Poacher turned game keeper

After a stint as an insurance broker, returning to an insurance company position in January of this year was a momentous home coming for me.

Some remember me in 2012 as an active and vociferous member of the broker lobby discussing United Arab Emirate Directive 2 (client payments) and the draft broker legislation. In a recent conference I was pulled to one side by a veteran managing director who was rather emphatic that now that I was wearing a different hat I should not be “batting for the brokers”.

My response was a football analogy: “When a player switches clubs (or sides on the field) surely the rules of the game do not change!” While there are the good, the bad and the ugly among the broking fraternity, one has to acknowledge that brokers have a very important role to play and they are the trusted partner of many of the clients. Their service as a professional broker is invaluable even to the insurance company.

That is why the UAE market needs broker regulation. But this should not be in the form of the draft issued in 2012 by the Insurance Authority. Nor should the legislation only apply to brokers; it should be tailored to address all intermediaries in insurance.

International Best Practice

Drafting a legislative framework for intermediaries – and not only for brokers – would reflect international best practice. Therefore, article 1 and 2 of the draft insurance brokers’ legislation should be amended to encompass all intermediaries similar to, for example, the EU framework. The law should also contain directives relating to the registers of approved persons and minimum license driven qualifications.

This would mean that, for example, Tom, Dick and Harry and their dog selling insurance from say car showrooms or even banks would be appropriately qualified and licensed to do so. Currently, the law regulates brokers and agents but not sub-agents or sales persons. There are many in the market posing as independent salespersons or consultants when they are not legally authorised to do so.


One of the bones of contention among brokers is the relatively excessive capitalization requirements contemplated in the draft broker legislation. This is ‘flat’ without regard to the company’s size; differentiating only by whether the broking company is local or international. Probably a more reasonable approach to capitalization – given that brokers are not the ultimate carriers of risk – is that this is based on the volume and classes of business that they write.

For example, a broker positioned to service the personal lines, SME and private motor market with a premium income of less than, say AED25m should not be expected to hold as much capital as the regional subsidiaries of the large international brokers writing in excess of AED100m locally in premium.

A ‘one size’ fits all approach to capitalisation would be inequitable to the smaller among the broker fraternity and tiered capitalisation based on revenue should be mandated instead. Tied to capitalisation should be the right to open branches within the UAE. Currently, the only requirement contemplated under the new draft legislation is the fee that is levied by the Insurance Authority for a broker to open additional branches. The premium requirement mentioned in the law is too low. This should be higher and tied to the capitalization tier.

Fiduciary Accounts

Prior to the publishing of the draft broker legislation in mid-2012 the Insurance Authority sparked controversy by the notorious Directive 2 instructing brokers to collect client money not in their name but in the name of insurance carriers. This rendered obsolete the practice of fiduciary accounts. It was repeated verbatim in the draft legislation while conversely advocating higher financial guarantees from brokers.


Some in the market contend that the draft legislation was nothing more than the product of a strong local company lobby aimed at bridling broker activity. In a market where conspiracy theory abounds no one quite knows whether this is true although many suspect that there is some veracity in it.

Brokers are not unlike the opposite sex: we love them, we hate them and we also complain about them but we all know that we cannot live without them.

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Inverted Modus Ponens

Most social science theories, including in economics, business and finance are ‘deductive theories’ based on the modus ponens mechanism. What this basically means is that conclusions are drawn from evidence; and from these conclusions one can then infer recommendations or an action plan.

Put simply, a ‘deductive theory’ draws a conclusion from a fact. A simple example would be (a) it is raining so (b) people carry an umbrella. It is reasonable to deduce that people carry an umbrella if / when it is raining. However, the inverse is not necessarily true, i.e. If people are carrying an umbrella it is not necessarily reasonable to assume that it is raining. A simple example perhaps (but I will be tying this to GCC insurance markets further on in this article). Deductive theory contrasts with Inductive theory (such as in mathematics). In inductive theory results are absolute i.e. If (a) 3 + 1 = 4 then (a) 4 – 3 = 1.

A disconnect seems to happen when mathematical and/or actuarial absolutes are inferred forward in business and finance into ‘models’. Mathematical modeling would perhaps have undergone rigorous testing within a framework of a set of variables. The world of economics and finance is a living, breathing and constantly changing beast and a change in variables may render a model that seemed otherwise robust yesterday obsolete today. Black Sholes for example came under severe criticism during the financial crisis. But, in reality, is it the case of the model being wrong / inadequate or is it a case of ignorance on the part of people who perhaps continued to rely on it (and similar other models) without taking into account the fact that models require constant recalibration in response to a constantly changing economic reality.

