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 Irshied Tayeb, 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

 Safder Jaffer, 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, Fareed Lutfi, 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 is underdeveloped 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 realise that 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.

 Fareed Lutfi 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

 Mazen AbuChakra, 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, Irshied Tayeb, 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.

Kalpesh Deasi, 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.

 Ziad Arnout, 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’.

Maroun Mourad, 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 Irshied Tayeb, 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.

 Wiam Salah, 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, Insurex 2011 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.

Respondents ranked telecommunications/cell phones first among 25 industries in providing the simplest and most effective user experience. News-related media including print, online, broadcast and mobile outlets also hold a prominent place in the Global Brand Simplicity Index, finishing in the second spot on the industry list.
Internet search brands also rank among the industry leaders, with Google securing the top position overall for simplicity. Rising access to broadband and increased disposable income appears to have driven respondents to praise the power of simplicity in communications offerings from technology firms, saving them time and money, making their lives more efficient and opening up access to a wider world.
Leading the list of the top ten simplest brands in the Middle East are Google, McDonald’s Apple and Sony. Rounding out the top ten are Asharq Al-Awsat, Samsung and Mobily.
“Brands in the Middle East have much to gain if they can effectively streamline their communications and experiences for consumers,” said Philip Davies, President, EMEA. “Simplicity is a powerful tool that helps brands get into consumers’ heads faster, and stay there for longer, whilst building loyalty and trust.”
Siegel+Gale used the survey results to develop the 2011 Global Brand Simplicity Index, which generates a Simplicity Score — a rating of each brand and its category on the elements of the simplicity methodology. Siegel+Gale defines simplicity as ease of understanding, transparency, caring, innovation and usefulness of communications as well as how complex typical interactions are in relation to industry peers.

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

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

Power is not speaking truth unto itself?

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

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

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

Take-home learning points

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

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

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

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

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

By James Portelli

FareedLutfi, Secretary General of Emirates Insurance Association and GCC Insurance Commission

FareedLutfi, Secretary General of Emirates Insurance Association and GCC Insurance Commission, is one of the most respected and knowledgeable figures in the GCC insurance industry.

He currently serves as President of the Dubai Insurance Group.

His career in international reinsurance and insurance spans 25 years. Before joining the Dubai Group in 1996, FareedLutfi worked at Arab Insurance Group (Arig) for 15 years, and was responsible for setting up and managing the London contact office. He is a board member of Oman National Investment Corporation Holding and chairman of the board of National Life & General Insurance Company, Oman.

Lutfi is also a former Director and CEO of Alliance Insurance, and a former general manager of Dubai Islamic Insurance and Reinsurance Company (Aman).

Policy sat down with him to learn the state of the industry.

Excerpts:

Q: Is the UAE insurance market saturated?

Over-capacity is going to be there because there are more than 60 companies operating and new companies are coming up. The market is saturated. The irony is that there are new companies when a moratorium is on new licensing. The last quarter results showed that most of them are in the red. In the red doesn’t mean that it is bad. Companies do go in the red but are still covering the cost to run the companies any way. The capital is not deteriorated which needs injection. But eventually it will happen if it continues for two-three years in a row. Of course,  the Solvency law, which is in the pipeline, will regulate the market in the years to come.

Q: Do you suggest any more regulatory move?

The way it is coming up, the Solvency Law, if implemented will benefit the market. It is mandatory because it protects the shareholder and the policy holder. It’s definitely going to be risk-based capital. That’s what the industry world-wide does.

Q: The rates are actually coming down jeopardizing the survival of many companies.  In such a scenario how many of the companies will survive?

I don’t think I am in a position to tell who will survive. But survival is going to be for the fittest. If we look at the results of some companies, there are some impairments from the past. Some companies are taking impairments for years rather than in one shot. Maybe that’s what happening on investment. Except for some class of insurance stiff competition is happening. Companies should look at their bottomlines. If you compare companies, some are writing over billions and some others 200-300 million and  up to 600 million. But their profits are more less the same. That’s why I say, they should look at the bottom lines and try to reward their shareholders, and not to be too aggressive on the budgeting, especially the new companies.

Q: In such a scenario, do you see a consolidation taking place?

That’s what we are hoping for. In my opinion, it should happen. The boards of individual companies should be looking at the bottom lines rather than prestige or ownership. There are some examples before us of selling off stakes. If you look at last year’s results as well as the first and second quarters this year, some companies have shown losses. They might be talking about mergers.

