Insurance Industry Investing Insurance Surplus Assets Events/Workshop... · Takaful operators have to remain liquid to be able to provide Qard Al Hassan facilities Challenges As an

25 March 2010

Insurance IndustryInvesting Insurance Surplus Assets

Andre Rohayem

Strictly Private and Confidential

Table of Contents

Page

1 Are ME Insurers overcapitalised 1

2 Financial return impact 6

3 Back to basics 10

Section 1Are ME Insurers overcapitalised?

Insurance Industry • Investing Insurance Surplus Assets

Insurance companies in the Middle East are currently considered to be overcapitalised when compared to international companies

2

Surplus ratios of selected international insurance players

183%161%

126% 127% 123%

256% 265%239%

169% 160%

0%

50%

100%

150%

200%

250%

300%

Aegon Allianz Aviva Axa Generali ING Munich Re Prudential Sw iss Re ZFS

Although still highly capitalised, GCC insurance companies have experienced a significant drop in their surplus due to severe losses incurred from investments

Surplus ratio

731%

333% 303% 335%

1200%

469%280%

174%292%

890%

156% 106% 105% 123% 160%

0%200%400%600%800%

1000%1200%

UAE KSA Bahrain Oman Qatar

2007 2008 2013

Section 1 - Position of ME Insurers

Source: PwC Analaysis


Indicative ratios

3

GWP/Equity

65%

157%

75%

144%

61% 46%

100%

258%

141%168%

72% 68%

0%

50%

100%

150%

200%

250%

300%

UAE KSA Bahrain Oman Qatar Kuw ait

2007 2008

Technical reserves/Cash & cash equivalents

495%

189%291%

125%

448%

245%352%

84%

0%

100%

200%

300%

400%

500%

600%

UAE KSA Bahrain Qatar

2007 2008



GCC insurance companies are overcapitalised due to high regulatory capital requirements

4

NYUSD17.3MnUSD17.3MnKuwait

N

Y

Y

N

N

Composite allowed ? (Y/N)

YUSD10MnUSD10MnQatar

NUSD13MnUSD13MnOman

YUSD13.3MnUSD13.3MnBahrain

NUSD27MnUSD27MnKSA

NUSD27MnUSD27MnUAE

Risk based capital ? (Y/N)Non-lifeLife Country

Capital requirements

High capital requirement combined with low GPI contribute to increasing GCC insurance companies’ surplus assets



Low insurance penetration rates require lower levels of capital

5

KSA 0.01%

Kuwait 0.10%

Oman 0.20%

Qatar 0.30%

UAE 0.40%

Bahrain 0.60%

Africa 2.34%

USA 4.01%

Worldwide 4.02%

Europe 4.27%

Asia 4.44%

Low

High

Life insurance penetration

Kuwait 0.50%

KSA 0.60%

Qatar 0.80%

Oman 0.90%

Bahrain 1.40%

Asia 1.51%

UAE 1.60%

Africa 1.80%

Europe 2.93%

Worldwide 2.94%

USA 4.58%

Low

High

Non-life insurance penetration

GCC

Internationalmarkets


Section 2Financial return impact


GCC insurance companies do not have a clear investment strategy

7

-30%4%6%60%Company 5

-

27%

-

13%

-

23%

Debt securities

-5%8%60%Company 6

13%

20%

41%

25%

5%

Unquoted equity securities

20%17%50%Company 7

28%37%15%Company 4

-9%38%Company 3

-58%17%Company 2

17%20%35%Company 1

Real estateQuoted equity securitiesCashLeading insurance

companies Investment mix

Highlyliquid

Illiquid

Hig

h ris

k ap

petit

eLo

w ri

sk a

ppet

ite

Section 2 - Financial return impact


Financial return account for a significant portion of companies’ results

8

Major GCC insurance companies' results

105141 53

129

22

104

24

(100)

(50)