I mentioned above that I will give an example of a deductive theory wrongly interpreted in place of the ‘umbrella example’ above closer to home in the UAE. A reasonable conclusion inferred from a competitive market is that prices are proportionately low and that is significant competition on non-price variables as a result. However, the inverse is not necessarily true, i.e. low prices are not necessarily indicative of a competitive market.

There is a misconception that the UAE insurance market is a competitive one. An inverted modus ponens, if you like, based on the fact that pricing is relatively very aggressive. This, in turn, generates comments, such as by an AON Benfield broker (Amy Andrews Analysis in the MENA Insurance Review, December 2012) that the Emirates Insurance Association should perhaps be agreeing on the imposition of minimum premiums to combat this. Setting aside the fact that, coming from a broker, this sort of statement is tantamount to foot-in-mouth verbal diarrhea, such assertions are nothing more than wrongly inferred conclusions. In the same way that the sight of Filipinas with umbrellas in Dubai does not necessarily suggest that it is raining, so also aggressive pricing in insurance does not necessarily suggest that the market is a competitive one. The following are some live examples as to why the primary insurance market in UAE is not a competitive one.

Firstly, the profits made by the insurance companies that are in the black, are consistently more than one would term ‘normal profits’. Growth and profitability is again in double-digit percentages.

Secondly, there is a certain opacity or inconsistency with which premiums are booked or reported. For example, Oman Insurance Co did not previously declare BUPA premiums on their books on the basis that this was purely fronted business. Without going into the argument as to whether they should or should not have been doing this, there is a possibility of a ‘U’ turn in this practice in the end of year 2012 financials. If this happens it will probably not happen to right a technical wrong but to reduce top-line losses which in 2012 were in free-fall; potentially around the AED 0.5 billion mark. Similarly there are at least two regional ‘A’ rated insurance groups that are internally creating a reinsurance spiral (London LMX anyone? Does the topic still bring shivers down your spine?) because on the face of it higher overall top-line gets reported. One of these companies has also recently (December 2012) issued an internal memo with various cost cutting measures and inter-group executive merry-go-round implying that not all is hunky-dory after all! This lack of transparency is as consistent with the conduct of a company in competitive market as the constantly changing closing date for financials every December.

Thirdly, because of the nature of ownership of some of the larger insurance companies that dominate the market, there is also an element of price discrimination. This, again, is a practice that is generally conspicuous by its absence in competitive markets but is certainly present in the region. It is also generally the case that price discrimination happens more in different geographies and not in the same market as is the case in insurance within the GCC.

Whilst the primary market is not competitive, the reinsurance market is vicariously competitive through primary carriers. This explains why, for example, certain major international reinsurers have cut down on their capacity. For them capacity is capital employed on which they need to see a certain return based on their normal profits models. When this does not happen capacity generally moves to other markets or products which can generate this return for the respective reinsurer. This happens because mobility (or ease of market entry and/or exit) is generally high in competitive markets. This being said as some capacity exits the market, fresh capacity replaces it underlying the relative competitiveness that exists in the reinsurance market when compared to the primary market. The continuous availability of reinsurance capacity by providers that are mainly price takers (and not price makers) and who, on the facultative side are increasingly working on a ‘net basis’ strongly suggests a competitive market at reinsurance level. A cursory look at their annual accounts also suggests the same. However, competition stops at the door of the primary market within the region.

Educating or reversing the regional ‘herd’ mindset is essential in order to instil competition in the market. This is easier said than done in that this requires not only a change in thought but primarily a change in the old guard entrenched in their thought. Was it not Einstein who said, “Only a fool does the same thing over and over again expecting different results?”

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CAT – Insured Loss = Big Difference!

If one had to be a fly on the wall in networking venues during the Montecarlo Rendezvous or Baden Baden Convention he or she would have quickly realised that discussions would have been dominated by the primary markets’ need to harden because of the escalation in number and value of catastrophes around the globe.

One of the most significant news in this respect during the last quarter of this year is that Munich Re, Swiss Re and SCOR, for example, issued US$ 6 billion in bonds for European and USA windstorms.