Q: How about takaful companies?

The new ones are mainly takaful and I don’t think they are doing well. Some of them have been here for three years and they may break even. For new ones, it will take at least three years to break even, if the market is good; But the market is bad as well.

Q: As per the Shariah law, takaful companies are required to distribute their surplus. Are they doing it?

Unfortunately, I have not seen anybody doing it. In the UAE, I have not seen anybody doing it, but in Jordan they have done it. When you calculate the costs, all the policyholders bear the cost until it is profitable for them and for the shareholders. As the investments are really bad, I doubt if they can distribute surplus even after five to seven years.

Q: What’s your advice to your association members?

Don’t compete on prices, but concentrate on quality. Think of technicalities and look at your bottom lines regardless of market share. Because if you go after market share, you burn yourself.

Q: Which business line will be promising?

The lines of business I have seen, most of them are profitable as a matter of fact and even on the motor side.

Q: Do you see the market hardening?

Till last year reinsurance market was soft. I think it is hardening. We will get an indication at the Monte Carlo Rendezvous.

Q: What’s the market outlook?

It’s gloomy, but I am positive.  The positive is that we learned a lesson.  And my advice is look at the technicalities, look at the bottom line and train more people.

Q: Having said that, is there shortage of talent?

The whole of Middle East countries see shortage, particularly in the GCC. They have to create forces and impart continuing training. The Emirates Insurance Association has been doing it in the past. But we being a non-profit organization we don’t have the means to do it. It needs more resources. Now there are facilities at Tanmia and the Emirates Institute for Banking and Financial Studies (EIBS) in Sharjah. The Insurance Authority has a plan to expand the scope of training.

Q: On the regulatory side, there are some move to regulate the TPAs.

They were in the past licensed by the local authorities. Not it has been brought under the Insurance Authority and the capital requirement is raised to AED 5 million. There are other regulatory steps. Brokers are now required to maintain two separate accounts: one for the premium collected and the other for their commission.

Q: There have been issues with brokers, TPAs, insurers and policyholders. Don’t you think it is time for appointment of an ombudsman?

Well, we don’t have a controller or ombudsman so far. It is high time we had one. The UAE Insurance Authority has a plan to do that. Already, Oman and Bahrain have them.

Tarik Aouad, General Manager, Hannover ReTakaful

TarikAouad, as General Manager at Hannover ReTakaful, has brought rich experience to Bahrain and is playing a pivotal role in the continued business success of the group. Prior to this he was the chief underwriting officer since the company’s establishment five years ago. Before that he was based in Hannover Re’s head office in Hannover, Germany,  where he spent almost a decade in the underwriting field.

He graduated in mathematics from the University of Muenster, Germany, with major in probability and mathematical statistics.

Hannover ReTakaful is a 100 per cent subsidiary of Hannover Re Germany andtherefore an integral part of the Group, one of the leading reinsurancecompanies in the world.

Tarik shared with Policy his views on the industry.

Q: There has been talk that there is not enough capacity in takaful reinsurance. What’s your view?

My opinion is that there is now sufficient retakaful capacity to cover the majority of the business. All one needs to do is to add the offered “acceptable” capacities of the retakaful providers and compare it with the retakaful requirement of the takaful operators. However,  from a risk theoretical perspective there will always be shortage in capacity particularly for high severity low frequency (i.e. aviation, energy,  etc.) lines of business as they are capital intensive. We at Hannover ReTakaful, like to offer in addition to capacity good service and expertise.

Q: Unlike the conventional counterparts, the takaful industry is set to be on track for high growth. Do you agree?

Yes, I agree, this reflects the trend development of the  population in our retakaful markets. Another element that explains this growth is increasing penetration in population segments that were resilient to conventional insurance.

Q: Is there a real competition existing in the market?

Competition is good as long as pricing commensurates with the risk involved. Otherwise,  insolvency scenarios have to be expected. Based on this conviction, we do not support unhealthy competition. The protection of our pools is an overriding  objective of our  underwriting strategy.

Q: The common refrain has been that there are more players in the market than required. What’s your call?

Yes, this is particularly true in most of the countries within the Mena region where there is a need for consolidations to a level that put the (re)takaful markets in a balanced risk-return landscape. In this context many of the determined regulators from the region are contributing, by way of rules and regulations, to a healthy (re)takaful market.