0

50

100

150

200

US

D in

mill

ions

(31) (4)

23 16

6

102

8

(100)

(50)

0

50

100

150

200

USD

in m

illio

ns

KSA insurer

Kuwait insurer

Abu Dhabi insurer

Dubai insurer

Bahrain insurer

Qatar insurer

Oman insurer

2007

2008

130Mn 141Mn 90Mn 173Mn <4Mn> 136Mn 19MnProfit / <Loss>

45Mn 18Mn 57Mn 68Mn <1Mn> 148Mn 10MnProfit / <Loss>

Net underwriting income Net investment income Other income-gain / (other expenses-loss)



Takaful companies face additional challenges due to the nature of their business model

9

Policyholders' contributionsPolicyholders' contributionsShareholders' capitalSources of funding

Limited availability of long term Islamic bonds to match products like annuities and pension plans

Lack of clear and strict regulatory requirements in some countries do not restrict companies from aggressive investment behaviours nor subject them to solvency margin requirements

Takaful operators have to remain liquid to be able to provide Qard Al Hassan facilities

Challenges

As an alternative to long term Islamic bonds, companies invest in real estate

Companies generally hold significant equity positions

Overcapitalised companies do not always maintain sufficient short term and liquid assets

Current investment behaviour

GCC Takaful companies' investments

Shareholders' funds

Policyholders' funds

General funds Family Takaful funds

High risk investments due to illiquid and volatile classes of assets

High risk investment positions due to highly volatile class of assets

Inefficiencies in portfolio management

Risks and implications


Section 3Back to basics


The financial crisis has come as an unwelcome jolt for customers, investors, regulators and governments, creating scepticism and uncertainty and spurring the stakeholders to take a harder line with insurers

11

Customers Regulators

Investors Government

Insuranceindustry

Faith of customers and confidencein financial institutions have givenway to shock, disillusionment and caution

The pursuit of innovation and capital efficiency has given wayto a focus on stability and risk management

The intensity of supervision is increasing and the crisis has ledto a review of the mark-to-market valuationAlthough governments are

eventually likely to divest theirholdings in supported insurers, their influence across the sector will persist

Section 3 - Back to basics


PwC’s and CSFA Insurance Banana skins survey highlighted a shift in risks perceived by insurance companies following the financial crisis

12

Risks 2009 ranking

Investment performance

Equity markets

Capital availability

Macro-economic trends

Too much regulation

Risk management techniques

Reinsurance security

Complex instruments

Actuarial assumptions

Long tail liabilities

Interest rates

Managing the pricing cycle

Managing costs

1

2

3

4

5

6

7

8

9

10

11

12

11

13

26

-

1

14

27

19

8

7

22

5

2007 ranking

Total sample

2

1

3

4

6

8

8

9

7

5

Middle East and Asia

2009 ranking



The insurance industry lifecycle and the financial crisis have changed the industry’s landscape, and there are direct implication on where should Insurance Companies direct their investments in the long term

Main features of the new environment

13

Two Three

Five

Increasing Insurance

Awareness

Four

Six Eight

Focus on Underwriting Profitability

Awakening of M&A

Nine

Reducing Cost

Five

Increasing Insurance

Awareness

Six Eight


Awakening of M&A

Nine

Reducing Cost

One

Manage Risks

Two Three

Improving Investment

Management Function

Invest in Human Capital

Four

Update Sales & Distribution

Models



A reshaped industry – Where to Invest

Emerging trends in the GCC are emphasising on the need for risk management as a key learning outcome from the crisis. Key trends are:

• The financial crisis uncovered to insurers that they lack a comprehensive view of their risk exposure

• Insurers are seeking to improve or maintain their rating

• Regulators and rating agencies are requiring insurance companies to establish risk management frameworks

Managing Risks

Implication • Measure economic capital to generate an optimal capital allocation (applied to insurance and investment operations)

• Establish effective Enterprise Risk Management (including risk profile and risk appetite)

14

OneSection 3 - Back to basics



As a result of the general decline in investment markets, insurance companies investments have been subject to significant impairment losses.

