Embed Size (px)
Citation preview
MARKET NEWS, DATA AND INSIGHT ALL DAY, EVERY DAY
ISSUE 4,558
MONDAY 14 MARCH 2016
Lloyd’s groups weather worst of soft market
p3 p4-7
p2
PPL begins market testing Special Report: Middle East & north Africa
insurance industry. Visit www.insuranceday.com/mergers-and-acquisitions
Combined ratios remained impressively low thanks to the lack of significant cat losses and modest large individual risk events
Market news, data and insight all day, every dayInsurance Day is the world’s only daily newspaper for the international insurance and reinsurance and risk industries. Its primary focus is on the London market and what affects it, concentrating on the key areas of catastrophe, property and marine, aviation and transportation. It is available in print, PDF, mobile and online versions and is read by more than 10,000 people in more than 70 countries worldwide.
First published in 1995, Insurance Day has become the favourite publication for the London market, which relies on its mix of news, analysis and data to keep in touch with this fast-moving and vitally important sector. Its experienced and highly skilled insurance writers are well known and respected in the market and their insight is both compelling and valuable.
Insurance Day also produces a number of must-attend annual events to complement its daily output. The Insurance Day London Market Awards recognise and celebrate the very best in the industry, while the Insurance Technology Congress provides a unique focus on how IT is helping to transform the London market.
For more detail on Insurance Day and how to subscribe or attend its events, go to subscribe.insuranceday.com
Insurance Day, Christchurch Court, 10-15 Newgate Street, London EC1A 7HD
Editor: Michael Faulkner+44(0)20 7017 [email protected]
Editor, news services: Scott Vincent+44 (0)20 7017 [email protected]
Deputy editor: Sophie Roberts+44 (0)20 7551 [email protected]
Global markets editor: Graham Village+44 (0)20 7017 [email protected]
Global markets editor: Rasaad Jamie+44 (0)20 7017 [email protected]
Publisher: Karen Beynon +44 (0)20 8447 6953Sponsorship manager: Marcus Lochner +44 (0)20 7017 6109Head of subscriptions: Carl Josey +44 (0)20 7017 7952Head of production: Liz Lewis +44 (0)20 7017 7389Production editor: Toby Huntington +44 (0)20 7017 5705Subeditor: Jessica Sewell +44 (0)20 7017 5161Events manager: Natalia Kay +44 (0)20 7017 5173
Editorial fax: +44 (0)20 7017 4554Display/classified advertising fax: +44 (0)20 7017 4554Subscriptions fax: +44 (0)20 7017 4097
All staff email: [email protected]
Insurance Day is an editorially independent newspaper and opinions expressed are not necessarily those of Informa UK Ltd. Informa UK Ltd does not guarantee the accuracy of the information contained in Insurance Day, nor does it accept responsibility for errors or omissions or their consequences.ISSN 1461-5541. Registered as a newspaper at the Post Office.Published in London by Informa UK Ltd, 5 Howick Place, London, SW1P 1WG.
Printed by Stroma, Unit 17, 142 Johnson Street, Southall,Middlesex UB2 5FD
© Informa UK Ltd 2016.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, mechanical, photographic, recorded or otherwise without the written permission of the publisher of Insurance Day.
NEWS www.insuranceday.com | Monday 14 March 20162
Lloyd’s groups weather worst of soft market
Graham VillageGlobal markets editor
Nimble action and a benign loss record enabled the lead-ing Lloyd’s businesses to compensate for deteriorating
conditions in most of their traditional lines and a tougher investment envi-ronment last year.
Syndicates are looking for new busi-ness in such areas as US excess and surplus lines and specialty, cyber pro-tection and reinsurance that is not ca-tastrophe exposed as they bow to the downturn that has hit property cat, ma-rine, energy and aviation lines.
Alternative vehicles such as Amlin’s Leadenhall Capital Partners and His-cox’s Kiskadee also helped maintain re-insurance income levels.
As the table shows, combined ratios remained impressively low, due in large part to the lack of significant cat losses and also a fairly modest level of large individual risk events. The Tianjin ex-plosions were the year’s largest loss for most players.
The strong underwriting performance allowed many groups to overcome a re-duced investment contribution and post an increase in net profit.
The Lloyd’s operations have risen to the challenge of the softening mar-ket to diversify into new lines and re-gions. Beazley and Hiscox have made a big play for the US specialty market over the past few years and are still in growth mode. A 13.3% growth in spe-cialty premiums at Beazley was fuelled by additional US business, particularly in the areas of cyber, management lia-bility and medical lines. Business writ-ten in the US has increased from 19% of the group total in 2013 to 26% last year.
Hiscox’s retail division posted a 9.5% rise in premiums, also driven by US de-velopment. Retail underwriting now accounts for just over half of Hiscox’s total book.
Amlin added 14.6% to its gross rein-surance premium income, writing addi-tional liability business and special risk classes, including a mortgage contract in Bermuda, as a counterweight to its property cat book. The non-cat compo-nent of the reinsurance book increased to 68% from 58%.
Novae reported record gross premi-um and underwriting profit last year, with all three main divisions deliver-ing premium increases. Growth in the property division was 39.8% as the unit added to its facilities accounts in the US, UK and Europe. And additional political and credit risk business offset softer rat-ing for marine and aviation risks.
