With the renewals in mind, the Dubai Rendezvous was timely in flagging the need for the reinsurance industry to review its ways of doing business, and place risk management as a priority and get it integrated into pricing and profitability.
Even as Dubai develops as a reinsurance hub, speakers at the Dubai Rendezvous called for the reinsurance industry in the region to look at ways of improving its efficiencies and step up to its role of contributing to the economy.
Mr Arif Amiri, CEO of the DIFC Authority said in his keynote address that despite the growing volume of premiums generated from DIFC-based insurers over the years, there is still plenty of work to be done. He said that a mature reinsurance sector is the backbone of a successful economy, and hence should be standard bearers, for example in attracting more UAE nationals to enter the industry.
Mr Scott Lim, Associate Director with the Dubai Financial Services Authority (DFSA) said that Dubai should not rest on its laurels given the number of challenges facing the economy and the insurance sector. As reinsurance products become commoditised, reinsurers should look into covering emerging risks, he suggested. Reinsurers should also review the way contracts are bound and look for opportunities to increase efficiency and optimise client experience, he added.
Dr Bassel Hindawi, Chairman/ CEO of the DIFC Insurance Association, said that business has to be looked at beyond just “a lower price with same or better terms”. He explained: “There must be a win-win for both partners to ensure sustainability and not short-termism. Risk adequate pricing should be the critical success factor for the industry, no matter how close the relationship.”
He added that aside from being a lobby force, “we’d like to see the Association become a representative body of the insurers, reinsurers and brokers operating in the DIFC internally and to develop into an excellent hub to serve the industry in the region every which way. We remain open to great new ideas as we move forward given the critical challenges facing the region”.
Pressures on the industry
Speaking on a panel, Mr Pantelis Messolonghitis, Head of Reinsurance with Oman Insurance Company noted that while plenty of capacity exists, “it still tends to be finite…there’s a lot of room for companies to do significantly more, as long as they have the appetite to do so”. For example, companies in the DIFC could venture beyond the GCC and look at writing risks in Africa or even Asia.
Another panellist, Mr Lazhar Charfeddine, Chief Reinsurance Officer with Abu Dhabi National Insurance Company, said that companies need to look into niche products to avoid competing for the same business. He also called for more dialogue to overcome some of the problems facing the reinsurance sector.
Mr Ali Karakuyu, Associate Director, Financial Services Group, EMEA with Standard & Poor’s (S&P) pointed out that the renewals so far have seen rates dropping about 5% generally but as those reinsurers which are well-capitalised and diversified are quite well-prepared for the challenges, S&P does not expect many rating actions over the next 12 months.
Given the excess capital and regulatory changes, companies may have to think about whether it is viable to continue on their own or look at merging. “Smaller, more concentrated reinsurers will need to carve out their competitive positions while protecting their capital and bottom lines, and could be candidates for future consolidation,” he added.
Risk management needs higher priority
Integrating risk management with effective use of capital is required for insurers dealing with a tough operating environment in the short term. In the medium term, there could be consolidation of insurance companies in the regional market, said Mr Prasanna Seshachellam, CEO of compliance and risk management firm, THEJAS Consulting.
Although insurers in the region have been making significant progress in building risk management structure and functions, there is still a critical need for them to give higher priority to risk management, he said.
Mr Seshachellam added that depressed commodity and energy prices, slower global economic growth and the need to sustain business imply a need for a high level of diligence and focus on risk management. He observed that declining government spending will reduce capital and liquidity available for investments, which will lead to a slowdown in business in the general insurance segment in particular. And with the capital squeeze, companies might have to borrow to fund their expenditures: “They are not only reducing capital…they are also entering the debt market.”
With liquidity expected to tighten, economic growth could slow, and this combination of factors would result in fewer underwriting opportunities for insurance players, he said, adding that the situation would be challenging for the insurance industry in the near to medium term. This would require insurance companies to pay more attention to factor in the cost of capital when pricing.
The pressure from multiple directions could trigger the much-expected consolidation of insurers in the regional insurance industry, which “could be a positive outcome”, he said.
The value of Lloyd’s
Nine months since its launch in the DIFC, Lloyd’s is gradually strengthening its foothold with 11 syndicates, said Mr Mark Cooper, General Representative Middle East, Lloyd’s. There is now one official Lloyd’s broker in the region (Lockton) and Lloyd’s is encouraging more brokers to come on board, he added.
Mr Cooper said that it is “very important” for Lloyd’s to add value to its market participants, from underwriting agents to syndicates, and it is currently trying to ascertain what it should do going forward in terms of data management, improving efficiencies and other areas.
Lloyd’s is in the process of finalising its regulatory framework with the DFSA. Currently, managing agents are separately licensed by the Authority, which has been examining other models of regulating Lloyd’s, such as the one adopted in Singapore, said Mr Lim.
Underinsurance: a global conundrum
The proportion of uninsured losses to total economic losses over the past 30 years suggests staggering gaps in insurance in both mature and emerging markets, said Dr Kai-Uwe Schanz, Special Advisor to The Geneva Association.
The root causes for this are economic reasons, lack of awareness and affordability, immature regulations and limits to insurability. He said that promoting financial literacy and building public-private partnerships are some solutions to these issues.
Dr Schanz added that the absence of major natural perils and the existence of generous government support schemes make underinsurance less of a problem in MENA. However, the deteriorating fiscal positions of countries in the region resulting from plunging oil prices as well as the accumulation and concentration of commercial and personal assets could change things.
The need for quality data in CAT modelling
Data scarcity is not a serious issue in modelling CAT risks in the MENA region as there is a wealth of information gathered by academics, government institutions and even utility providers, which have not been tapped by the insurance industry, said Mr Ahmed Rajab, CEO, MENA and Turkey, Aon Benfield.
Dr Praveen Sandri, Managing Director and Senior Vice President, AIR Worldwide India, said that CAT models are designed in such a way that does not require much data. “What a CAT model does is create an ensemble of scenarios in the absence of data,” he said. “At the end of the day, CAT models are based on assumptions…and it is up to us how to interpret and use the model results.”
Dr Mohammad R Zolfaghari, Director of CatRisk Solutions said that better data is still needed to model CAT losses. “At the moment, the situation with data is quite bad even for the UAE, where there are newer buildings. For example, you may only know that a building is a commercial building, but you don’t know the number of storeys, the construction materials, age and so on – but we are getting there. If we don’t have such data, modellers have to assume it’s an average building and this will lead to unreliable results.”
Responding to a question on the emerging uses of modelling, Dr Sandri noted that cyber risk is coming up as a big risk which AIR started looking into two or three years back. However, modelling such risks are “multiple times more complex than Nat CATs”, which have geographical limitations. The company is expecting to launch a probabilistic cyber model by 2017 in collaboration with two market leaders, he disclosed.
The Dubai Rendezvous was co-organised by Middle East Insurance Review and the DIFC Insurance Association with the theme “A Brave New World of Reinsurance in the Middle East”. Event sponsors included S&P and THEJAS Consulting.