2011 had its fair share of disasters and by the end of the 3rd quarter Lloyds of London had already reported losses close to £ 700 million British Pounds primarily due to losses emanating from Japan, Australia, New Zealand and Thailand in almost all 4 quarters of 2011. However, by mid-2012 Lloyds had already posted a profit of  £ 1.53 Billion British Pounds. Given the leap, one would necessarily question whether this is due to excellence in operating performance from the end of 2011 to mid-2012 or whether it largely represents a positive run-off on claims reserving from the previous year’ losses. Probably the truth lies somewhere in between.

2012 also didn’t lack natural calamities, not least Hurricane Sandy that wreaked havoc particularly in New Jersey, Pennsylvania and New York. Whilst the catastrophe risk consulting firm Eqecat estimated the total cost of damage in the region of US$ 50 billion, consisting mainly of property damage, increased cost of working and consequential losses, the cost to the insurance industry is likely to be less than 40% of this notwithstanding that Hurricane Sandy already has a higher price tag than Hurricane Ike (2008) and Hurricane Ivan (2004). One would also have thought that the power of hindsight would have made insurance purchasers wiser. However, it appears that it is the insurers (and not their consumers) that became wiser since certain catastrophe perils (post, say, Ivan) became ‘buy-backs’ at an additional premium … and it seems that several consumers, particularly private policy holders, opted not to spend the extra amount on the buy-backs. Of course, the bigger picture in the form of indirect losses (due to sub-way outages and protracted recovery periods would, though substantial in value particularly to small and medium sized businesses, mainly do not feature as insurable losses.

For practitioners active in the GCC market, the above scenarios conjure back images of Hurricane Gonu in Oman. Whilst the hurricane in 2007 was substantially devastating for both private individuals as well as business and commerce, the insurable loss was negligible when compared to total losses. This was mainly attributable to two factors, i.e. a relatively low culture of insurance at the time in Oman as well as, under motor policies (where insurance is compulsory) a standard exclusion on such natural catastrophes as flood. It appears that Hurricane Phet in 2010, although having a much smaller impact on Oman (whilst Gonu estimates are in the region of US$ 5 billion, Phet’s are more in the region of US$ 300 million), proportionately more of Phet’s losses were insured. An increase in market pricing (particularly in Motor insurance) as well as an adjustments in limits and priced buybacks under say construction project insurance reflected more the market realities that have to reserve for such contingencies.

Similarly in the UAE (even as recent as early 2012) various consumers cried ‘foul’ when insurance companies did not compensate them for flood damage to their cars, blaming it on the Insurance Authority approved wording for Motor Insurance in the UAE. The truth of the matter is that this wording is only an absolute in that it is the ‘minimum acceptable’ level of cover for the market and consumers can demand more  cover (needless to say, at a premium) in the form of buy-backs of certain fundamental peril exclusions such as flood. Not every spade is a spade and the fact that ‘comprehensive’ policies are priced differently should be an indication that the level of cover under the respective ‘comprehensive’ policies is also different.

Back from the mundane world of motor insurance to the world stage of natural catastrophes, Munich Re conducted an interesting study in 2011 on the 10 deadliest hurricanes and tsunamis across the globe between 1985 and 2010. The total value of recorded losses is in the region of US$ 800 million. However, only around 10% of this was actually recouped from insurance.

Why the disparity? The reasons are various, ranging from geographical / region, economic, cultural amongst others. The following table provides some insight as to what extent these catastrophes were insured:

Industrialised Countries (US$ millions): Developing Countries:
  Damage Insured Percentage   Damage Insured Percentage












S.E. Asia




New Zealand




















Source: Analysis by J. Portelli of Geo Risks   Research (Munich Re) March 2010. 36% of estimated tsunami and earthquake   losses in the industrialised countries were insured compared to less than 1%   elsewhere. Armenia





















Prima facie, the only ‘surprises’ in the above tables are Japan (Kobe) and Chile. The possible explanation to these is that whereas the Kobe (1995) earthquake occurred over 15 years ago and did not significantly affect urban areas (in comparison to others), the Chile disaster occurred mostly in an inhabited area. Also, though classified as ‘developing economies’ insurance density in some of the urban and/or industrial Latin American markets is proportionately higher than other developing economies. These factors may explain the two blimps.

The US$ 6 billion bonds raised by Munich Re, Swiss Re and SCOR also perhaps signals that this is a precursor of market hardening for catastrophe losses in the same way that the Marsh and McLennan and the Guy Carpenter (then separate entities) cat bonds in the USA in the 1980s preceded a period of market hardening. Maybe the link is not so strong because other factors contributed to escalating losses then (such as Piper Alpha or occurrence wordings faced with asbestosis claims among others). Nevertheless, the period did have its natural catastrophes as well; such as the Great Storm (UK) in 1987 and Hurricane Hugo in 1989.