Novae said of its 32 underwriting units, 21 delivered premium growth while 11 reduced premium levels.
Company reports underline the depth of the rating downturn. Renewal rates for Amlin fell 4% overall, including re-ductions of 6.7% for reinsurance and 4.9% for marine and aviation. Prices for other non-life lines were down more
modestly because of increases for UK domestic risks.
Beazley identified falls of 17% for en-ergy, 8% for large property and 6% for marine hull. Reinsurance was down 7%, which was slightly less than the firm ex-pected because of higher demand for US windstorm cover.
In special lines, competitive pressure was severe for large-scale liability risks for clients such as global law firms, ma-jor US hospitals and hospital systems, Beazley said.
With more favourable pricing for many specialty lines, the overall fall in rates across Beazley’s portfolio last year was 2%, the same rate of reduction as in 2014.
Hiscox said reinsurance rates at Janu-ary 2015 renewals were down 12% fol-lowed by another fall of 5% this year. But good growth in international, spe-cialty and healthcare, plus income from Kiskadee, helped Hiscox make up for poor property cat rating, and the divi-sion’s reinsurance premium was up 8.2% last year.
Tomorrow’s Companies House brings more annual results and takes a further look at the performance of the top busi-nesses at Lloyd’s.
Table: Selected London market and UK operations, 2015
Gross premiums Change (%) Combined ratio (%) Net profit Change (%)Amlin (£m) 2,744 7.0 89.0 236 –Atrium ($m) 149 (3.3) 81.5 16 59.6Beazley ($m) 2,081 2.9 87.0 249 14.3Brit ($m) 1,999 (7.0) 91.7 16 (na)Hiscox (£m) 1,944 10.7 85.0 210 (2.9)Lancashire Lloyd’s (Cathedral) ($m) 248 (12.9) 56.4 *86 *34.8Novae (£m) 787 23.3 90.8 52 2.6RSA (£m) 6,858 (6.0) 96.0 235 240.6
*underwriting profitSource: company filings/Insurance Day database
Lloyd’s: low losses have helped leading players to ride out the difficult mrket conditions
NEWSwww.insuranceday.com | Monday 14 March 2016 3
PPL begins market testing
London market placing platform has passed ‘quality thresholds’
Michael FaulknerEditor
The board of Placing Platform Limited (PPL) has commenced mar-ket testing of the new
placing platform, it was an-nounced on March 11.
Around 100 market practi-tioners have volunteered to test the platform for terrorism busi-ness as the initiative moves to to-wards going live in that class.
PPL said the system, developed by software firm Ebix, had passed the “quality thresholds” and add-ed the testing would “iron out any final issues”.
The “extensive” testing period is expected to last approximately
five weeks and would allow bro-kers and underwriters to “experi-ence all aspects of the process in real time”, PPL said.
Insurance Day reported last week the contract with Ebix was likely to be signed this month, more than a year after the soft-ware provider was selected to provide the platform.
The placing platform will not be able to “go live” until the contract is signed.
Nine brokers and 44 carriers have signed up for the initial ter-rorism launch.
David Ledger, chairman of the PPL board, said: “We committed to the market we would only be-gin market acceptance testing once all the quality thresholds we had established were passed. The system has done just that, so now it is time to let the practitioners
test it in earnest to iron out any final issues.
“We are very grateful to all the practitioners and subject matter experts who are committing the time to making this project a suc-cess,” he added.
At the end of last year the board of the International Underwriting Association (IUA) unanimously supported the concept for the platform, having signed a state-ment of support for the project.
The IUA’s agreement to sup-port a contract with Ebix to de-velop a placing platform also includes a commitment to fund a one-third share of the costs for this work in 2016.
In September Insurance Day re-vealed the London & Internation-al Insurance Brokers’ Association (Liiba) board, with the exception of one member, and the London
Market Association (LMA) were also backing the PPL initiative.
The 16 Liiba board members have agreed to fund 25% of the start-up cost of the platform, with individual contributions linked to their membership fees.
The platform is managed by PPL, a body established jointly by the IUA, the LMA and Liiba.
The platform aims to be adopt-ed by 95% of London market busi-ness over the next five years.
Ebix beat rival Xchanging to provide the placing service.
The PPL initiative is a long-standing ambition among the London market’s associations. It will allow data to flow securely to and from market participants and is a key component of the London market’s reform pro-gramme known as the Target Op-erating Model.
Acord appoints Marsh’s Pieroni as new chief executive The board of directors at Acord has elected William Pieroni its new president and chief execu-tive. He will replace Gregory Ma-ciag, who is retiring after nearly 40 years with the organisation, writes Sophie Roberts.
Maciag has been named pres-ident emeritus of the insurance industry’s global data standards and services organisation and will be available as an adviser.
Pieroni served as the global chief operating officer of Marsh and was responsible for the firm’s global operations.
In addition to that, he was the chief technology and trans-formation officer across the risk and insurance segment.
Pieroni has significant experience in the insurance in-dustry and a proven track record in helping to facilitate improve-ments in a sustainable manner across a variety of organisations.
