points listed above, five observations arise.

Misalignment of shareholders’ and policyholders’ interest
With the exception of several cooperative risk pools in Sudan, the takaful models employ an organisational structure whereby shareholders assert themselves as “agents” for the policyholders through Mudareb or Wakala arrangements.

This arrangement is typically legitimised by the voluntary purchase by the policyholder/member of a takaful operator’s policy. However, many takaful policies are frankly oblique in terms and conditions, and may not fully disclose rights, responsibilities and fees attendant to this arrangement. Hence, the first important observation is the rights, responsibilities and role of policyholders are not always clearly set forth and readily disclosed in ads, brochures, websites, let alone in actual policy wordings.

Common practice under good corporate governance requires that customers (read policyholders/members) be provided clear, unambiguous and easily accessible descriptions of rights, responsibilities and other consumer protection disclosures, today circumscribed by normal business practices – especially in financial services. No doubt in reaction to the recent global financial crisis, regulators and insurance practitioners alike are giving more attention to transparency and disclosures.

Secondly, nearly all takaful operators establish themselves as managers of the risk pool with no consultation with policyholders – the main beneficiaries of that risk pool. Of the various policies the author has read, not one specifies how policyholders can appoint management or even remove management. It seems their sole recourse is to lapse their policy, or to terminate the policy early if aggrieved or somehow poorly represented by their “agent”, the takaful operator. Again, good corporate governance practices among stock companies generally (including insurance) sets forth the manner in which customers (read policyholders) can complain, influence business management or in extreme cases, mount an appeal to the board via a proxy campaign or via legal recourse called “class action suit” to impress upon management its grievances.

Thirdly, on a slightly more technical point, the calculation of surplus at year-end is conducted by shareholders only through management with no consultation (again) with policy holders. The decision about retaining surplus, adding to reserves or size and timing of distribution of funds is totally determined by the takaful operator. Some industry experts take comfort in the Sharia Supervisory Board’s oversight of takaful business operations, which does include this issue of surplus calculation. Nonetheless, surplus is the right of policyholders who have contributed that risk capital to the takaful pool. Good corporate governance should dictate that policyholders be actively involved in such calculation and decision-making, rather than resort to a “watch-dog” status for scholars or discovery through a shari’a audit, which is still not a regular and respected fixture of takaful operations globally.

The Middle East and North African markets experienced a softening in prices during the renewals season. The UIB Group provides a review of conditions and highlights from 2009.

The Monte Carlo Reinsurance Rendez Vous held at the beginning of September of each year is deemed to mark the opening of the reinsurance year. Over the past few years it has witnessed events or happenings which have had a major effect on all sides of the reinsurance industry, for example the tragic events of 9/11, and the downgrading of Converium in 2004.

By way of contrast, the buzz word of the 2009 Rendez Vous was “flat” – no major losses, no significant mergers or down gradings and the prediction that the 2009-10 renewal season would be “flat”.

This prediction proved to be justified as the overall result of the renewal negotiations was a limited reduction in excess of loss rates especially for cat business, and pressure to increase commissions for proportional treaties.

This was against a background of an over abundance of capacity, a very profitable 2009, and a concerted effort by reinsurance buyers to reduce their reinsurance spend.

Middle East
In line with expectations months before the January 1 renewal, the Middle East and North African markets (MENA) experienced a softening in prices across most lines of business and in almost all territories. Despite much talk earlier in the season by many leading reinsurers about increases, or at least a stabilisation of rates, this did not materialise.

The strong capital replenishments by major reinsurers along with the positive underwriting results of 2009, coupled with a projected recovery from the financial crisis, has shifted many reinsurers’ focus towards increasing market share and retaining business.

Although the MENA region continues to have a very low contribution to world premium, many reinsurers continue or have started to focus on that region due to high growth potential compared to developed markets attributed to its highly untapped market, rising awareness and government initiatives to promote the insurance sector. Reinsurers are also attracted to that region as a way to diversify their portfolio into relatively low-CAT exposed territories. This has been evident by the establishment of several branches of major reinsurers, Lloyd’s cover-holders as well as the creation of new reinsurance and re-takaful operators in the region. This abundant capacity by existing companies and by start-up reinsurance companies hungry for premium has negatively reflected on both original rates and reinsurance prices.

