Some months into the financial crisis that gripped the world there was an insurance conference in Dubai and one of the discussion panel topics was ‘Dubai Insurance Companies: Is the Party Over?’
I was fortunate enough to sit on this panel to discuss what is essentially a topic that flirts with the crystal ball. This was approximately 3 years ago.
The chairman of the discussion panel, Mr. Iqbal Mankani, CEO of Dubai Islamic Insurance Company took an interesting perspective to the topic, attempting to address the challenges that the UAE insurance market as the contagion spread internationally. Certain insurance sectors in the UAE suffered heavy declines in revenue. These included construction and engineering insurance, marine cargo and various forms of personal insurance related to credit, mortgages and life assurance.
Mr. Mankani set the scene by outlining the then prevailing market scenario vis-a-vis the perrenial struggle between revenue generation and underwriting. “When it comes to reinsurance, the problem is not one of capacity,” deliberated Mr. Mankani, “ Rather, the problem is the quality of capacity.”
However, the international financial crisis did not result in a shrinkage of capacity by leading international reinsurers as was expected. Consequently premium rating within the region continued to erode in an endeavour by retail insurance companies to hold on to their market share. It appears that they were oblivious to the fact that, all other things being equal, this would solely and directly impinge upon their technical results and, hence, their net profits. The increase in licensed insurance companies from around 40 to close to 60 during the boom years meant that there were more companies vying for a shrinking market.
Hence the reason for AMANA’s CEO’s closing remarks as he opened the discussion floor, “The emphasis, moving forward should be a greater commitment to underwriting and less to market share.”
My take on the topic was from a completely different angle. In reply to the title, ‘Is the Party Over? my suggestion was that, “The party is just starting.” This assertion was based on some very evident trends appearing in the market suggesting that until then UAE insurance companies had been simply ‘milking it’. These trends betrayed:
- the lack of real growth when stripping figures to exclude compulsory insurance and the compounded effect of inflation over the 4 – 5 years preceding the crisis;
- The increase of licensed insurance carriers compared to market growth;
- Aggressive under-cutting as opposed to real market competition. I have often been quoted as stating that the UAE retail insurance market is not a competitive one but an aggressively price-driven market. This is evidenced in certain barriers to entry and exit, relative lack of consumer knowledge, general unsophisitication of products and consistent generation of super-normal profits in the long run. In contrast, it is the reinsurers that are vicariously competitive within the region, largely reducing insurers to an extension of their distribution.
Why am I revisiting this event relevant 3 years after the start of the crisis? The answer is that, for the companies that have taken a more pragmatic, certainly more professional approach to the emerging market dynamics are themselves emerging as the new qualitative market leaders whereas some of the traditional market heavy weights may be falling behind.
I am firm believer in Warren Buffett’s 2001 statement that one notices that people are swimming naked when the tide goes down. Some insurance companies in the region had been having it good for some years more through luck than technical competence. What the market really needed (a need made more acute by the crisis) was long term strategies focusing on greater market involvement at association level and with regulators. The market needed then (and still need now) true and transparent market competition. The development of this must start with greater market cooperation and hastening in the pace of legislative and supervisory framework development. The building blocks for long term sustainable and competitive market were essentially three i.e. (a) cooperation, (b) regulation and (c) education. That was my assertion then and it remains my assertion now.
Of course, these have not really happened. Maybe in the spirit of the current political turbulence one may be tempted to cry, “off with their heads,” at the old guard still running the retail insurance companies in the region in the same way they ran them 10, 15 and even 20 years ago! Of course, in reality, solutions are never that simple and one has to patiently stay the course in respect of cooperation, regulation and education.
The absence of these measures as the world emerges from the financial crisis (and the insurance market hit by a combination of other events be they geo-political, piracy, earthquakes, tsunamis, nuclear devastation and the like) will mean that quality international capacity will begin to harden as the cost of money (i.e. interest rates) start to augment. Already squeezed technical margins for retail insurance companies in the region will suffer yet a further pinch over the medium term. Regrettably the results of the lack of true strategic thought are very evident in the UAE market in that:
- Some of the newer takaful companies continue to eat into their equity in a bid to increase market share when logic calls for consolidation and not growth;
- The larger insurance companies in the region (with the exception of QIC group) have mainly suffered significant drops in profitability. One can blame it on diminishing investment returns but the reality is that somehow, somewhere in their technical computations they are getting it wrong;
- Many companies (including some A rated retail market leaders) have grown only to feed outward reinsurance with no significant contribution to their own net technical results;
- There are signs of regulatory development from the UAE insurance regulator but these seem to be too little too late. Some other measures, such as freezing of licenses (only to then rule by exception) also do not send the correct message vis-a-vis liberalisation, development and regulatory transparency. Even sadder is the fact that some market movers and shakers have actually applauded the freezing of licenses perhaps not understanding that it is appropriate regulation (i.e. capitalisation, solvency, market conduct etc.) and supervision that should be the gate to market entry and exit and not direct regulatory imposition of bans;
- The QIC group is perhaps a good example of how a company can flourish when well regulated. Notwithstanding that Qatar Insurance Company controls approximately 65 % of the domestic Qatar market, it is its QFC-regulated subsidiaries, i.e. QICI and Q-Re that have in proportionate terms contributed significantly to the technical profitability of the group. Regulation coupled with a wider spread of business continue to contribute to the growth of this group, particularly QICI and Q-Re. In contrast, other market leaders that have maintained a focus (and sought to grow rather than consolidate) in their home, albeit scantily regulated, market have suffered significant blows to their technical profitability;
- Two other emerging success beacons are RSA and Zurich who are pursuing consolidation as a precursor to organic growth due to the current market conditions.
Having looked at how the predictions of 3 years ago unfolded, it may be worth concluding on what one may expect, say, 3 years down the line. Predictions are always difficult because of the dynamic nature of the market. However some signs are already evident. By way of conclusion a few examples are mentioned below.
Consumer knowledge is growing among the larger corporate with the engagement of risk managers and chief risk officers as well as an increasing practice of insurance supply tenders. This will foster a much needed culture of competition of mainly non-price variables, i.e. availability of cover, stronger security, unambiguous contracts and robust servicing. It will also increase interest in alternative risk transfer mechanisms with a greater initial focus on captives.
Cost rationalisation will be a priority with several of the leading companies and one may, as a result, witness M&A activity, conventional and Takaful ‘marriages of convenience’ and use of outsourcing.
Tying in with the above, technology will be key. It will not be a just a matter of market superiority but will increasingly become a matter of survival.
Further bleeding will be witnessed among some of the UAE companies before they are on the mend.
Regulation and education may finally start to feature more at the Insurance Authority, Insurance Association and leading companies in the UAE.
It is a pity that Buffett’s sage words have not been heeded by the market at large and many have been caught with their proverbial pants down. But then, philosophically one may argue that there is no such thing as failure in life. There is success and there is learning. Time will judge us a few years from now.