Before joining Marsh, Pieroni was senior vice-president and part of the office of the chair-man at State Farm. Before that, he served as Aon’s senior vice-president and global chief
information officer with glob-al responsibility for operations across retail, wholesale and re-insurance brokerage.
His insurance and finan-cial services background also includes stints as the general manager of IBM’s insurance business, as a partner at Accen-ture and as a consultant with McKinsey & Company.
Sal Branca, senior vice- president of AIG and chairman of the Acord board of directors, said: “[Pieroni] is an example of the best in our industry. He is a
OCIL diversifies portfolio with property hireBermuda-based Oil Casualty In-surance (OCIL) has appointed Natasha Pethick property under-writer, writes Sophie Roberts.
Pethick, who will join the re/insurer from Axis Specialty in Bermuda, is experienced in man-aging a diverse book of large property risks.
OCIL began underwriting di-rect property insurance for the energy and mining industries in late 2012.
Jerry Rivers, OCIL’s chief operating officer, said: “More recently, OCIL announced a diversification strategy to underwrite beyond energy company risks and [Pethick’s] ex-pertise will greatly contribute to the successful execution of that strategy.”
OCIL holds a Class 3B li-cence from the Bermuda Mon-etary Authority operating as an insurance and reinsurance company providing a variety of forms of property/casual-ty re/insurance coverage for a broad array of industries with a particular focus on the energy and mining industries.
strong leader with deep knowl-edge of the insurance business and a vision for the future suc-cess of Acord.”
He added: “[His] enthusiasm, passion for innovation and un-derstanding of the limitless op-portunities ahead will bring valuable perspective.”
Maciag said: “With four de-cades at Acord, I am truly proud of our success. The future con-tinues to be filled with oppor-tunities and I can’t think of a better leader than [Pieroni] to continue the Acord journey.”
“With four decades at Acord, I am truly proud of our success. The future continues to be filled with opportunities and I can’t think of a better leader than [Pieroni] to continue the Acord journey”Gregory MaciagAcord
SPECIAL REPORT/MIDDLE EAST & NORTH AFRICA www.insuranceday.com | Monday 14 March 20164 www.insuranceday.com | Monday 14 March 2016 5
Extending the asset baseRequirements for insurers in the Middle East to dedicate more of their investable assets into local equities and fixed income will contribute to creating a larger institutional investor base in the region
Blake GoudMiddle East Global Advisors
Domestic insurers face significant challeng-es when making their investment decisions
and the limited options available to insurers has consequences for the financial markets. Regulations governing insurance globally is reactive in how it incorporates the issues and challenges faced by insurers. However, by looking at new regulations, in the context of the results of a survey of Middle East and north Africa (Mena) re-gion insurers conducted by Middle East Global Advisors, it is possible to identify some of the particular challenges facing the industry.
The survey identified two self- reinforcing problems created in insurance markets that act as a drag on financial market develop-ment: cross-border investments and real estate allocations.
Lack of supportOn cross-border activities, we found there was a severe lack of cross-border regulatory support which makes insurers based in the Mena region highly concentrated on their home markets. With the region having relatively undiver-sified economies and small insur-ance markets, the ability to expand
their cross-border activities is im-portant as a way to encourage bet-ter diversification of risks because otherwise the larger markets face excessive competition while small-er markets are underserved.
The regulations governing the insurance business across mar-kets is different enough to limit cross-border activity in insurance markets which introduces strong single-country exposure in the in-vestments that each insurer holds which leaves them more vulnera-ble. This is particularly important to some of Mena countries, where the intensity of the competition has driven aggregate underwrit-ing profitability down significant-ly, forcing insurers to rely more heavily on investment income.
Insurers’ exposure to real es-tate investments is also a function of limited financial market depth. While most insurers in developed markets hold a significant share of their assets in fixed income, in-surers in the region hold a much larger allocation to real estate.
The survey did not ask specifi-cally about existing asset alloca-tions but did ask about changes expected in asset allocation. More than 38% of respondents, the highest level for any asset class, told us they expected to reduce their exposure to real estate. Our survey found the asset classes where an increase was most like-ly were emerging market fixed in-come, alternative assets and cash.
Regulatory changesWhen we compare these survey results with some of the regulato-ry changes in the region, includ-ing those from the United Arab Emirates’ (UAE) Insurance Au-thority, there is a common thread around the high real estate expo-sure issue. Addressing this issue, and opening markets to more cross-border expansion for insur-ers, the region can help encourage the development of deeper finan-cial markets.
The UAE Insurance Authority’s regulations limit insurers’ real estate exposure to 30% (com-pared to single-digit percentag-es for most global insurers). In designing the phase-in for the new rules, there is added flexi-bility built in for insurers to get underneath this relatively high cap. There is an extended win-dow – three years rather than two – for insurers to comply with the 30% cap and a special exemp-tion available to the Insurance Authority to allow some insurers to maintain up to 40% of their as-sets in real estate, even after the phase-in period ends.
The thresholds and phase-in requirements contained in the new regulations – designed to be in line with the Solvency II regu-lations that applies to European insurers – are not problematic on their own but reflect the issues in the market. By providing a for-malised timeline that requires a
shift away from real estate, it will put even more pressure to see greater finanial market develop-ment in the Mena region.