There is a domino effect to reinsurers raising capital to finance catastrophic losses is insurers (or cedants) either charging extra or excluding such perils from the primary market. The knock-on effect on the consumer is that, theoretically, they either cough up at the time of purchasing insurance and, if not, to do so at the time of a claim.

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Oops! Am Insured?

Recently I came across a very interesting blog on medical insurance. Peeling off the US-centricity and Obama-bashing aspects in the piece, the main point that the blogger wanted to drive home is that one shouldn’t purchase insurance after a loss happens.

Before being accused of stating the obvious, a cursory look at some examples (primarily in the private health insurance sphere) in the Middle East, suggests that it might not be that obvious after all! For example, how many inbound calls in insurance call centres would you reckon are from women requesting an alternative or a top-up to their employer financed health insurance scheme which may not cover maternity? Plenty. You’ve probably also already guessed what instigated their call: they are now pregnant. Similarly, how many clients downgrade or switch insurance to a more economical policy only to try reverting back to more quality cover after the emergence of a disease or medical condition that is not adequately covered by the more economical policy? Covering such losses goes against the very essence of insurance. Insurance covers incidents that are, in as far as the insured it concerned at the time of occurrence, accidental in nature.

Let us take a live example. Hypertension and diabetes can trigger kidney problems. In case of kidney failure one can be looking at three dialysis sessions per week at a weekly cost of not less than AED 5,000 (including incidental treatment). Annually this amounts to over AED 250,000.Gulf News reported in 2009 that a public hospital in Dubai started turning down expatriate patients due to lack of space. On individually underwritten medical plans (or ones excluding pre-existing conditions) it is likely that an applicant would be refused cover by an underwriter for such treatment if the applicant already suffers from hypertension or diabetes. Within the region there is also an added complication. One’s residence visa generally is tied to one’s employment visa which, in turn, is directly related to one’s health and/or ability to work. If individuals are under an employer’s private medical insurance plan, without the ability to commute this forward, a notice of employment termination/redundancy also results in private medical insurance cover being pulled from under their feet. If under the company scheme they enjoyed the benefit of, for example, pre-existing conditions’ cover, for a new employer and/or insurer this might not be the case anymore.

The foregoing highlights the importance of careful consideration being given by an expatriate employee to one’s private medical insurance as part of their overall personal health management and well-being. Relying on a company health insurance policy may or may not provide the required solution. Health insurance is certain GCC regions is either compulsory or on the way to becoming compulsory. Therefore, economics play a very important role in the decision making process when employers buy private medical insurance for their employees. It is often a tale of two cities or an upstairs-downstairs philosophy, i.e. too much for the patricians and too little for the plebeians. It is therefore important for an employee to understand what cover is available and, if need be, how to supplement this with, say, high-deductible policy, or additional in-patient cover or emergency evacuation (to home country).

Price is not necessarily an indicator of value. The perception of value is personal. For example, if the cost of a medical plan is being driven up by, say, pregnancy / maternity cover and an applicantdoes not require this cover, then the policy should be such that it allows a client to customize according to one’s needs. For example an expensive, high powered, low bodied car may be of little or no value in a 3rd world country. Likewise high out / in-patient treatment covers (or cover being restricted to local / regional treatment or subject to a local network / cost ceiling) may not be half as beneficial to certain expatriate employees as a generous medical evacuation / repatriation cover and the coverage in one’s home country.

Whilst one understands the drive by governments in the region towards compulsory medical insurance for all residents, this is probably only a panacea to reducing public sector spending on medical care. The motive behind it is as much driven by the desire for greater social welfare as was the 2009 decision by a public hospital to turn away expatriate dialysis patients. Medical insurance is fast becoming compulsory in the region because the economics do not currently add up. There is demand, there is supply and there is a scarcity in supply relative to growing demand. None of this equation is about social welfare or personal wellbeing.

Purchasing private medical insurance, on the other hand, is personal. It may be well worth keeping this in mind.

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2012: A Year of Reckoning


The first month of the year is called after a Roman God, Janus, who is usually depicted with 2 faces, one looking back and one looking forward. Janus is associated with new beginnings and gateways.

What is perhaps lesser known is that Janus is associated not only with the month of January but also lends his name to the word janitor.

It is customary in January to read about the past year’s events as well as predictions for the year ahead.

