Recently I was engaged in a few interesting exchanges of opinion with colleagues from the financial services industry. I would like to make reference to two of these and entwine them into the fabric of this article.
The first comment that I am referring to comes from Mr. Hussain Al Qemzi, Group CEO of Noor Islamic Bank with specific reference to the markets that we operate in. “There cannot be effective regulation without education.” Well spoken. Very true.
The second exchange was with Bob Boghos, Head of P&C (UK and Ireland) at Partner Re and with Suzie Neuwirth, Editor of the MENA Insurance Review on whether the insurance markets in the region will harden post-crisis and if not, why not. This discussion evolved into whether the regional insurance markets are perceived to be aggressive or competitive and what is the difference between the two.
Let us for a moment forget the world of insurance and concentrate on a sport that epitomizes competition, i.e. football. Competition flourishes because there are rules to the game, a referee, linesmen, fouls, free-kicks and penalties, goal-posts and demarcation lines for the pitch.
Let us also, for the sake of continuing this example, imagine a football game with none of the above ‘boundaries’; or with some boundaries but blatant disregard on account of general referee / linesmen apathy to enforce the rules of the games and maybe fans’ ignorance to what constitutes a goal. Would the game remain competitive? It would certainly become aggressive without the regulations that provide a level playing field. But would it be competitive? Certainly not.
There are eight insurance regulators in the six GCC countries. It beggars understanding, but this is the case. Out of these eight regulators not more than four instil some level of confidence in what they do and three are, to use a Philip Larkin term, “fatigued with indolence.” Insurance legislation in three of the eight jurisdictions is archaic and/or requires a serious makeover. True day-to-day rigorous but transparent supervision is largely non-existent outside DIFC and QFC. This paragraph pretty much sums up the state of insurance regulation and supervision within the region and sums up insurance markets, vis-à-vis the game of football example.
Out of the six countries, only one has a track-record of continuous commitment to developing local talent within their market, namely Bahrain. This shows not only by the number of Bahrainis working in the industry but also by the relative quality of the cadre compared to regional peers. In some of the other markets significantly less than 5% of the respective workforce are nationals employed in technical positions of significance. Some countries actually collect training levies from insurance companies but do not put them to effective use.
Perhaps contrary to belief within the region, the culture of imported resources on a long term basis does not sustain qualitative development. In the absence of learning and development, and the persistent expatriate legacy there are several examples of ‘making do’ in markets that afford to do much better. For example, why is it that the standard (i.e. approved or recommended by various associations) fire and perils wording in most of these markets is a plagiarism of the FOC wording, which ceased to exist in the UK in the mid-1980s? Why is it that most property underwriters in the region cannot tell the difference between an FOC, ABI and an LM7 wording or that, indeed, a francophone property policy (since some of these also crop up from time to time due to the Maghreb or Lebanese connection) may have an element of liability cover in it which a property reinsurance treaty does not generally cover? Why is it that one may get lectured by a senior life assurance manager on why a life policy is actually a policy of indemnity (when it is not)? Why is it that the Head of Risk in an insurance company may ask you, “What’s AML?”None of these are rocket science. These and many more are day-to-day examples of basic intellectual paucity in insurance within the region. A recent classical anecdote was a reinsurance manager telling me that he is not sure whether a facultative placement can be either on a proportional or non-proportional basis. “All I do is pick up the phone and offer it to reinsurers!” was his classic reply. Now doesn’t that sound familiar?
In this culture, top-line is perceived as the goal irrespective of repercussions. 7 out of the top 10 insurers in the UAE collectively registered a 9% deterioration in technical results to achieve an aggregate 9% increase in gross written premiums from 2009 to 2010. The three top UAE insurance companies by revenue have collectively registered a 13% (higher than market average) increase in gross written premium but with a 30%, 8% and 17% drop in their respective net technical returns.
It was clear from the onset of the crisis that loss ratios in general would deteriorate as premiums continued to be squeezed. In a December 2010 article of mine entitled Beyond Reinsurance Protections (https://insuranceguild.wordpress.com/2010/12/23/2011-beyond-reinsurance-convention-predictions/) the impact of the industry’s delayed reaction to the financial crisis is discussed. Now, the retail markets seem to have endeavoured countering rising loss ratios by purchasing more reinsurance. For example, five out of the top six UAE companies (i.e. representing 10 of UAE insurance licensees or close to 50% of insurance business in the UAE, increased their reinsurance cessions as a percentage to gross written premiums from 2009 to 2010. I hasten to add that this is not a sign of market hardening because closer look at the figures in some cases reveals a proportionately higher number of policies for the premium written and, for some of the companies in question a more than proportionate claims (reinsurance) recovery compared to claims. This simply shows that proportionately more risks have gone to the treaties (probably at proportionately less premium) for which a more than proportionate amount had to be subsequently met by reinsurers as their share of the claims.
These facts and figures are symptomatic of a market (or markets) that require changes at their grassroots. And the grassroots in this case are education and regulation.
What better time for a commitment to change does one have if not during a time of ‘reconstruction and renewal’ (to borrow a phrase from Sir David Rowland the driving force behind the Lloyds metanoia)? That time is now.