Mena’s regional financial mar-kets are limited by their lack of an institutional investor base and tend to be quite volatile as a result. The lack of institutional investors is due to the absence of private pensions, limited life insurance penetration (in part because of concerns that conven-tional insurance violates sharia precepts) and the focus of sover-eign wealth fund assets outside their home markets (for reasons related to diversification).
Requirements for insurers to dedicate more of their invest-able assets into local equities and fixed income will not, on their own, create vibrant financial markets, but along with market opening to foreign institution-al investors (particularly in the UAE, Qatar and Saudi Arabia), it will contribute to creating a larg-er institutional investor base.
Parallel moves in the regulatory framework that encourage more cross-border regional insurance companies to develop can enhance the size of local insurers and move more of the insurance company assets into the region and create more active financial markets. n
Blake Goud is chief research officer at Middle East Global Advisors
Towards a workable distribution modelWhile insurance law and regulation in the Middle East may not be keeping pace with the emerging distribution models, developments in recent years have been positive
Simon IsgarKennedys Dubai
Levels of insurance pene-tration in the Middle East are low, but gradually increasing. As a conse-
quence, and also in response to the geographically expanding needs of existing insured clients, inter-national insurers are increasingly looking to the region to grow and build on existing books of busi-ness. They face various challenges, from the regulatory environment to the emerging – but under- developed – distribution models.
The development of distribu-tion models in the Middle East and specifically the Gulf Co-operation Council (GCC) countries remains in its infancy. This presents op-portunities for the London mar-ket, but it is important to choose the right distribution model, tai-lored to the individual business.
As re/insurance regulation is also a developing area, there is a ten-dency for carriers to look to local markets to create distribution mod-els that present a workable solu-tion, while mitigating any potential risks to its larger global portfolio.
FrontingA common (and low-risk) form of entry into the region involves “fronting” with primary (locally licensed) insurance companies, where the underlying risks are then reinsured out of the local markets, normally back to the re-insurer’s home jurisdiction. This model of distribution is popular for medical and life business in the United Arab Emirates (UAE), Oman, Bahrain, Kuwait, Qatar and Jordan. There is a common-ly held view these “fronting” ar-rangements are not legal, but this is incorrect. Locally licensed in-surers are permitted to write and distribute overseas products in their markets within the param-eters of the regulatory and legal systems in place. For example, while the UAE has promulgated
“anti-fronting” laws, these are not enforced, partly to encourage for-eign investment into, and the de-velopment of, the local economy, including the insurance market. Such arrangements are low-risk, but they may also limit the inter-national insurer’s branding and marketing capabilities.
Another method of distribution is through insurance intermedi-aries, which are major players in terms of local distribution. They
include local and international brokers, underwriting agents, tied insurance agents, independent fi-nancial advisers and to a limited extent banks.
One issue faced by this method is the fact locally licensed inter-mediaries are not permitted to deal directly with non-admitted insurers or reinsurers; they are restricted to dealing with the lo-cally admitted insurers. This of-ten presents a practical barrier for the international insurers. This restricted approach is seen in the Dubai market with the re-cently enacted Dubai Health In-surance Law (Health Insurance Law (No 11 of 2013) of the Emir-ates of Dubai). This prevents non- admitted insurers (which have “fronting” arrangements) from dealing with the locally licensed intermediary market, and directs they instruct their cedant to deal with these entities, while making sure proper contracts are put in place between all of the parties, to mitigate any risks associated with these arrangements. Although in-dividual “insurance agents” are recognised as a class of insurance intermediary, there are strict regulations around eligibility cri-teria, with the result that only a very small proportion of insur-ance business is sourced through individual agents in the Middle East region.
As with other regions, the use of e-commerce to sell insurance is becoming increasingly popu-lar – especially for motor, travel, personal accident and other re-tail lines. While e-commerce and
the use of the internet is a very cost-effective and convenient method of selling or soliciting in-surance, it also involves a high risk of mis-selling. One of the tradition roles of an insurance intermediary has been to under-stand the insurance requirement of the prospective insured, and to then recommend the product that best suits such requirement. Using the e-commerce route, and directly selling, increases the chances of the insured purchas-ing a product, which does not fit its requirements. Unlike other ju-risdictions, there is no regulation of comparison websites in the Middle East, and there are sever-al non-licensed entities providing insurance comparison services.
BancassuranceBancassurance is a popular meth-od of selling insurance in mature insurance markets. To date its im-pact in the GCC has been limited, but insurers and banks across the region are now realising its poten-tial, especially for life and health insurance. For example, all local banks, which have an insurance company in their group, have started distributing that insur-ance company’s products through the bank’s branches.
While regulation is still devel-oping in the Middle East insur-ance markets, we have seen some recent positive changes, which are leading towards the implemen-tation of a “Western-style” pru-dential and regulatory landscape. This is true of the UAE, which are promoting new regulations for
insurers’ solvency and financial governance, as well as anticipated conduct of business regulations, which are anticipated to be simi-lar to UK financial regulations.
