The decision to place Arab Insurance Group in run-off paints a bleak picture of the Arab (re)insurance sector, with far-reaching consequences that should not be taken lightly.
This year marks Arab Insurance Group’s (Arig) 40th anniversary. A poignant reminder considering that the company’s shareholders have decided to cease writing reinsurance business and are looking for a buyer to take over the firm while it’s in run-off.
Arig was founded in 1980 with the aim of creating a reliable Arab reinsurer capable of filling the gap in the market and contributing to the development of the regional insurance industry.
“In its early days, Arig stood out as a serious reinsurance player with great potential. It was a dream that came true for the Arab insurance markets,” said General Arab Insurance Federation (GAIF) secretary general Chakib Abouzaid, who was the former CEO of Takaful Re, a subsidiary of Arig.
Arig embodies the most important pan-Arab insurance project, he said. “The goal was to create a reliable reinsurance company that stood for the region’s aspiration in building regional capacity, and consequently improving the industry’s standards.
“This was materialised in the early days of setting up Arig. The company, from the start, had all the success factors, including a state-of-the-art infrastructure, talented professionals and a strong organisational body which helped it to create a strong presence in the reinsurance market.”
Gulf Insurance Federation secretary general Fareed Lutfi, another former Arig employee, noted that the region had always been looking for ways to retain premiums.
He said, “Arig was well established and became the solution to the ongoing debate on how the regional industry could retain earned premium. This was a major contribution. Arig stood as a positive example of what could be accomplished in the region’s industry.”
The root of the issue
Despite the promising start, Arig has had a chequered run, said some industry professionals.
In a series of articles published in Al Mal newspaper, Trust Reinsurance Broker executive chairman Ibrahim Shahid, who was formerly in charge of Arig’s facultative operations, explained in detail that the fate of Arig is the result of several strategic missteps committed by the company’s shareholders and top management over the years.
Among examples he cited, Mr Shahid lamented that strategic decisions such as launching a subsidiary in the London market competed with the parent company with time. Another misstep was investing in direct companies, which saw Arig taking over controlling stakes in several direct insurance operations in Bahrain, Egypt, Jordan and Lebanon. He said such a move affected cedants’ confidence as Arig was seen as a competitor in the guise of a reinsurer.
Mr Abouzaid noted that Arig was not agile enough when it came to adapting to market norms and client needs. “With time, the company’s business model was losing ground as it continued to rely heavily on treaty business at the expense of facultative operations, specialty lines and profitable lines of business, where the market norms were headed,” he said.
“At the same time, offering counselling and consultations was not a very strong pursuit of the business as it was supposed to be.”
In that respect, the company lacked a clear, strategic vision and a proactive approach to adjust to the market conditions, he said, “which resulted in having a business model that is no longer profitable”.
Mr Abouzaid pointed out that there was a failure to ensure consistency with regard to certain projects – whether direct operations or regional offices. Arig opened in Hong Kong, Kuala Lumpur, Tunisia and Singapore, then shut them down – some due to rating downgrade, others for economic considerations.
Takaful Re, Arig’s subsidiary, was a very promising project, said Mr Abouzaid. He served as its CEO since day one. “Takaful Re was a pioneer initiative having the first-mover advantage and strict compliance with shariah. However, the business model was designed to benefit first the parent company; therefore, Takaful Re struggled with Arig whose board of directors was keen on generating quick dividends. Despite several success factors in the early days of its set-up, Takaful Re was not given the chance to prove its potential. Other reinsurers established their own retakaful arms and were able to succeed.”
Impacts of the run-off
One of the major impacts of Arig’s withdrawal from the market is the diminishing of Arab reinsurance capacity, said Mr Abouzaid.
“Although Arig was a follower capacity, the company had built a reliable brand as a strong regional reinsurer. It was a main block in building the region’s capacity and increasing retention of reinsurance premiums within MENA.”
There is also a reputational impact on the region’s reinsurance sector. “The region has witnessed the departure of a handful of reinsurers such as Egypt Re (which ceased operations in its 50th year in 2007), Best Re, Emirates Re and Takaful Re, while other prominent brands have been struggling with serious problems. This would certainly shake the confidence in the Arab reinsurance industry. It ruins the reputation of reinsurers in the region and questions their sustainability,” Mr Abouzaid said.
Losing the big brother
Mr Lutfi believes the decision to shut Arig has multifaceted consequences. “Technically the impact has been minimal. Arig stopped underwriting more than a year ago, while the shareholders awaited the final decision from the regulators. Truthfully, the region has lost a stable locally-based reinsurance supporter, but technically there are many available reinsurance options that have been doing business with regional companies for years, so these providers can easily fill the void.”
However, “morally, the impact was quite significant. For nearly 40 years, Arig had provided knowledgeable support for the region and beyond. Arig was the ‘guy next door’ and a ‘big brother’ in so many ways – it was approachable, had an understanding of the culture, with the bonus of having international connections, insight, expertise and ability”.
When such a prominent player in the region exits the market, there is a profound sense of melancholy and loss among those in the industry, said Mr Lutfi.
Is run-off avoidable?
Based on his experience with Arig, Mr Lutfi, who left the company in 1997, said he witnessed competent management of the reinsurer.
