2012’s soothsayer

How I wish that the end of year results would prove me wrong because that would mean that insurance companies in the United Arab Emirates performed better than expected.

I had lunch with a chief underwriting officer of one of the local ‘A’ rated insurance companies in UAE recently and, inevitably, our conversation focused mainly on the performance of certain companies as we approach the end of 2012.

Previously I have alluded to 2012 being the year of reckoning for the UAE insurance industry for a number of reasons, one being that once the investment crisis softens industry leaders would not have a crisis to blame for their relatively poor results.

Another reason is that some hardening in the real competitive arena of this market (the reinsurers behind local capacity) would adversely affect results that are largely reinsurance commission dependent.

A cursory look at the half-year results of around 30 conventional and Takaful companies active in the UAE immediately reveals that almost half of them suffered a drop in their net earned premium, an increase in their net incurred claims, a drop in their net underwriting income and/or a drop in their net profit.

These statistics are even more pronounced because four out of the five top companies in the UAE – controlling over 60% of premium income – all suffered an increase in net incurred claims and deterioration in their net underwriting result and net profit.

The one company, out of the top five, that didn’t continues to follow a philosophy of ‘If safe is good although safe is boring, then boring is good.’

Despite its equity it continues to cede proportionately more to reinsurers as they grow with the boring and unspectacular consistency of a postman on the beat.

From information available, some of the companies that do not publish results have not fared much better either. So, all are more or less in the same boat.

The prevailing technical results, the continued reliance on reinsurance (not only for capacity but for expertise and pricing) and the general all-round mediocre service expose a perennial problem that the market continues to turn a blind eye to. There is an acute shortage of talent in the market at all echelons.

This impinges not only on the technical capabilities and horizons of a company but on the more seminal issues of governance and principle-driven behaviour that should be led more by the spirit than the letter of the law.

The few companies that have a compliance function in place have one that is subservient to legal or management.

Although incumbents would perhaps vehemently disagree, there is a shortage of technical talent even at chief executive or general management level.

A major stakeholder in one of the local UAE companies recently succinctly described this as an “inverted funnel vision” wherein some, even senior insurance practitioners, frustratingly would not recognise an opportunity if it looked them in the eye if this required them to think outside the box.

It all boils down to lack of talent, lack of talent development and an overall culture where they felt comfortable.

A pessimist may call it a market of losers. I prefer to call it a market of immense opportunity. When one has hit rock bottom the only onward direction is up.

Sadly, many continue to languish lethargically in their status quo when the regional market has started to pick up again after the economic crisis. It is not rocket science that the UAE insurance market needs a different frame of mind. But how many acknowledge this? And who should be driving it?

If 2012 has exposed losers among the insurance companies, it has also exposed the regulatory authority’s continued procrastination as a contributing factor to the current state of the market.

One, of course, cannot blame it all on the regulator; but much needs to be done at regulatory and supervisory authority to harness an energy that is currently all revved up with many places to go but can’t somehow get into gear.

The biggest loser in all this is, sadly, the client. As we quibble over Directive 2 and the new draft broker legislation, other more important areas of consumer protection, such as adequacy of reserving, solvency testing, segregation of short-term from long-term reserving and the much needed technical supervision of insurance companies and brokers, transparency in pricing all remain in abeyance.

The journey is not for the faint hearted. Who will take the first step?

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This entry was posted in ERM, Governance, Insurance, Middle East. Bookmark the permalink.

One Response to 2012’s soothsayer

  1. rogerbickm says:

    The continued reliance on outwards reinsurance is a major point well made James. If the local companies do not share in the risk then underwriting skills locally won’t develop; a point I made in my own blog recently following a visit to Jordan http://rogerbickmore.com/2012/10/15/on-opportunities-and-challenges-in-the-middle-east/ . Roger

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