Saudi Arabia has also a devel-oped a system that regulates both insurers and incoming reinsurers to a very high standard, based on the Saudi Arabian Monetary Agency’s stated goal of achieving a transparent and open insurance market. Dubai (with the Dubai International Financial Centre (DIFC)) and Qatar (with the Qa-tar Financial Centre) have set up financial centres incorporating Western-style regulation, and both of which have had an impact on the distribution channels avail-able to international markets. For example, many reinsurers have set-up in these centres, in order to accommodate their global risk business with a regional approach. Lloyd’s has recently launched a platform in the DIFC to facilitate a regional distribution model.
While insurance law and regu-lation in the Middle East may not be keeping pace with the emerging distribution models, there has been positive progress in the region to address the balance. Recent chang-es by local regulators indicate a willingness to adopt a more hands-on, “Western” style, and princi-ple-based regulatory system. In our view, this will present significant regional opportunities to members of the London and international in-surance markets. n
Simon Isgar is a partner at Kennedys Dubai
While regulation is still developing in the Middle East insurance markets, we have seen some recent positive changes, which are leading towards the implementation of a ‘Western-style’ prudential and regulatory landscape
Adapting to instabilityAlthough political instability and social unrest in the Mena region have yet to have a direct impact on the performance of local insurers, the sense of uncertainty across the region is creating increased levels of economic risks for many companies
Mahesh MistryAM Best
Political instability in the Middle East and north Africa (Mena) region has existed for some time,
but over the past five years it
has become a heightened issue. For insurers operating in the re-gion, the implications have been varied. While some countries – such as those that form the Gulf Co-operation Council – have been relatively immune to long-term political instability others, includ-ing Algeria, Egypt, Lebanon and Tunisia, have experienced signif-icant political instability.
taken by companies to mitigate, manage and financially absorb country specific risks. It should be noted, however, our country risk evaluation does not impose a ceil-ing on ratings in a given domicile.
Operating profitablyFor most local insurers political in-stability and social unrest has not directly affected their operations or performance over the short term. For instance, AM Best rated insurers with operations in CRT-5 countries (such as Algeria, Egypt and Lebanon), which have experi-enced significant social unrest and political instability in the past five
years, have in most cases continued operating profitably and without significant hindrance. However, the political strains that have arisen in these countries have resulted in heightened economic issues as well as financial market volatility.
Economic factors such as infla-tion and foreign exchange move-ments are also critical to insurance operations, and in countries with increased political instability such factors often experience volatility. Inflation assumptions are essential when setting premium rates for long-term policies and can also af-fect sum assured values over time. Additionally, claim and expense
costs are often very sensitive to movements in inflation, with a shift outside of an insurer’s expectation easily able to move technical oper-ations from a profit to loss position.
Furthermore, this type of envi-ronment creates additional risk and challenges for insurers when attempting to determine effective investment strategies. For ex-ample, an insurer operating in a CRT-5 economy with a high level of inflation may be able to gener-ate a seemingly strong investment return of between 5% and 10%. However, in real terms (adjusting for inflation) the return would be significantly lower. In addition,
the risk of a suspension of finan-cial markets, as occurred in 2011 in Egypt, can introduce not only fluctuations in the value of assets, but also create liquidity issues.
Foreign exchange movementsThe scope for significant foreign exchange movements outside the GCC is also increased in CRT-4 and CRT-5 countries, adding a further challenge for insurance companies. For local insurers operating in a single market, for-eign exchange movements may not be an issue as assets and lia-
AM Best’s approach to country risk analysis places countries into one of five tiers. Country risk tier 1 (CRT-1) denotes a stable environ-ment with the least amount of risk, while country risk tier 5 (CRT-5) pose the most risk and, therefore, the greatest challenge to an insur-er’s financial stability. Country risk assessments form an integral part of AM Best’s rating process and in the determination of financial strength ratings for insurers. Con-sideration is given to the impact of economic, political and financial system risks on a company’s op-erations, performance and capital adequacy, as well as the measures Continued on p7 >>
Dubai International Financial Centre: Dubai and Qatar have set up financial centres using Western-style insurance sector regulation
Protests in Tahrir Square, Cairo: the Mena region has seen considerable unrest recentlyHang Dinh/Shutterstock.com
SPECIAL REPORT/MIDDLE EAST & NORTH AFRICA www.insuranceday.com | Monday 14 March 20166 www.insuranceday.com | Monday 14 March 2016 7
bilities would be matched in the same currency. However, in most cases domestic writers purchase reinsurance protection from the global markets, with volatility in exchange rates creating vari-ations in reinsurance cost. To combat this risk, some local and regional insurers look to write risks in a non-domestic currency.
Some insurers have benefited from the regional unrest, taking advantage of opportunities such as an increasing demand for po-litical violence cover offered as riders for existing policies. These risks tend to be underwritten on a selective basis where risk miti-gation measures are in place and are generally priced by the inter-national market, with local insur-ers typically fronting these risks with small net participations.
While the short-term impact of political instability and relat-ed economic and financial sys-tems risks can be absorbed by most Mena insurers, longer-term exposure requires enhanced en-terprise risk management capabil-ities and practices. Many insurers in the region that are rated by AM Best have successfully navigated these issues to date and have a proactive and constantly evolving risk management approach.