The region continues its heavy dependence on proportional treaties as the main form of protection coupled with excess of loss covers protecting the companies’ retentions. The results are very low net retention levels when compared to the gross treaty capacities meaning many companies are heavily dependant on earned commissions as opposed to underwriting profitability. Gross excess of loss covers are rarely used by direct insurance companies, even the more established and financially able ones; the only exception to that rule would be motor business, which along with medical premium continue to represent a significant percentage of most companies’ gross incomes.

This dependence on proportional treaties with reinsurers following the original rating of the direct companies meant that the deterioration in original rates along with an increase in treaty capacities and reduction or even stabilisation of reinsurance commission levels has put the underwriting margins of treaties under pressure. There is voiced concern by many regional and international underwriters that the current terms offered by the reinsurance market is not sustainable, which will be clear once the industry suffers some major losses.

Excess of loss protections did come under pressure and unless results were extremely poor, reductions between five per cent and 25 per cent were observed across property, marine and motor business.

The main international players on treaty business across the region continue to be Munich Re, Swiss Re, Scor and Hannover Re and in the 2010 renewal Scor and Hannover Re have increased their involvement across many territories, while the GIC of India has become a leading and influential player particularly in the Middle East markets. Lloyd’s involvement in the region is quite limited given their lack of appetite for proportional treaties and Motor Xl business, however, Lloyds continues to be an important leader and capacity provider for the retrocession programmes of the regional reinsurance companies.

Highlights in 2009
While the MENA markets were not directly affected by the bad debts of the banking industry in the US and Europe,  the effects of the financial crisis were strongly felt by almost all countries. The drop in oil price had a direct effect on the spending power of companies and governments, particularly the Arabian Gulf oil-rich countries which will affect the number of projects that see the light in 2010. Having said that, those governments have accumulated enough wealth during the boom years to see them through the crunch and it is most probable that the government will now play a bigger role as the main spender in those countries with focus shifting towards infrastructure projects as opposed to the more luxurious construction projects that have identified the region recently.

The slow-down in international trade and piracy off the coast of Somalia has affected the volume of cargo business particularly through the Suez Canal and Jebel Ali in Dubai, which was reflected in non-realisation of projected marine cargo premium.

The Jeddah flood loss, with an initial loss estimate of US$40m, is expected to mainly affect the motor line of business. It is yet to be seen how reinsurers will react to this loss particularly in a region where not sufficient premium is paid for the catastrophic exposure.

Cancellation of the compulsory share on marine business to the Societe Centrale de Reassurance (SCR), the national reinsurer of Morocco. This trend has already started in a number of markets and is expected to continue in compliance with the WTO requirements and will ultimately lead to the direct insurance companies having more control and negotiating power over their reinsurance placements and will promote increased competition among reinsurers.

Medical premium is rapidly growing following new laws in several GCC countries making it a compulsory cover with an expectation that other neighbouring countries will follow suit in the near future.

The Saudi Arabian Monetary Agency (SAMA) continues its strong regulation of the Saudi Insurance market following the ‘Cooperative Insurance Companies Control Law’ that was passed in 2005 and has re-structured the market since. The number of licensed companies has exceeded 20 with several more in the pipeline.

The Egyptian Insurance Supervisory Authority) has come under the umbrella of the newly formed Egyptian Financial Supervisory Authority which has become operational since July 1, 2009.

Life insurance penetration is on the rise with a number of international insurance companies realising significant growth through their local offices. Takaful products will prove to be of utmost importance for life covers which have been historically avoided by many consumers for religious considerations.

Having attended the fifth Chief Risk Officers (CRO) Assembly in Switzerland at the turn of the year, James Portelli provides an overview of key messages delivered by some of the leading risk management guardians of the global insurance industry.

Given the current economic climate, it is not surprising that the Chief Risk Officers (CRO) Forum chose “Navigating the Storm” as the title for this year’s CRO Assembly. The CRO Forum was formed in 2004 and comprises chief risk officers from major European insurance companies and financial conglomerates with the aim of developing and promoting industry best practices in risk management. The fifth CRO Assembly was organised under the auspices of the Geneva Association which, in itself, is a unique organisation formed by the CEOs of some of the most influential insurance companies/groups internationally. Swiss Reinsurance Company acted as hosts this year and the event was held at Swiss Re’s Centre for Global Dialogue in Rüschlikon, Switzerland.