Equally, a mismatch between assets and liability did not allow an optimal investment strategy in addition to a liquidity risk that companies could face.

Improving Investment Management Function

Implication

15

• Define clear investment strategies in line with overall strategic objectives

• Link insurance operations and investments mix through robust asset liability management while optimising investment returns

• Improve asset quality identification process and investment performance measurement.

TwoSection 3 - Back to basics



Coping with business growth, more sophisticated demand, and increasing requirements from regulator is becoming very challenging with the number and level of available resources.

The insurance industry requires specialised technical and behavioral skills that cannot be easily developed from experience outside the industry

Such lack of availability of insurance human resources is one of the main challenges facing insurers in the region

Invest in Human Capital

Implication

16

• Manpower planning to properly manage growth

• Invest in employees training programs

• Focus on talent management and performance appraisals to retain top talents

• Embed employee’s satisfaction within Companies’ strategies

ThreeSection 3 - Back to basics



Insurers in the region have weathered the economic downturns better than other financial institutions mainly due to the sector’s strong fundamentals (low penetration rates and market potential)

Nevertheless, the market growth is less than expected due to the crisis.

More importantly the market is becoming increasingly competitive and gaining market share requires appropriate strategies to be implemented backed by enhanced sales methods

Update Sales & Distribution Models

Implication

17

• Increase speed to market through customer segmentation, process optimisation and automation supported by robust CRM tools

• Leverage on bancassurance distribution channels, introduce adequate remuneration schemes and appropriate pricing strategies

FourSection 3 - Back to basics



Current low penetration rates in the GCC countries are the main driver for future growth. For penetration rates to increase, customers should have a more risk and insurance awareness culture. This awareness is currently increasing.

As new insurers are being established, marketing of insurance products is becoming more effective and customers are exposed to an increasing insurance environment

This may lead to changes in existing large insurers market shares, leading to a significant reconfiguration in the list of leading players.

Increasing Insurance Awareness

Implication • Investments in Marketing tools such as CRM to establish strong market position and brand awareness will enable companies to reach out to customers and create loyalty.

18

FiveSection 3 - Back to basics



Regional insurance companies have had low retention ratios and their profitability mainly driven by reinsurance commissions and investment income


Implication • Moving forward, insurance companies should focus on improved andsustainable underwriting profitability through:

– introduction of new products and innovative distribution channels,

– enhanced product pricing through robust pricing engines,

– robust underwriting philosophy differentiating between new and renewal business,

– optimised reinsurance programs, and

– recruitment of appropriate human resources.

19

SixSection 3 - Back to basics

Insurance Industry • Investing Insurance Surplus AssetsSide 22


There are strong underlying rationales for consolidation and restructuring within many markets.

Most markets are still in their early maturity stage and consolidation would be expected following increasing maturity levels.

Awakening of M&A

Implication Insurers are expected to actively search for attractive opportunities to acquire insurance companies/portfolios in order to achieve:

• Growth in market share and economy of scale

• Increasing investments in core operations

• Synergies

20

SevenSection 3 - Back to basics



Many companies reacted quickly to the financial crisis with attempts to align revenue and costs

However, broad-based cost cutting efforts could have damaging tactical and strategic consequences, both in the short and long term.

The foundation of any effective cost cutting initiative is a systemic understanding of people, processes and technology, with a primary focus on carefully adjusting cost drivers.

Reducing Costs

Implication Introducing cost reduction initiatives contribute to enhance profitability through increasing efficiency allowing optimal positioning in ancompetitive market.

21

EightSection 3 - Back to basics

Documents

Insurance Industry Investing Insurance Surplus Assets Events/Workshop... · Takaful operators have to remain liquid to be able to provide Qard Al Hassan facilities Challenges As an