Real testIn our opinion, understanding the risks of operating in countries with higher CRT tiers exhibiting currency fluctuations, illiquid asset classes, investment market volatility, high inflation and busi-ness interruption is only one part of the challenge. The real test for an insurers’ risk management ap-proach is the strength and agili-ty of the controls, practices and measures that it puts in place to prevent issues triggering earnings and capital volatility.
Looking ahead, should the envi-ronment of low oil prices persist, it may put a dampener on insurance growth and pressure earnings. We believe the impact of these testing market conditions is unlikely to result in a sudden deterioration in market performance and as such will enable insurers to adapt their strategies as necessary. Rated insurers across the region have largely shown good balance sheet strength, which enables them to absorb market deficiencies over the near to medium term. n
Mahesh Mistry is director, analytics at AM Best
Continued from p5Looking beyond the conventional solutionThere remains a largely untapped market for Islamic commercial insurance products in the Middle East but buyers need to be persuaded Islamic solutions exist and are a competitive alternative to conventional products
Norton Rose Fulbright launched its inaugural report of the Islamic insurance market at
the International Takaful Summit, which took place in London at the end of last month. The objective of our analysis was to gain an in-sight into the mindset of buyers of commercial insurance products across the Muslim world and to assess whether their perception of Islamic insurance matched up to the Islamic insurance market’s understanding of the challenges it faces from a demand perspective.
Our key finding was there is a significant gulf between the use of Islamic insurance and the use of sharia-compliant investments and Islamic finance. The vast ma-jority (96%) of respondents used Islamic finance and 76% invested in sharia-compliant investments, whereas the use of Islamic insur-ance is much less extensive.
Our results also illustrated:• The absence of a broad and
competitive Islamic insurance product range; and
• Inadequate marketing of Islam-ic insurance products as a via-ble alternative to conventional insurance products.
Our questionnaire was sent to heads of risk or financial directors at corporate entities in a number of Islamic jurisdictions. The ma-jority of those who participated were based in Gulf Co-operation Council states (Saudi Arabia, Ku-wait, the United Arab Emirates, Qatar, Bahrain and Oman). How-ever, we also had engagement from entities in south-east Asia and north Africa.
The companies we canvassed ranged in size. Almost half (48%) of our respondents were from large companies with an annu-
al turnover of more than $750m, 31% were medium-sized between $50m and $750m) and 23% were small companies (less than $50m). Those companies were in a broad range of industry sectors includ-ing financial services, engineering and construction, energy, retail and consumer, communications and transport and logistics.
Key questionsAmong the questions we posed to respondents, we asked them to tell us whether they took out in-surance for business-related risks and, as one would expect, the vast majority of the businesses surveyed (around 82%) purchase commercial insurance.
We then asked those 82% who do purchase commercial insur-ance whether they used Islamic insurance – only 30% of those surveyed said they did, which demonstrates there is huge scope for further market penetration.
Of those 30% surveyed, the most popular Islamic insurance prod-ucts were group health, directors’ and officers’ liability, property and business interruption, ma-chinery breakdown and commer-cial general liability. At the other end of the spectrum, none of our sample respondents took out a cy-ber product or a product liability policy. There was also low take-up of trade credit, fidelity and ma-rine hull and war policies.
The majority of the business-es surveyed use conventional insurance either exclusively or in place of Islamic insurance for certain types of cover. The most popular conventional products included group life, group motor and professional liability where-as the least popular conventional products included airport liabil-
ity, aviation hull and war risks and cyber. The appearance of cyber insurance in both lists is confirmation of the generally low take-up for protection against this emerging risk. This is likely to be a question of educating insureds about the particular risks to their business and the extent of the pro-tection a cyber policy can provide.
We asked those respondents who used conventional insurance to tell us whether they would pre-fer to use an Islamic insurance product to cover their risks. Al-most 65% of those respondents were reluctant to adopt an Islam-ic insurance solution. The reasons for not purchasing Islamic insur-ance can be categorised into four broad areas of concern:• Product-related issues;• Education issues;• Competitiveness of Islamic in-
surance products; and• Prudential issuesThe absence of appropriate Islam-ic insurance products was high-lighted as a problem while other respondents considered there was insufficient capacity in the Islam-ic insurance market to cover large commercial risks. Product educa-tion and marketing also appears to be a challenge with a number of respondents saying their broker has never raised the possibility of purchasing Islamic insurance for the risks in question. Other respon-dents were unsure what benefits Is-
lamic insurance would bring them over conventional products.
A further significant issue which appears to prevent respondents from viewing Islamic insurance as a viable solution is pricing, with a number of respondents asserting Islamic insurance is uncompet-itive compared to conventional insurance. Other respondents con-sidered conventional insurance providers offered a better claims service than their Islamic insur-ance counterparts.
The financial strength of Islam-ic insurers appears to be less of a consideration to our respon-dents with very few saying the credit ratings of Islamic insurers were inadequate.
