Flirting with the Crystal Ball was a title I had adopted for an INSUREX presentation some five years ago. The theme seems to have gone down well then and the title itself has emerged elsewhere on other presentations in the industry. Isn’t imitation the sincerest form of flattery?
This year I am reverting to the same title to gaze at the coming year. Whereas pre-crisis, crystal ball gazing resulted in “more of the same thing for next year”, this year, as the market comes out of the proverbial woods revelations should be different.
The Macro Environment in 2010 and 2011
No markets operate in a vacuum. This is certainly truer of insurance since it is heavily dependent on three main components, i.e. the reinsurance market which provides it the propensity with which to grow, the economy in general which creates the demand for more business and the regulators who can be either enablers or inhibitors of growth.
International Perspective: Returning to Growth at Lower Technical Returns
From an international market perspective it seems that inflation adjusted figures indicate that the insurance market is more or less at the same level as pre-financial crisis times. What is more interesting is that the emerging markets continue to grow at a more than proportional rate. The world share of premiums of the industrialized world against those of emerging markets has proportionately shrunk by about 2% to 3% since pre-crisis. The GCC markets continue to be sources of growth.
Similarly, over the past 5 years markets such as China and North Korea continue to climb up the top ten list of insurance markets worldwide as some of the traditionally established EU markets tumble down the charts. It might not be long before, say, India joins the top 10 markets (by premium volume) knocking an EU insurance market off the charts. This is particularly relevant to the Middle East because so much international companies have established a presence in, say, Bahrain, DIFC or to a lesser extent QFC, to capitalize on the increasing importance of the region as a centre of insurance and reinsurance.
The crisis had a delayed effect on UAE (which accounts for almost half of the GCC insurance premium). If one had to look at premiums pre and post crisis, UAE suffered a drop of about 24%. This is comparable to that of other emerging (BRIC) economies and higher than some of the industrialized markets as illustrated in the table below:
Annual reports (2010) and half yearly reports (2011) indicate that the markets’ woes are largely behind them but holding on to their premiums and or attempting to grow under these market conditions have had a severely negative impact on the technical profitability of some of the companies. However, shrinking technical profitability has been a worldwide phenomenon. This indicates that companies have been able to write more for less. If they have been able to do this it also means that there is adequate reinsurance capacity to support such rating.
The Regional Economies
Various factors including the leading role of some of the GCC states in the Arab spring elsewhere in MENA, meeting of financial obligations brought to light by the crisis, the price of oil, the economic woes in Europe and the USA, the prospects of the World Cup in the region in 2022 etc. are all contributing to a more bullish outlook for the GCC in general perhaps with the exception of the Kingdom of Bahrain (which continues to struggle with political strife). All of these are contributing to economic growth which, in turn, supports growth, albeit more subdued than previously, in insurance.
Regional and International Regulatory Development
INSUREX this year highlighted the increased focus on regulatory development in UAE. The 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.
Closer to home
Independently from the financial crisis, a number of companies within the region have gone through a level of turbulence. Some, such as Emirates Insurance Company in Abu Dhabi, emerged from it victorious with a healthily growing bottom line. Others, such as ADNIC are showing signs of strong recovery having boldly taken the bull by the horns during the crisis. As for others, the market is still waiting to see their annual report and accounts at the end of 2011. One expects, for example, that Oman Insurance Company will suffer significant results’ depletion (no different to the earlier mentioned companies) after significant organic changes in 2011. In all of these cases (and others before them) the culprit was not the crisis. To perhaps put it diplomatically was it a case of directors failing the companies in their fiduciary duties, or was it a case of top management failing their directors by treating them on a need to know basis and otherwise keeping a lid on how they were allowed to run their respective organizations with relative freedom from ‘corporate governance shackles’? The fact that companies grew at the expense of technical profitability and soundness is evident from the books.
Time will shed light on the answer.
2012: More of the same thing?
Whilst GCC markets return to a semblance of what was normality as they know it, the race to write more for less would certainly continue. There is international reinsurance capacity to support this. The proverbial will in future, again, hit the fan and we will find some other plausible scapegoat for declining technical profitability then.
Following the restructuring / refocusing of QFC and the political woes in Bahrain, DIFC has emerged as the regional leader; attracting more and more international insurance entities to establish and/or occupy more space in DIFC. One has to add with tongue in cheek that the reduction in the cost of rent may also have contributed to this. There is no doubt, however, to the soundness of DFSA as a highly credible regulator in midst of an emerging regional market. This is certainly another important factor that will continue to contribute to the centre’s as well as regional growth.
Whereas pre-crisis, growth was mainly organic and by exploiting product and distribution development, the more recent growth movements were through M&A activity (Zurich, RSA-Al Ahlia, Fairfax etc.) One expects that this trend will continue in the short to medium term as companies seek to rationalize as they grow. Ample M&A opportunities exist within the region perhaps even between conventional and Takaful companies as the results for some of the latter suggest that they are available prey.
It is unlikely that Solvency II will seriously be on the agenda of most regulators in the region (other than perhaps DIFC and QFC) within the short term as more concrete steps still need to be taken vis-à-vis more rudimentary prudential regulations and their enforcement. IFRS, on the other hand, will.
I will end the article with the three items on my wish-list and this is more education, education and education in regional insurance markets. We have sometimes flirted with ignorance and it has proved to be more expensive.