When someone in the market moves from an underwriting to a broking role or vice versa the expression that is generally used is, “the poacher turned game keeper.”
In my case, I have the privilege of now being neither a poacher nor a game-keeper; I’m more of the hiker who, when time permits, can stop and observe poachers, hunters and game-keepers. Just as a work of art is admired more by the connoisseur standing at a distance than by the artist, who is generally too close to see the bigger picture, so also I often enjoyed a wider perspective of the insurance markets in the Arabian Gulf by virtue of my past and current roles in training, consulting, risk management and as a service provider. Not that I am a market connoisseur, I hasten to add; If life begins at 40 that
means I am still a toddler. Every day brings with it fresh learning opportunities about the insurance market, about varying practices and about the practitioners that drive this. In this article I would like to share some learning snippets with specific reference to insurance broking.
As I sat enjoying a coffee with a seasoned reinsurance broker at DIFC recently, he put forward an interesting statement, “In this market insurance companies only come to us if the account is either too complicated for them to understand, or too difficult for them to place or if they have already unsuccessfully had a go at trying to place it themselves.”
His assertion undoubtedly emanates from experience. However, I would also probably add one more factor to his list. Some reinsurance business also flows through a particular reinsurance broker because someone, somewhere, has a financial interest that it does. I am, of course, not discussing ethics here; I am merely stating a fact. And, when this happens, the other possible factors dim in significance as sometimes even the simplest or most straight forward of cessions goes through a reinsurance broker with the right connections!
The role of the broker, whether in insurance or reinsurance, is quite specific. A broker needs to add value to the transaction. The value that a broker adds can be synthesized into:
- Independence: The broker provides a technical view that is independent from that of the insurance or reinsurance carrier. That independence also allows them to provide a perspective that is wider than the risk in question and would also
encompass, for example, credit rating, jurisdiction, commercial issues, alternative risk financing options etc.;
- Intellect: The main benefit of using a broker is to tap into their expertise
which a buyer does not normally possess in-house;
- Innovation: A solution may require some thinking outside the box, such as in the
case of non-proportional treaty structuring, event-triggers, priorities and
such like. For example, some captive insurance companies that are major global
reinsurance players today were born out of the innovative cat bond programmes
decades ago of what were separately then Marsh & McLennan and Guy Carpenter;
- Integrity: This, of course, is the bedrock of all practitioners be they brokers,
underwriters, loss adjustors or insurance managers alike. It is even more
pronounced with professions that have to act with greater independence as in
the case of the insurance or reinsurance broker because of the vicarious nature
of their relationship.
How prevalent are these factors in the GCC insurance markets? If they are not, who is to blame and what needs to be done?
While insurance legislation in general reinforces the requirement for brokers to be independent, UAE broker directives went a step further in stating that brokers cannot be simultaneously involved in a transaction as retail and reinsurance brokers. Nor can they simultaneously be a client’s broker and consultant.
Whilst the logic behind these directives is arguably sound, how much is the spirit of the law being respected? For example, if larger brokers in the GCC have both a retail and reinsurance arm then this places the smaller retail brokers at a tactical disadvantage. Similarly, family ownership or sponsorship of businesses means that in some cases there could be an incestuous Board relationship that translates into a significant portion of business emanating from certain brokers flowing by default to certain specific insurance
In addition to raising questions on internal governance and market specific systemic relevance, these practices highlight a general level of paucity in insurance supervision throughout the region in general. Some would say that I am being kind. In some of these regional jurisdictions insurance supervision is virtually non-existent making the task of internal governance more onerous for the more serious brokers.
Having worked in the UAE market specifically on broker business development for a number of years, it fairly evident that the parito rule broadly applies; i.e. 20% of the insurance brokers command approximately 80% of the insurance business. Most of these brokers have their internal think-tanks that support their business functions. There are also SME brokers possessing a strong skills and/or knowledge base. However, one does come across a tale of two cities (or an ‘upstairs / downstairs’ technical divide) even in some of the larger brokers that becomes even more prevalent as one works his way down the market echelons. There is a general lack of insurance expertise, often peppered with a significant dose of bigotry, in the regional insurance markets whether in insurance companies or broking firms.
If one had to look at other markets one notices, for example, products that are designed or white-labelled by brokers and subscribed by insurance companies. This is largely not the case in the gulf retail insurance markets.
Some banks profess that they come up with innovative bancassurance products; however these are generally plagiarisms proliferated by the security behind the product and not by the intermediaries themselves.
The lack of expertise is worrying not only from a technical insurance perspective but even more so from a regulatory, compliance or governance perspective. Some markets have been collecting training levies for many years and therefore have no excuse for the lack of intellectual insurance capacity. In contrast, Bahrain has used training levies relatively expediently and this translated in a relatively high Bahraini contingent working in the market with at least a market entry level of insurance and certainly a higher number of
qualified locals in senior technical and or managerial positions.
This is closely tied to the intellect factor raised earlier.
However, it is not just an issue of lack of expertise that holds back innovation. One must also consider the level of maturity of the insurance markets in question. Contrary to common belief the middle east insurance markets are more aggressive than they are competitive. This is due to a number of reasons including barriers to entry or exit, lack of consumer knowledge, relative lack of substitutes, market patronage or domineering positions of certain companies in their respective markets etc. All of this is often
reflected in cut-throat undercutting rather than competition on non-price
Trying to be innovative under such market conditions may prove to be rather counter-productive. Instead what one witnesses is often a technically frugal import dressed in all the cosmetic frills and bells.
This is a relatively hot issue with two significantly sized regional brokers under scrutiny. Although their final straw predicament is credit related, the causes leading to default of one’s financial obligation are generally interwoven into internal governance or practice lapses. Loosely, they transit into lack of integrity in business practices.
Needless to say, the woes of two broking companies should not weigh heavily on the rest of the broking fraternity since many of them exercise reasonably sound internal discipline. But, sadly, from a reputation perspective these incidents do affect the market as a whole.
What may be more worrying is that the default of two brokers may also be indicative that others may have internal issues that need addressing which, however, have not been sufficiently pronounced to result in default.
It also certainly betrays a lapsus that has been highlighted earlier in the article, i.e. the lack of appropriate insurance supervision, namely the enforcement and supervision of bank accounts for clients that are distinct from general accounts. Is it rocket science that money collected from a clients which is due to an insurer or reinsurer is a liability as far as the broker is concerned? Regulators and supervisors, in addition to insurance practitioners,
should surely be aware of this?
In conclusion, whilst the broking fraternity continues to grow in the middle east, this augurs well in general as it places greater responsibility on insurance companies to improve what they deliver beyond the price at which they deliver it. It should also improve service levels in general as brokers seek to justify their existence in traditionally tacitly protectionist markets were a level of collusion still persists at insurance company level. Although tacit agreements in some of the GCC insurance markets have diminished, there are still some where certain insurance companies covertly exercise feudal lordships. And this neither helps competition nor the consumer. Their advocate can only be a more active, independent, better regulated broking fraternity possessing the requisite internal expertise and able to create a more openly competitive level insurance playing field.
The two factors that would significantly improve the quality of these factors are education (consumer, broker and company education) and regulation.