Our analysis confirms there re-mains a largely untapped market for Islamic insurance but buyers need to be persuaded Islamic in-surance solutions exist and are a competitive alternative to conven-tional products. The facilities that are now available in the London market and the ongoing initiatives in local markets will hopefully lead to greater education and a more extensive range of products, which should strengthen the mes-sage Islamic insurance is a viable risk management tool for corpo-rates across the Muslim world. n
Susan Dingwall is a partner and Martin Schneider an associate at Norton Rose Fulbright LLP
A changing marketplaceThe political violence and terrorism risk environment in the Middle East has been undergoing change for some time and the insurance market is now beginning to react to that change
In a highly competitive Middle Eastern marketplace product development is essential for insurers to differentiate themself and to provide new sources
of revenue. To facilitate this development we need a
changing risk environment to provide the platform for innovation. In the political violence and terrorism market we have been witnessing a change in that risk envi-ronment for some time and gradually we are seeing the market react.
In the first quarter of this year there have been nearly 100 terrorism-related incidents. The vast majority of those incidents have not been focused on mili-tary, government or economic targets but on civilians. In addition, the perpetrators of some of these attacks are not affiliated to known groups but are of the lone wolf variety, being extremely unpredictable and harder to protect against.
The standard market wordings cur-rently used provide coverage for physical damage and any ensuing business inter-ruption but currently the protection af-forded by the market for liability and loss of life in emerging market territories is very restrictive.
In addition, clients are increasingly concerned about the impact on their busi-nesses from actions by security forces and governments in quashing attacks or following an incident in restrictions that may be imposed while investigations are carried out.
Business interruptionWhile there may not be any physical damage to a client’s asset, the reduction in revenue from either an imposed secu-rity perimeter or from cancellations or reduced sales can for many businesses be devastating and have a long-term effect on their reputation.
Additionally, we see a greater require-ment for insureds to protect themselves and their employees against any liability or claims for bodily injury following a po-litical violence and terrorism event.
In reaction to this, demand is going to require a complete change in thought process. Since the development of the first terrorism and strike, riot or civil commotion wordings, the principle has been centred on physical damage and ef-fectively writing back the exclusions in an all-risk policy. To move to a more contin-gency or casualty type approach immedi-ately poses a number of problems.
Subscription marketThe political violence and terrorism market is still primarily a subscription market. Endorsing these expansions in coverage is not practical where only a number of markets may be in a position to provide these additional coverages, and it marginalises the market and re-stricts capacity for the main property damage placements.
Moving away from property damage- orientated risks may restrict the re insurance markets that are able to provide treaty or excess of loss protection. Finally, stan-dard loss occurring placements may need amending to a more appropriate claims made basis, again changing the underlying principle of the property damage placement and bringing in other requirements such as retroactive and sunset clauses.
Staying relevantWhile all the above may pose certain hur-dles to the development of the political violence and terrorism product, it is in-evitable that the market will need to move in this direction. The Middle East, outside North America and western Europe, rep-resents one of the key regions within the political violence and terrorism insurance market and it is vital that the insurance market stays relevant.
Now the political violence and terrorism market is established in its own right and is not just an adjunct to either the prop-erty or political risk classes, to expand its offering into contingency and casualty lines and fill a void that exists will provide the next stage in the growth of the mar-ketplace. It will provide much need fresh income and diversity in a class that has plateaued. It will show its detractors that it can react to the changing threat environ-ment, whilst protecting itself from being absorbed back into all-risk placements in the years to come. n
Chris Kirby is principal partner at Newbridge Risk Partners, a division of Castel Underwriting Agencies
Chris KirbyNewbridge Risk Partners
Takaful – time for a change?A raft of regulatory developments and a noticeable shift in market sentiment over the past 24 months will bring significant change to the takaful insurance industry in the Middle East
Peter HodginsClyde & Co
The tremendous growth potential of Islamic in-surance has long been a talking point in the in-
dustry. Global takaful contribu-tions are forecast to reach around $18.5b by the end of 2016, up from $12.2bn in 2013, representing a 14% annual growth rate, accord-ing to EY. Impressive numbers, especially when compared to the traditional insurance market.
However, we have started to see a shift in focus. There have been fewer headlines about fu-ture growth potential and more highlighting concerns about re-turn on equity (RoE). In addition, recent studies suggest the sector is failing to live up to shareholder expectations and on average in-vestors receive a lower RoE than those in traditional insurance.
It remains to be seen if this is an inherent aspect of the taka ful structure or a reflection of the relative youth of the industry. Whether or not future growth will allow takaful operators to off-set their initial start-up costs is a factor which is exerting addition-al pressure on the management of these operators.
What is certain is most taka-ful operators still suffer from a fundamental lack of scale. They comprise just 11 of the 60 insur-ers licensed to operate in the in the United Arab Emirates (UAE), and only 14% of the total written premium in 2014 in the UAE was sharia-compliant. These statistics are compounded when you take into account the fact a few of the larger takaful operators account for a disproportionate share of the premiums.
The outlook for the takaful in-dustry is also clouded by the fact that the regulatory landscape in the Middle East is continuing to develop apace. Indeed, takaful op-erators have highlighted the need to keep up with evolving regula-
tion as the second-greatest risk to their business after competition.
In the UAE new financial regu-lations became effective last year which introduced a risk-based capital model – not dissimilar to Europe’s Solvency II – which re-quire the implementation of a raft of new systems and processes to ensure compliance. Elsewhere, in Qatar a new rule book for the insurance industry will also ush-er in Solvency II-style regulation, while in Saudi Arabia the market in subject to a number of a new regulations including a revised corporate governance code.