Q: Is it true that most takaful companies are struggling to capture a decent market share? There are also allegations that takaful companies have not been distributing their surpluses among policyholders. What’s your view?

The success of a takaful company in capturing market share is depending on its strategic objective. If a takaful operator is lacking on clear vision on how to penetrate the takafulmarket  then it may become irrelevant for the same company to differentiate itself from the other market players by providing good level of services. It is true that some takaful companies do not distribute surpluses. A closer look at the financials of most of those companies blurt out the truth. The most pervasive reason for the non-distribution of the surpluses is the need for reserving for Incurred but not reported  losses(IBNR),  Catastrophe (NatCat& Man-Made). Another reason might be inadequate underwriting in largely loss-making lines of business like medical  and motor.

Q: Are there enough Shariah-compliant investment avenues available to takaful companies?

Sharia-compliant part of the capital market is still at its infancy compared with the conventional part. There are still limited possibilities to invest in  sharia-compliant instruments. In addition to this, there is a serious challenge when it comes to finding high quality investment products.

Q: What are the challenges for takaful industry other than operational scales and low penetration level?

The takaful operators need to commit themselves to the fundamentals of the sharia-compliant insurance, which will give credibility to the industry. We have already touched upon some of  the challenges in the earlier answers, but we could add among others the need for committed staff,  product  expertise and consistency of takaful regulations and standards.

Q: What’s your suggestion to limit over-reliance on investment income?

The takaful operators must complement the mission and the vision they have set, by realizing the fundamental role of  protection of the underwriting pools and not to generate income from investments.  This is more valid in these times of high uncertainty of the capital markets.

Q: What are the growth areas? Property, motor, energy, health?

Engineering and life are major growth areas. With the major projects underway, engineering is on the rise on both takaful and conventional sides. As to life, this is a matter of awareness and the availability of innovative and competitive solutions. I believe takaful operators are on the right track there.

Q: Do you advocate compulsory medical insurance, which will be a major driver for takaful companies?

Compulsory health will be a driver for growth in the industry.
However,  it is important that the price is commensurate with the risk assumed to ensure long term sustainability. Proper risk management (including the close monitoring of the loss development) is also an important factor in this high frequency low severity line of business.

Q: There are reports that most takaful companies are expected to report losses and only a few will survive. Do you agree?

This statement is in my view inaccurate. First of all what time frame are we talking about? Any company might have to sustain some financial burdens in the beginning. But, once the portfolio has reached certain critical mass to allow for a sufficient diversification, a positive future is likely. Another important factor is the lines of business as some takaful start-up who concentrates on motor and medical, will show losses. In this context we  already  discussed (see above) a possibility of future consolidation. This implies that eventually the number of market players will be fewer.

Q:  What are your suggestions for a healthy growth?

Fundamental for a healthy growth are among others:

Innovative Products; good services; simple,clear and consistent regulations and standards, commitment of management & staff to sharia compliance; technical expertise; and developed sharia compliant investment vehicles

Q: Is it true that GCC region cedes more to reinsurers than others? Then, what’s the remedy?

This is valid for the Menaregion in general and not just the GCC, partly due to the existence of too many players with small capital base benefiting from attractive reinsurance commissions. The remedy is for primary underwriters to have more confidence in their own business. This confidence needs to be high enough for them to retain a well-diversified profitable book. We see this trend with some companies operating in the GCC already. With regards to the reinsurance commissions, reinsurers need to show more discipline.

Q:  What’s your view on rates. Are they hardening?

In most lines of business, they are not. In some property areas like catastrophe covers or SRCC they are or at least will be upon policy renewals.

Q: How did Hannover ReTakaful fare in the first half?

Hannover ReTakaful is on track with the forecasts on both contributions and results, despite some serious losses during the first half of this year that bring challenge to the underwriters in term of controlling both the type as well as the level of exposure. However, they remain within budget.

Q: What is gross written premium?

Our latest published annual report is as of December 31, 2010 reported gross contribution is BHD30.25 million ($80m).

Sanjay Kalia, Managing Director, Arya Insurance Brokerage Company

Sanjay Kalia entered the insurance arena by accident, a quarter of century ago. But acquired enough skill and experience to lead as managing director one of the top insurance brokerage firms in the UAE, Arya Insurance Brokerage Company, to success with ethical practices.

Policy spoke to Sanjay at a time when brokerage segment is in the throes of a much needed consolidation.