I will not dedicate my first piece of 2012 on speculation of expected 2011 results (the good, the bad and the ugly). Nor will I try to predict whether reinsurance will harden following the relative instability of the Euro or the ongoing global political and economic sagas.

Instead I will refer to some past and current events in relation to a topic which the GCC market has been giving lip service for very long but, in general doing very little about it: Corporate governance. Although corporate governance and prudential regulations go hand in hand, the two are not the same and one should not depend on the other. Many companies have often pointed fingers at regulators for doing too little in this respect. However, in reality, corporate governance concerns the internal affairs of an enterprise.

Self-Discipline and Competence

Although technical or economic reasons have been cited for the past decade when market stalwarts such as, for example, in Dubai, Abu Dhabi, Oman etc. have been brought to their knees, behind these reasons there is always a lapse in corporate governance. This is not just a regional phenomenon. Ashby et al (FSA, 2002) in their paper, ‘Lessons about Risk: Analysing the Causal Chain of Insurance Company Failure,’ discuss the findings of the 2001 EU Insurance Supervisors’ Conference analysing 21 supervisory cases of failures or near failures of insurance companies from 15 different countries came to essentially the same conclusions namely:

  • although no cause is singularly responsible for the failure of a company;
  • Common causes in all cases are what they called ‘sloppy’ management and the inter-related governance / systems lapses;
  • Even in the two cases which prima facie no lapse of governance was evident, upon further investigation it was revealed that this played a decisive role in the companies’ failure.

Similarly in USA, Grace et al (George State University, 2003) studying the failure of 250 property and casualty insurance companies in the USA between 1986 and 1999, built their hypotheses on three main components augmenting insolvency costs. One of these was specifically the moral hazard attached to management decisions and/or behaviour of troubled insurance joint-stock companies.

Oman Insurance Company’s recent announcement of a formidable senior management suite, including a head of distribution who also previously had ERM experience as well as a ‘tried and tested’ head of internal audit are certainly steps in the right direction. The company’s results may still have to travel south before going north again but when people marvel at magnificent edifices they tend to overlook the fact that these stand on a sturdy foundation. These changes are perhaps the necessary foundation work after a 2011 of debris removal. The reason why some heads rolled in 2011 may manifest itself in financials. Passing technical performance through an ERM/ governance sieve may help us draw not only certain conclusions but also lessons on how individuals, teams and boards ought to behave.

Many insurance companies in the region should follow the cue in 2012 and take a very close look at their internal corporate governance regimes, the authority limits and the oversight structures. They should ensure that no CEO or Managing Director reigns supreme; and this above all for his or her own protection as well as that of the company and its stakeholders. This admonition is aimed at all insurance companies active in the region but even more so to the ones that are onshore regulated in jurisdictions where regulation is still work-in-progress.

An ‘A’ rating is not necessarily a universal ‘carte blanche’ on a company’s health and wellbeing. The larger companies in the region have all been too obliging with credit rating agencies to prove that the necessary risk management and governance regimes were in place. But one should hasten to ask, “To what extent have these been cosmetic?” Try as they might, rating agencies are generally beyond their depth when deliberating on potential results that do not necessarily emerge from number-crunching. For example, hypothetically, would they have flagged a name of a person on an OFAC list if it is uncanningly similar to someone in a responsible position within, say, a regional ‘A’ rated insurance group? Or do they just brush over these and other issues (TOBAs, KYCs, sanctions procedures, oversight processes etc.)? It is such, perhaps seemingly small, current misgivings (white lies and venial sins masterfully covered in make-up, or not) that like wood-worm collectively dilapidate an enterprise bringing it to its knees. ERM and corporate governance are more qualitative then they are quantitative. This is not something that can be easily modelled. One needs not only the nose for it but also the intestinal capacity to walk the talk. Take it from a whistle-blower.

Internal Audit and ERM

Traditionally, internal audit and ERM functions in insurance companies within the region have not communicated effectively and significant synergy between the two has been lost.  There may also be merit in merging the operational functions at the ERM and internal audit coal face whilst maintaining their independent reporting lines at board level.

Both internal audit and ERM/GRC operate at arm’s length of other functions within the company. Both have a relative degree of independence. The main differences between internal audit and ERM/GRC process are that:

  1. Whereas Internal Audit operates at a micro-level, i.e. identifying and reporting  individual non-compliance areas;
  2. ERM/ GRC operate more at a macro-level measuring actual performance against risk appetite and risk tolerance (represented by the traffic light system, risk dashboard, heat maps etc.).
  3. Also, internal audit identifies and reports (and is more ‘surgical’ in its approach) whereas ERM/GRC identifies, analyzes and recommends corrective action (i.e. is more systematic and holistic in approach).
  4. From a cultural and/or governance perspective, internal audit is already entrenched at Board of Directors (or Board Committee) level. ERM / GRC, other than oversight, is not.

