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.

Despite the current buzz of excitement surrounding the Hashemite Kingdom of Jordan as it hosts this month’s GAIF Conference by the Dead Sea, most of the kingdom’s insurers will nonetheless return to their offices once the event is over still resigned to the probability of their business proving little easier in 2010 than it was last year. Intense competition and government regulation together continue to constrain premium rates while costs rise due, for example, to increasingly steep increases in health care expenses, and steadily rising staff bills as insurers pay more and more to prevent their best employees moving abroad to work in burgeoning GCC insurance markets.

So, although many Middle Eastern insurance markets have now started to rise above the difficulties of late 2008 and 2009, the Jordanian insurers’ dilemma – and that of their regulators and shareholders also – remains simple: there are still too many local companies with too much capacity chasing too little insurable activity, notably 28 licensed insurers with approximately JOD510m of current market capitalization writing (according to preliminary official estimates) some JOD361.8m of total gross written premiums in 2009, a figure expected to rise by approximately 10 per cent in 2010 to around JOD400m (US$560.5m), with nearly all of this being written domestically in Jordan itself. Meanwhile, the Amman Stock Exchange, on which all 28 insurers are listed, has tracked the morose local insurance sector and seen its Insurance Index fall by -11.8 per cent in 2009 and by a further -4.5 per cent to-date in 2010.

True, some Jordanian insurers still appear remarkably optimistic. Yet as often as not their enthusiasm is based on opportunities – some real, some imagined – to buy into local equity and property markets at what they believe to be today’s depressed prices. In other words, Jordan’s insurers are using their often considerable capital bases less to support underwriting risk and more to fund their activities in the capital markets, with property and equity investments to the fore. Undoubtedly, both investment and underwriting opportunities exist alongside the threats confronting the insurance sector (see Fig 1), and long-term assets can be an appropriate asset class for companies writing long-term business such as life or pensions. Nevertheless, shareholders of many of Jordan’s smaller insurers must sooner or later ask themselves why they invest in insurance? Are they hoping to participate in the rewards of a company’s underwriting expertise or are they, in effect, placing their cash in what is tantamount to an unusually opaque, expense-laden investment fund that will speculate in land and shares on their behalf? Similarly, do they have a long-term commitment to investment in the future of the country’s insurance sector, or are they merely hoping for windfall gains if and when the long-awaited consolidation of the Jordanian insurance sector eventually occurs?

Macro-economic considerations
Jordan’s currently constrained macro-economic situation is all too clearly reflected in Standard & Poor’s recent lowering in March 2010 of the kingdom’s local currency sovereign rating to a still good, but nonetheless diminished BBB-/Stable/A-3 from the previous BBB/Stable/A-3. The economic issues identified at the time of the sovereign downgrade were varied but principally included weakened medium-term fiscal flexibility and an associated likely rise in government indebtedness. Although the severity and term of the economic difficulties may be debated, even an optimistic assessment of the Jordanian position suggests that 2010 will, at best, see only a stabilisation of the present situation, and that any such stabilisation will only be achieved through
carefully controlled government borrowing and expenditure.

So, unlike some GCC neighbours, Jordan’s insurers cannot realistically hope to see economic recovery jump-started by government infrastructure spending, and any sustained, strong upturn will likely prove dependent on a resumption of foreign inwards investment. Meanwhile, sovereign economic considerations may also impede recent initiatives to turn Amman into a regional reinsurance hub.

A sophisticated but still imperfect marketplace
Potentially serving a domestic population of some six million, the Jordanian insurance sector may appear relatively small by many international standards but it is unusually open and liberal for the region and many of its better-managed insurers can offer a broad and often sophisticated range of products to both retail and commercial customers, including rated insurers such as Middle East Insurance (BBB-/Stable/–), and Euro Arab (BB+/Stable/–). The principal exception to this is in the area of motor third-party liability (TPL) where insurance is compulsory but also closely controlled by government, which lays down a uniform template for policy terms and conditions, as well as the amounts to be paid out against legitimate bodily injury claims.

The problem is that motor TPL represents a significant part of the Jordan insurance sector’s revenues (total motor, including TPL, represented 45.5 per cent of the market’s gross premiums in 2009, and 60.7 per cent of total paid claims) – and a particularly large percentage of the under performing businesses of many small, and some not-so-small players. Yet even now tariffs are set at levels that are insufficient to generate reasonable underwriting profits. As already indicated, this may have encouraged some insurers to try to supplement their disappointing underwriting results through somewhat “adventurous” investment strategies, with land and equity investments even today representing a surprisingly large share of many insurers’ total assets. However, the sector’s more prudent management teams have sought to encourage their retail customers away from simple, low margin motor TPL covers towards fully comprehensive policies, where tariffs are not controlled. This is a positive initiative but one which nonetheless leaves the profits on “good” (properly priced) business being used to subsidise the losses on “bad” (under-priced) compulsory TPL.