Excerpts:

Q: How is the industry faring. It is bad time as most say?

I think it is getting slightly better and improving. I am not comparing it with three or four years back what it used to be. I am seeing the reality. It is now coming to the real business.  Yes, the number of players is more and there is unhealthy competition. But the real business is coming, enquiries are coming. There is no floating around.  I am positive.

Q: How are the corporate results?

We have not seen premiums falling down.  The premiums are more than what they had last year.

Q: It’s the usual question. There is rampant undercutting, unhealthy competition. Do you see a consolidation as a result?

Well, ultimately, yes, I do see it will happen. The reason being there are tough regulations coming by. What you need here is a healthy competition. We have a number of new players coming up with a small portfolio, not even calculating the risks and what expenses are going to be there.  I do see a consolidation coming shortly, not very long.  Consolidation can also mean there will be acquisitions.

Q: Does the unhealthy competition arise because there are unprofessional players in the market? Do you prescribe a minimum qualification?

A broker has to be qualified professionally.  So far it has not been there.  The broker concept is comparatively new, or young in this part of the world as compared to Europe or other parts of the world. Broker used to be acting more as a marketing person than of a proper insurance manager.  My interpretation is broker is supposed to be an insurance manager. If you need to be a manager for your client, you need to be qualified;  you need to understand the risk. He is an adviser to the client, he has to see that client’s interests are taken care of, for which you need professional qualification and experience.

Q: Do you see dearth of talent?

No, I see lots of professionals are passing out. There are so many young people taking insurance as their career. So, there will not be a shortage.

Q: Which line of business will hold more promise now?

Insurance is a service industry and it follows the main line.  There was a time textile traders moving to real estate.  People always move when they see business opportunities. And insurance moves in tandem.  The enquiries we see now are medical, employee benefit, group life. From the premium point view, these two lines are promising.

Q: There have been reports of misrepresentation by brokers to get more business?

Yes, of course, there have been many cases of misrepresentation. But that is again because of lack of knowledge.  That’s the reason why professional qualification is needed. Some times some do misrepresentation, but that’s not on purpose, but of lack of knowledge.  Most of times, I have seen, the agent doesn’t discuss the complete details of the policy. Not even the deductible of a policy. The client is not aware of these things.  The fine prints are not discussed. That’s also part of the rate war.

Q: In your opinion, what should the regulator do now?

The regulator is doing perfect. There is already many regulation to monitor and regulate the market. As the industry evolve, more will come.

Q: There have been issues such as brokers, after collecting premium from clients, not paying the insurance companies. This has led to the authorities insisting on having to maintain separate accounts: one for the premium collected and the other for commission. What’s your view?

There was a circular issued by the ministry and I think all brokers have complied with it. We welcome it as we have been against the practice right from the beginning. It’s wrong and unethical. “It’s not my money.  My money is only the commission part. I am not supposed to use the premium collected from client for my own purpose. It is public money, which has to go to the insurance company.”

Q: What’s Araya’s mainstay?

In this industry what we are mainly doing is marine cargo insurance and the second is employee benefit, which is medical and group benefit.

Q: What are your growth plans?

We are very conservative in a way that we don’t want to show unrealistic figures. Our philosophy is different. One the one hand, we don’t want to have any kind of liabilities. We are selective about our clients who pay on time so that we pay the insurance companies on time. We are looking at achieving 25 to 30 per cent growth rate.

Q: What are your expansion plans?

Well, we are looking at expansion. We have had discussions in some neighbouring countries.

Chief Commercial Officer of Daman Dr. Sven Rohte further explained: “A survey of this scale offers an in-depth view of the current health scene across the country; in a nation as diverse and multicultural as the UAE, such information is invaluable. The data will allow us to enhance the existing high quality of services we offer our 2.1 million subscribers, and has the potential to contribute to improving awareness on health issues.”
“This survey aims to develop insights to enrich our knowledge and support Daman’s public communication efforts with factual information. We had four key research objectives in conducting this survey – to identify key issues regarding health and lifestyle habits, to promote healthy lifestyle choices across the UAE population, to create awareness surrounding key health concerns, and to remain abreast of changes and developments on the level of healthiness of the country’s lifestyle habits. We are confident this data will allow us to meet each of these goals” added Dr. Rohte.

The survey represents responses from residents across all seven Emirates, and is the first of its scale to be conducted by Daman.

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.