These differences serve to augment the synergy potential between the two processes as well as reinforcing the argument for greater cohesion between them.


2012 will be a better year than 2011 for the regional insurance industry in terms of business growth. I hope we will also see greater wholesale acceptance of internal corporate governance as the precursor of sustainable long term growth.  If we do not learn from history we are otherwise doomed to repeat it.

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Flirting With the 2012 Crystal Ball [Middle East Focus]


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.

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Reinsurance Season: Here we go again!


This article ties in with one on a similar vein last year entitled, “Beyond Reinsurance Convention Predictions” (https://insuranceguild.wordpress.com/2010/12/23/2011-beyond-reinsurance-convention-predictions/) and will follow on last year’s sentiment for 2011 to see to what extent the predictions and concerns of last year have come to pass and also to build the predictions for 2012.

One of the underlying topics in last year’s article was market cycles; i.e. the cost of capital versus catastrophes. We had no shortage of those in the course of this year so it would only be too relevant to make reference to this as well.



Prudential Regulation, Cost and Impact on Insurance / Reinsurance

In the course of the year, concerns over the rising cost of regulation with impending Solvency II have been echoed even by FERMA’s Peter Von Dekker as a cost that is ultimately likely to be absorbed by consumers.

The topic was revisited during this year’s Baden Baden symposium in a bid to quell concerns that Solvency II will discourage reinsurance models skewed towards non-proportional protections. Endurance’s CUO, Hans Joachim Gunther negated this, stating that proportional forms of reinsurance will continue to be sought by smaller companies and in markets where other forms of capital / capacity are not easily accessible. This is of direct relevance to most companies in the Middle East markets and one would expect that proportional forms of reinsurance will continue to persist despite an effort from leading reinsurance to shift the some emphasis onto non proportional.



Market Cycles and Catastrophes

Mr. Costas Miranthis, President and CEO of Partner Re perhaps encapsulated the whole of the Baden Baden discussions on pricing in one statement, i.e., “In the forthcoming renewal…. while there will be demand, and there will be capital to meet that demand, I am not sure whether all of that capital will be put to work.” In short, there is no market hardening in sight.

To a great extent this reflects the conclusions gleaned from the Montecarlo Rendezvous 2011,  SIGMA (2011) report and the annual report and accounts of international heavy weights such as Munich Re and Swiss Re. Although the international markets have been hit by a hefty share of catastrophes, the market has paid up. Some of the major international reinsurers have suffered at least one technical loss over the last 2 – 3 years but in most cases, even post-financial crisis, investment returns have translated this into a net profit. The bottom line is that, demand for insurance internationally is again on the rise (reaching pre-financial crisis levels), in emerging markets double digit growth is again being witnessed and in some markets, such as the GCC, growth is already more than 50% higher than the aggregate growth rate of emerging markets.

All of this is indicative not only of availability of capacity but also the willingness by reinsurers to support existing reinsurance programmes and pricing in the Middle East. Is this reasonable? Is it long term? Anyone’s guess is as good a mine … but it will definitely prevail in 2012.

The following table shows the development of premium from 1990 to 2009. The blue boxes highlight the few episodes of market hardening in the market over the past two decades. These episodes, i.e. 1993 (post LMX debacle / property crisis), 1999 (uncertainties associated with the millennium change), 2003 (post Sept 11th) and 2003 (petro-dollar build up) were more related with cost of capital then with catastrophes.

The growth in premium from 2009 to 2010 is less than 5% when adjusted for inflation and is close to pre-crises levels. This indicates that we are still in the soft market prevailing for almost a decade. Will the cost of capital driven by the prolonged financial crisis in Europe put pressure on the cost of capacity and, therefore, on reinsurance pricing? It is too early to tell. Even if this is the case, there is sufficient capacity building up in the Middle East and imported from Asia that would substitute and capacity that comes in at higher prices in the short run.


Conclusion: Much of the same thing

Therefore, it is safe to assume demand, cost of protections and the structuring of outward reinsurance by most companies in the region will not witness significant change in 2012. Many will, of course, continue to blame dropping technical profitability on tougher reinsurance conditions but honest introspection would suggest otherwise.

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