Although the authorities are believed to be sympathetic towards the liberalisation of tariffs in this area, it is unlikely that significant changes will be made while the population continues to suffer the difficulties of the current economic downturn. In February, for example, the Jordan Insurance Federation called on the government to raise motor TPL rates by 58 per cent, this being the estimated amount required to bring the line into technical profitability through to 2012. The authorities themselves proposed a more moderate increase of 25 per cent (together with a higher rate of compensation for injury) on the previous fixed rate of JOD55 for renewals from March 1 onwards.

What the numbers are saying
Although 2008 and 2009 were rollercoaster years on the investment front, the Amman Stock Exchange General Index nevertheless ended 2009 having fallen 8.1 per cent during the calendar year and has remained virtually flat so far in 2010 at around 2,560. Nevertheless, the available statistics suggest that reasonable momentum has been maintained technically, with the market’s gross premiums rising 9.8 per cent to JOD189.4m by the end of June last year relative to JOD172.5m in the first six months of 2008. Similarly, the still provisional official statistics suggest total gross premiums for the whole of 2009 at JOD361.8m, implying year-on-year growth of 8.6 per cent.

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.

RSA’s acquisition of Al-Ahlia, Oman’s third-largest insurer, may signal the start of a new wave of long-sought-after M&A activity in the Middle East insurance sector.

The acquisition of Al-Ahlia by RSA represents not only a major shake-up of the Omani insurance market, but a relatively unique occurrence in the recent history of the Middle East insurance industry. Calls for consolidation across the region’s fragmented and highly competitive markets have gone unheeded for some time, but M&A activity is expected over the coming years.

According to Clyde & Co, the legal firm involved in the Omani acquisition, further consolidation in the region is on the cards. James O’Shea, Clyde & Co’s senior corporate insurance partner in the region, said: “The RSA acquisition further confirms Clyde & Co’s view that the Middle East region has now become a priority for investment by global insurance and reinsurance players. We believe that the coming years will see a major wave of consolidation and M & A activity in the sector as the industry seeks to capitalise on the potential created by the growth in the market for more sophisticated insurance services in both the retail and the commercial insurance sectors.”

The last major M&A transaction to be announced in the region was the merger of three of Egypt’s state-owned insurance companies: Egypt Re, Al Chark Insurance and Misr Insurance. The integration process is still ongoing and has not been without teething problems.

Otherwise, there has been virtually no sign of consolidation in the region to date. On the contrary, the past three years have witnessed the establishment of a plethora of new insurers; most of which have been takaful operators. There are more than 350 insurance companies operating across the Middle East and North African markets that collectively generated little more than US$20bn in gross written premiums in 2008. This equates to less than half the total premium volume of Belgium.

This is symptomatic of the MENA region’s under-penetrated and highly fragmented markets – a point emphasised by Fig 1, which highlights high concentrations of insurance companies in relation to population size and premium volume.

There is a general consensus across the industry that consolidation is needed. A survey of delegates attending the General Arab Insurance Federation (GAIF) conference in Bahrain two years ago (see Fig 2) revealed that 82 per cent of respondents agreed that there were too many companies operating in the MENA region. An overwhelming 95 per cent supported M&A activity. A panel of industry leaders at the GAIF conference acknowledged that the high number of smaller companies was stretching the limited regional skills pool, and that this would be acutely felt in Saudi Arabia, leading to additional calls for consolidation.

So what has held back M&A activity in the region? The ownership and management structure of many companies (marked by a number of smaller, family run businesses) is frequently cited as a major obstacle. Entrenched management teams, cultural factors and limited transparency make it difficult to get discussions off the ground. Furthermore, the widely divergent regulatory regimes in the region make cross-border acquisitions difficult.

However, regulatory harmonisation is a long-term objective of the Arab Forum of Insurance Regulatory Commissions (AFIRC). In a recent interview with Policy magazine, AFIRC chairman Dr Bassel Hindawi, said: “I’m focusing intently on harmonisation because I believe the Arab insurance industry is quite fragmented with many small and local players. We need to see more Pan-Arab players.

“For this to happen we need to pave the way to facilitate the process and encourage the Arab insurance companies to expand regionally. Having harmonised rules will make it easier to facilitate this process.”

