Regional trends spell good opportunities for MENA insurers, but more needs to be done to overcome the hurdles to prepare for the next stage of growth. MICC CEOs give their takes ahead of this month’s Middle East Insurance Forum (MEIF).
Life and non-life premiums in MENA are expected to grow by 7.2% and 5.6% in 2014, down slightly from last year’s 8.9% and 7.7%, according to a recent Swiss Re report. It said the life market will continue to benefit from an improving outlook and increasing insurance awareness, while infrastructure investment and government spending, particularly in oil-producing markets, will continue to support non-life premium growth.
While premiums have been forecasted to shrink slightly, the insurance industry remains resilient. Growth opportunities in the region are being supported by numerous factors, including healthy GDP growth (up from 2.1% in 2013 to 3.8% in 2014, according to IMF), positive regulatory developments, attractive demographics, major construction and infrastructural projects, and increase in average individual income in the region. In addition, low insurance penetration and compulsory covers such as motor and health insurance also offer ample room for growth.
Pricing matters
While the attractions of the MENA region are many, increasing competition has put terms, conditions and pricing under pressure, challenging the ability of insurers to grow profitability and differentiate themselves.
Mr Fateh Bekdache, General Manager of Lebanon-based AROPE Insurance, said: “Due to a high degree of competition, several companies are adopting aggressive pricing strategies weakening the market.” For AROPE, a sound financial strategy backed by an excellence in customer service and transparency are essential for a healthy insurance market, he added.
It is hard to argue that the direct insurance pricing in the region truly reflects the underlying risks, said Mr Mahomed Akoob, Managing Director of Hannover ReTakaful in Bahrain, adding that in many cases, several insured perils are covered for almost no premium at all.
“Consider natural perils for instance. While the exposure may not be as high in the region as it is in neighbouring Turkey or Iran, it is not absent. The same goes for other covers that are not carefully considered. We try to structure our reinsurance solutions to make sure the pricing gets closer to what we deem a risk-commensurate level. We try to look deeper into portfolios and help our partners clean up and get rid of underpriced or undesirable risks,” he said.
The industry needs to understand that even though competition is a healthy aspect of any functioning market, it can be destructive, Mr Akoob added. “The industry needs to know that there is a level of pricing below which no one should go.
We all need to realise that our business is risk carrying. It is not risk trading. To carry risks, we need to be compensated adequately.”
Mr Bekdache added that regulations are needed to organise the licensing process of newly established companies in a way that would tilt the scales towards quality and reliability rather than proliferate the number of companies.
Call for underwriting discipline
The insurance business model in the region has traditionally depended on investment returns rather than underwriting. “This was fuelled by the strong - sometime on pure speculation - performance of the capital markets several years ago. This led to insurers acting more like hedge funds. The focus was collecting as much premium as possible, ceding as much risk as possible, capitalising on the float (delay between collection of premiums and payment to reinsurers), and investing heavily and actively in the very short-term capital market,” said Mr Akoob.
As a result, “it was not necessary to cultivate an underwriting and risk carrying culture. The only important income item from this function was reinsurance commission,” he added.
The industry therefore needs to focus on principles of insurance, said Mr Yassir Albaharna, CEO of Bahrain-based Arig. “Underwriting discipline goes hand in hand with the education of insurance professionals”, he added.
Need for improvements in regulation
Overall, there is scope for further improvements in insurance regulation to strengthen growth and ensure stability in the sector.
Mr Akoob said that regulators need to make sure that the framework they present is clear, adequate for business and achievable. They should also encourage industry organisations to take a more active role towards self-regulation besides following prescriptive regulation, and set a long-term plan to move towards principle-based regimes.
Besides following up on and enforcing the directives they issues, he said regulators should also intervene when necessary to prevent markets from spiralling out of control. He explained: “I always say it would be a sad day when regulators feel it necessary to intervene and tell us how to conduct our business. However, in this region, it seems that not much changes unless the regulator gets directly involved.
“Take the Saudi Arabian motor and medical markets, for instance. Until SAMA required companies to present actuarial studies of their portfolios and pricing, competition was the only factor that determined the performance of these lines of business. As soon as the results of such studies were out, the market witnessed an upward pressure on rates. I would say the industry should have taken the initiative before SAMA’s intervention.”
On the other hand, Mr Albaharna said there is substantial effort being put into insurance regulation all over the region, resulting in more order and much-needed professionalism coming into an industry that appears all set to record good growth over the medium term.
He added that regulators can have a positive influence on the business by helping to protect customers, “a vital part of market development if we are to see increased customer confidence in the local insurance industry”.
Closing the talent gap
The insurance sector understands that it needs to attract and develop the right talent to drive the business, but the challenge lies in realising these.
Mr Nagib Bahous, President and CEO of MIG Holding, said the insurance industry as a whole should put more serious efforts to train and prepare the young local generation that would be the future insurance market leaders.
“In almost all of the GCC, ambitious nationalisation plans are pursued with accelerating percentages over a period of time. Unless the new generation is well prepared and trained to lead the industry, there would be a big shortage of talent that would have a negative impact on the entire market,” he added.
Mr Farid Chedid, CEO of SEIB Insurance and Reinsurance, added that closer cooperation is needed develop local talent. He said the company has supported the market primarily by providing training and development programmes to both clients and talented Qatari students. For example, SEIB has signed agreements with the Qatar Finance and Business Academy (QFBA) and Qatar University to mentor local talents.
Deepening awareness
In addition to building talent pools, educating the markets and building awareness among potential customers on the benefits of insurance is just as pressing a need.
Mr Bahous noted that real progress can only be achieved when the general public becomes more aware of the importance and the added value of insurance. However, “the insurance industry is not doing enough to increase public awareness about the topic of insurance and the role insurers play to support the wealth and progress of the community”, he observed.
Mr Tarek Hayel Saeed, General Manager of United Insurance Company (UIC) in Yemen, said that more cooperation between the regulators and local insurance companies is needed to enhance awareness and develop new products that meet the needs of all segments of society.
On the company’s efforts to improve awareness, Mr Saeed said: “We intend to organise different seminars, workshops, awareness campaigns and so on about the importance of insurance and its regulations, to show what other countries have done in this field.” UIC has previously several workshops on topics such as engineering and takaful.
Moving forward
With the industry set for continued growth, both regulators and insurers need to make concerted efforts to strengthen the industry, overcome competitive pressures, capture profitable growth and ensure stability in the sector.