The first keynote speech, delivered by Curtis Mewbourne, managing director at PIMCO, provided a macro update on the economic crisis, explaining what PIMCO coined the “New Normal” (N₂). Mewbourne outlined the economic events leading up to the crisis including: “shadow-banking” activities, excessive debt creation, and balance sheet inflation. In an economy that is increasingly globalised, it becomes very difficult to predict recovery on a set of essentially heterogeneous economies. Certainly the silver lining, as world economies emerge from this crisis, will include greater regulation of shadow-banking (ie derivatives, swaps, off-balance sheet transactions etc.), deleveraging of balance sheets, and a greater focus and specialisation by the various financial institutions on their core activities. During ensuing discussion, Klaus Otto Bick, CRO at Allianz Global reiterated that the “New Normal” will inevitably necessitate better understanding of risk, operating with greater transparency and building of trust as operational pre-requisites.

The second and third keynote presentations on the first day, by the Swiss Re and Zurich Financial Services CROs, focused on how Enterprise Risk Management (ERM) fared during the economic crisis and focused on ERM insight and strategies looking forward. Swiss Re CRO Raj Singh’s presentation can be summed up in the five rules of engagement for CROs:

. Know what’s beneath the deck: It is important for senior management to have a more holistic and detailed grip on operations
. An equal seat at the table: The CRO having a seat at a decision-making table is a challenge for several risk managers but also one that is acknowledged as an important step by several of the larger companies. Stefan Lippe, Swiss Re CEO, for example, stated that his ‘actions are not dominated by his opinions’ and that the input of his CRO is extremely valuable. The Swiss Re CRO is a member of Swiss Re’s Executive Committee
. Think the Unthinkable: A crisis is often the result of a risk that has not been thought
of or a risk that has been overlooked or under-estimated
. Be everywhere: The importance of a culture that every manager is a risk manager and that the relevant information permeates back to the risk function cannot be over-stated
. Speak out: Key officers were rapped by the judge (and even sentenced) for knowing what was going on and not speaking out in, for example, the Independent Insurance Company plc case in the UK

In the words of Axel Lehmann, group CRO for Zurich Financial Services, “ERM should be deeply engrained in strategy.”

The morning sessions were followed by presentations on Solvency II implementation progress and regulatory development in the US by the European Commission Head for Insurance and Pensions and the CEO of the National Association of (US) Insurance Commissioners respectively.

The second day morning sessions of the conference proceeded with an equally impressive line up of speakers including Stefan Lippe, CEO of Swiss Re, Rob Jones, Standard & Poor’s managing director, and Paul Sharma, director of prudential policy at the UK Financial Services Authority. To mention two themes from two of these speakers:

. “Let us not be affected by the winners’ curse.” (Paul Sharma, UK FSA). This is with reference to the risk of relative complacency arising from the fact the crisis has not resulted in systemic failure in the insurance sector. The fact that banks have been at the source of and mainly bore the brunt of the crisis does not make us immune to similar risks.

. “Crisis sharpens the sense of  urgency.” (Stefan Lippe, Swiss Re CEO). Lippe was talking about the urgent need to implement the regulatory reforms, particularly Solvency II regulations within the industry and to create common international solvency benchmarks or matrices with other jurisdictions internationally.

The breakout sessions on both days were equally engaging tackling issues of systemic risk, cyclicality of risks, climate change, systemic risk regulation in insurance, risk partnerships between private and public bodies and risk reporting.

The cherry on the cake was a delivery by a guest speaker to the conference, Gillian Tett, assistant editor at the Financial Times, journalist of the year at the British Press Awards 2009 and author of Fool’s Gold. I can only quote an independent newspaper book critic to condense her interpretation of the events leadingto the financial crisis: “Ever the anthropologist, Tett sketches a system in the grip of a great error, emanating outwards from a cadre of elite traders who were able to repel any attempt to monitor, question or restrain them. Greed is in there. Fear, too, …fraud, and wilful negligence … and poverty of imagination among regulators. Fool’s Gold resists simple answers to a complex disaster – and so should we.”

With this lesson, the framework for next year’s CRO Assembly (to be hosted by Munich Re) has already been etched. Drawing on the words of Albert Einstein,“The significant problems we face cannot be solved at the same level of thinking we were at when we created them,” the sixth CRO Assembly in Munich 2010 already aspires to deliver insight and engagement.

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.