The intention of the new regu-lations is clear: regulators want to ensure the industry is financially strong and insurers have a clear vision of the risks to which their businesses are exposed. However, these changes will have a material impact on operating costs and one regulator – the director-general of the UAE Insurance Authority – has gone on record to say that the new rules “will eliminate insurers with small amounts of capital”.
Looking for consolidationAlthough the intention may be to encourage consolidation, there-by removing the smaller players from the market, the reality may not be so simple. Historically, a number of barriers to transac-tions in the insurance industry in the Middle East have existed, including structural issues, mis-matched price expectations be-tween buyers and sellers and the difficulties of due diligence.
In the case of the first, the busi-ness landscape across the region is characterised by the prolifer-ation of family businesses, many of which are large conglomerates with operations spanning a range
of diverse industries. Inevitably, a level of rivalry exists, with any one family business reluctant to enter into a transaction with an-other that may result in confer-ring a potential advantage.
Should these challenges be overcome, there is also a question around the benefits of merging two sub-scale businesses that only been competing on price. Despite this, there are signs of a shift in market sentiment, which could see an increase in mergers and acqui-sitions involving takaful players. In two examples in the region in 2015, Bahrain Kuwait Insurance acquired its compatriot Takaful International and Dimah Capital Investment Company of Kuwait bought Bahrain’s Tazur. The likeli-hood is there will be more to come.
For players that do not wish to consolidate or sell part of their equity to foreign insurers, there remains the option to establish pooling arrangements with other takaful operators across the re-gion. Such arrangements would be potentially beneficial by allowing the operators to share resources, diversify the risks to which they are exposed (through the internal reinsurance of the business writ-ten by each member) and benefit from the technical expertise of the other pool members.
There is a clear evidence such an approach can work – just look at the success Lloyd’s coverholder Co-balt Underwriting has enjoyed. Re-gardless of whether this becomes a feature of the market in the Middle East, it is clear there will be oppor-tunities arising from the regulato-ry changes. For those prepared to adapt to them, at least. n
Peter Hodgins is a partner at Clyde & Co Dubai
There have been fewer headlines about takaful’s future growth potential and more highlighting concerns about return on equity
Susan Dingwall and Martin SchneiderNorton Rose Fulbright
Praying in a mosque: take-up of sharia-compliant insurance lags far behind that of other Islamic financial products
General Re closes six regional property/casualty teams
Scott VincentEditor, news services
Berkshire Hatha-way’s general rein-surance unit, Gen Re, is consolidat-
ing six smaller property/ casualty (p/c) operations into teams in larger locations in a re-structuring of its direct global property and casualty business that it says will facilitate more ro-
bust delivery of services and po-sition the company for the future.
With the consolidation, p/c operations will be discontinued in Charlotte, Seattle and St Paul in the US; in Riga, Latvia; and in Hong Kong and Melbourne in the Asia-Pacific region.
Despite the closures in those six areas, Gen Re said it “remains committed to these markets, ser-vicing clients and pursuing new opportunities across all regions”.
Gen Re president and property/ casualty chief marketing officer, Bob Jones, said: “We have re-
viewed our entire global footprint and, with this change, we are posi-tioning Gen Re’s property/casualty operation to address the realities of today’s markets, while capital-ising on tomorrow’s opportunities.
“When you add technology to the equation, being a direct re-insurer in the 21st century has evolved from where it was two decades ago.”
In Europe, the group said un-derwriting resources will be more centrally organised along five line of business teams that will support the entire region.
BIBA2016
theg 2place...CONFERENCE & EXHIBITIONManchester Central. May11-12
What are you waiting for? Book nowwww.biba2016.co.uk
Principal Sponsors
Includes a seminaron the London Market
in association withInsurance Day
Four unmissable keynotes…6 insurance seminars…a packed fringe programme…the largest insurance exhibition in Europe… a dedicated Young Broker Day…the best networking opportunity in 2016…Manchester May 11 & 12The Go To Place…
insurance age ad _ half page_Ad filler A4 07/03/2016 17:44 Page 1
Allianz appoints new board members Allianz has appointed Jaqueline Hunt and Günther Thallinger as new management board mem-bers to run the group’s asset management companies and in-vestment strategies, respectively, writes Herbert Fromme, Cologne.
From July, Hunt will run the group’s asset management com-panies, including US fixed-in-come giant Pimco.
She takes over from Jay Ralph, who leaves the group in June.
Hunt, who joins from Pru-dential where she was chief ex-ecutive for the UK, Europe and Africa, will also look after Alli-ianz’s US life insurance business.
Hunt’s new role means the number of women in the Allianz board of directors will double to
two on the management board, which is led by Oliver Bäte. She will be joining Helga Jung.
In a second move, Thallinger will replace Maximilian Zimmer-er, assuming responsibility for the insurer’s own investments as well as the group’s global life and health insurance segment, based in Munich.
As the current chief executive of Allianz Investment Manage-ment SE, the asset management company that oversees capital as-sets for insurers, Thallinger is re-sponsible for €636bn ($705.39bn).
Thallinger will step in for Zim-merer at the start of 2017, follow-ing Zimmerer’s retirement at the end of 2016. He has been with the company for close to 30 years.