“I am totally for merger and acquisitions for consolidation, but while we need to let market forces play out, we still need to encourage the industry in that direction.

I think fragmentation is really undermining the development of the industry. As much as it is growing nicely, it could be much more. What we need to look at is not only quantity but quality. For example, if there is a new player coming into the market, what is the value added? Those coming in only to provide the traditional lines of business may find certain markets already saturated with such providers.

“We need to encourage innovation in specialised lines of insurance and, in the process, push for more and more consolidation. Perhaps what is related is the capability of the insurers to retain risk. I think fragmentation is contributing to low retention of risk. Insurance companies will not be able to grow and develop significantly if they do not become true risk underwriters with proper risk retention models,” Hindawi added.

Before Dr Hindawi’s long-term vision can be realised, it will be the harsh economic realities of the market that may drive M&A activity in the medium term. The vulnerability of the cash-flow underwriting model has been exposed with the evaporation of easy investment income and smaller players may find that they will not survive alone.

However, it remains to be seen whether RSA’s acquisition of Al Ahlia signals the beginning of a new era of consolidation but conditions are ripe and the industry is in need of a shake-up.

ALL EYES ON THE BOURSE

Thomas Schellen, head of insurance opportunities at ABQ Zawya, casts his eye over share price performances across the GCC and assesses how listed insurance companies fared in 2009.

With 10 days left in 2009, it was a timely question to ask: How did GCC-based insurers fare in a year that has been cataclysmic for many business expectations?

To look into this question, this column takes a peek at the performance of listed insurance companies in the Gulf region. It will try to determine positions of national sectors and companies through a triangulation process of sorts, examining share price developments with a supportive look at available net profits and underwriting profits for the first nine months of the year.

The jitteriness of equity markets in the past 18 months has demonstrated how easily financial investors get nervous these days and how much they favour companies that meet their expectations for financial returns. More often than not in today’s pecking order of investment decisions, this means share price gains of liquid stocks.

On the top layer of sector performance of insurance sectors in relation to the underlying benchmark general indices of their respective equity markets, the first picture emerges with ease.

Only three out of the six insurance sector indices on securities markets in the GCC achieved any gains in 2009 and just two markets saw relative outperformance of insurance when gauged against the general index.

Saudi bourse outperforms
As peak performer to its GCC peers, the Saudi Stock Exchange (SSE) is the indisputable winner when it comes to insurance sector share performance in 2009. While the TASI, the SSE benchmark index for listed stocks in Saudi Arabia, gained almost 30 per cent from the first trading session in January 2009 to its close on December 20, the insurance index did much better still.

Recording a gain of more than 84 per cent, the Saudi insurance index achieved an outstanding price return not only when compared with other sectors on the SSE and with insurance sectors tracked on other bourses in the GCC, the Levant, and North Africa, but also when compared with practically all sector indices that one can find in the Middle East. However, this meteoric performance of the Saudi insurance industry was an isolated phenomenon, very different for one thing from developments on the stock markets of the northern Gulf – Kuwait and Bahrain.

Kuwait and Bahrain
These markets were the underperformers of 2009 when it comes to general index trends in the GCC.
The Bahrain Stock Exchange (BSE) had to carry that red lantern for much of 2009 and its general index closed almost 20 per cent lower on December 20 versus the beginning of last year.

The general index of the Kuwait Stock Exchange (KSE), the region’s number two by market capitalisation, lost about 10 per cent in the same period.

However, investors in insurance on the BSE had a few more reasons to smile than those on the KSE, the performance differentials between insurance and general indices on the two bourses suggest.

With a drop of 15.6 per cent from the start of 2009, the BSE insurance index actually closed the period 3.6 percentage points better than its benchmark index.

Inversely, the performance of insurance on the KSE undercut the already unimpressive benchmark index by a full seven percentage points. It may be a tiny comfort that the real estate and investment sectors on the KSE were battered even a bit more than insurance, but overall it was not the year to achieve big returns from owning insurance shares in Kuwait.

Alfred Thornton, a lawyer in Clyde & Co’s insurance team, considers developments related to the UAE Insurance Authority.

The UAE Insurance Law (Federal Law 6 of 2007) was enacted in February 2007 and saw the establishment of an autonomous Insurance Authority (the “authority”) to regulate the insurance industry in the UAE. After a six-month interim period, presumably to allow the authority to get up and running, the law became effective at the end of August 2007. There has to date, however, been little evidence of action on the part of the Authority with respect to the preparation of new regulations to regulate the insurance industry.