“Until very recently it was still solvent. A company can lose financially in some areas but that does not mean it goes into liquidation. In Arig’s 40-year history, it was in the red only a few times, which is not unusual, particularly for a reinsurer. Natural disasters, catastrophes and big losses can all affect a business entity. Take the COVID-19 global pandemic, wildfires in California, and the devastating blast in Beirut, for example. Some years, companies show a profit and some years they show a loss – that does not mean a company is insolvent.”
Mr Abouzaid believes Arig has failed to meet its shareholders’ expected returns. “This is especially with non-governmental shareholders who were dismayed by the modest returns. I would say this is mainly because they were more of speculators who sought return on equity. Hence, shareholders should have taken one of two options: either restructure the business in a way that meets their goals, or sell the operation altogether, instead of causing the damage we are seeing today.”
Human capital powerhouse
Many insurance professionals in the industry today, including several top senior executives in the region, are former Arig employees, said Mr Lutfi.
“Many have benefited from Arig’s progressive graduate trainee programme, which started in 1981 to give practitioners a solid industry foundation. Many current and retired professionals in the industry owe their start to Arig. The company’s training and corporate environment have enabled many to make (re)insurance their lifelong career,” he said.
“The company encouraged the Bahrain Institute of Banking & Finance to include insurance training in its curriculum, which is still ongoing. Arig was a talent builder across all nationalities; many expatriates returned to their home countries after making a name for themselves working at Arig.”
The Arig network is a strong one – current and former employees would meet, collaborate and interact with other industry professionals across the globe. “Networking is a major asset in our industry and Arig had the profile of a regional leader and global player, which facilitated this networking capability,” said Mr Lutfi.
Arig was a school for professionals, said Mr Abouzaid. “Shutting down this entity is like closing the doors of a great school. Arig has created a great cadre of executives, many of whom are at the helm of successful organisations. On a different scale, the impact of closing down Arig on the Bahraini workforce is substantial.”
Lessons to learn
An organisation is only as good as its worst player or its weakest link, said Mr Lutfi. “Look at your team players to determine if the team is cohesive and all are on the same playing field. So often the ‘referees’ are not well-versed in the industry and might not even know the rules of the game. In any business, attention to detail in good times is a mark of good leadership and teamwork, which will keep the ball rolling during the hard times. In other words, identifying and fixing that weak link is a lesson for us all.”
Mr Shahid, in his commentary in Al Mal, stressed that it is unfair to hold the last management fully responsible for the current fate of the company. He pointed out that the unfortunate outcome is caused by poor strategies and practices over many years.
Mr Abouzaid said, “Arig could have continued its run and grown further with long-term vision and commitment from all stakeholders to prove that as an industry we are capable of building success and making a difference.” M
More could have been done to save Arig
Insurance and reinsurance consultant Amer Daya shares his views about Arig’s predicament.
Arig brought serious reinsurance capacity to the region at a time when most substantial capacity was offered from the international markets. What’s more, the company provided Arab markets with a new, highly visible ambassador that was able to wholesale MENA insurance portfolios in mature reinsurance markets and on their own turf.
The company was a regional pioneer in writing specialty risks, aviation, space, energy and
liability from Bahrain and other offices it established later on. Such risks were usually exported to London and European markets after local cedants retained single digit percentages or were altogether exported against a risk-free fronting fee.
Dealing with the run-off
With the run-off, local insurers will lose treaty and facultative support, and the presence of a local reinsurance adviser. Furthermore, Bahrainis and other residents will lose highly-skilled jobs.
Bahrain and the MENA region will lose one of its established financial icons that Manama became well-known for. Arig was also an industry school that graduated many talents and skills. The long-term effects of this will be felt for many years to come.
Furthermore, Arig also has to consider its staff future concerns and cedants’ outstanding indemnity settlements. An overall subversive atmosphere could result in settlement processes getting delayed and complicated. This might damage what is left of the reinsurer’s good reputation.
Could it have been avoided?
The run-off decision may have been avoided if the company had presented a three-year restructuring plan to the regulator detailing a fresh strategy and vision. This strategy could include distancing the company from long-tail liability risks, weening it off its faltering Lloyd’s business and refocusing it back on MENA bread and butter treaty and facultative markets.
The board can forge a prudent business plan to replace unprofitable revenue from overseas markets with the less volatile portfolios of local cedants and work on improving loss ratios and reducing expense costs.
In addition, the digital transformation of its business model will allow the company to improve margins to better serve its surrounding and future markets.
Furthermore, the company’s major shareholders represent three oil wealthy Arab states; these governments could have approved exceptional additional funding to finance such a plan and allow it to emerge from the current difficult operating environment. These governments could have even influenced commercial and insurance entities within their own territories to ensure Arig remains their reinsurer and partner of choice.
Finally yet most important, the board is made up of influential businessmen who could through their own connections locally and overseas steer valuable business towards the reinsurer, thus enriching their own stake in
Lessons for the sector
Insurance and reinsurance go through times of soft and hard cycles. Therefore, a provider must factor in economic and financial volatility in their markets in addition to anticipating natural hazards, their severity and frequency.
Providers also must focus on local markets before looking over the horizon, diversify into classes that increase technical margins first and should not depend on investment returns to mitigate underwriting losses. They also must enforce the tightest ship in managing operations and create value for shareholders in every expansion. Finally, staff must be encouraged to become shareholders and equity stakeholders. M
Mr Amer Daya is an insurance & reinsurance professional with almost four decades of industry experience within the Middle East, GCC and UK.