In fact, besides the sourcing of offices, appointment of board members and appointment of senior management by the authority, there have been very few visible changes to the insurance regulator and insurance regulation in the UAE since the new insurance law became effective. Perhaps this position is now finally changing as is apparent from the following developments.

Increased regulatory activity?
Two decisions by the board of the authority during December 2008 and July 2009 were the first indication that the authority was becoming more active.

Pursuant to these decisions, apparently in response to the global financial crisis, the registration and licensing of new insurance companies in the UAE have been suspended, as has the registration and licensing of new insurance brokers or new branches of currently registered insurance brokers.

Although these decisions have proved problematic for firms wishing to set up operations in the UAE, and it remains to be seen when the suspension of the licensing of new companies will be lifted, the fact the decisions were made by the authority underscores that it is able and willing to make decisions in accordance with its wide-ranging powers.

A further indicator of a more active regulatory role is also evident from the fact that the authority, in its decision of July 2009, has warned insurance brokers that they have until December 24, 2009, to satisfy the guarantee requirements introduced by Ministerial Decision 543 of 2006. The July decision means that should brokers not satisfy these requirements, they run the risk of having their licences cancelled.

Launching of the Insurance Authority website
The Insurance Authority unveiled its new website in July 2009 – www.ia.gov.ae. There is a link to an English website that is still under construction.

What is clear from a review of the site is that the Authority intends for the site to become a key source of information in the future. The system will also serve to ensure that the authority will able to comply with the general policy of the UAE federal government, which is to move to an electronic system of interaction with users.

The 28th General Arab Insurance Federation (GAIF) conference will take place on May 17, 2010, in jordan. Speaking at a press conference, Jawad Hadid, chairman of the Jordanian Insurance Federation (JOIF), outlined what delegates can expect from the most important industry event on the calendar.

Under the theme of  “secured economy and comprehensive development” for the Arab insurance industry, the 28th General Arab Insurance Federation (GAIF) general conference will be held at the Dead Sea in Jordan on May 17 to 19, 2010. Co-hosted by the Jordan Insurance Federation (JOIF), the conference is held under the patronage of His Majesty King Abdullah II Bin Al Hussein.
Announcing the beginning of the preparations for the biannual event, Dr Mohamed Jawad Hadid, president of the JOIF, said that the conference takes place at a time of great challenges to the economy. “Our Arab economies are in the same context and need to find the right solutions to stand strong amid the undefined global economic environment,” he said.

Stressing the importance of the assembly, GAIF secretary general, Abdul Khaliq R Khalil, said the conference had gained momentum over the years and proved to be the most important pan-Arab gathering. “With more than 320 members, we feel that this body has grown in size and achievements and we hope that the coming conference will add value to the inter-Arab co-operation. A major reason for the success is that GAIF, although operating under the Arab League umbrella, has preserved its professionalism regardless of the common political climates governing the Arab World.”

Confident that the event will add to the success of the previous GAIF gathering, Imad Abdel Khaleq, managing director of the Jordan Insurance Company and JOIF board member, said he expects more than 1,300 regional and international delegates to attend the GAIF conference.

He noted that the coming GAIF will be organised differently, while still tackling the outstanding issues facing the Arab insurance industry. “For the first time in the history of GAIF there will be workshops organised on the sidelines of the event, each discussing an important issue concerning our industry.” Topics to be covered at the event include: the role of the Arab insurance industry in comprehensive development, and reinforcing the capabilities of the insurance under writer.

The organisers have chosen Jordan’s “black lily” as the logo of the conference. This will be Jordan’s third time hosting the GAIF conference, after organising the 13th and 21st conferences in 1980 and 1996.

Gaif in brief

• Established in 1964 with its permanent headquarters in Cairo, GAIF is a Pan-Arab body that strives to be the principal supporter of the Arab insurance industry
• GAIF serves as an organised framework for the collective work of its members, and produces valuable analytical studies and market guidance
• The federation’s primary purpose is to strengthen the Pan-Arab market and insurance sector, and coordinate activities across the Arab insurance industry
• Member organisations encompass: Arab insurers and reinsurers; regulators; national insurance associations; non-Arab insurers and re-insurers that operate in the region; research bodies; and, industry training centres and institutions
• GAIF boasts 320 member insurance companies across the region
• Abdul Khaliq R Khalil has been the GAIF secretary general since 1999
• The GAIF conference is held every two years. The 27th GAIF 2008 conference was hosted in Bahrain and the 2010 conference will be hosted in Jordan