Insurance industry should aim at core competence

The year 2005 had set some sort of record in terms of the quantum of claims paid through natural disasters, with hurricanes Katrina, Rita and Wilma together picking up a mammoth loss figure in excess of $80 billion.

When the industry suffers such massive losses it is not uncommon to find some insurers experiencing a "capital drain" which leads to shrinkage in capacity or shortage of supply. Usually this is the harbinger of good fortune for prospective investors as the cost of insurance will increase at renewals, caused by the demand outwitting the supply. The insurance programmes are then expected to be renewed at higher prices when insurers can make more profits.

Contrary to general expectations however, the reinsurance capacity worldwide has increased by more than 7 per cent, according to an expert analysis made by the New York branch of stock broker Merrill Lynch, when they cautioned investors against being overexcited.

Notwithstanding the increase in capacity, the insurance cost for the corporates in the United States could still increase sharply and for those in Europe, there could be a mild increase in the range of 5 per cent to 10 per cent. Investors could therefore expect to have the same return on equity in the year 2006 to the tune of 16 per cent, as they had in the year 2005, as per the projections made by Merrill Lynch.

The Middle East region was fortunately saved from any major natural disasters though it still suffered from the impact of some major fire losses especially in some of the commercial complexes and warehouses.

A small percentage of international cost increase however does percolate down to the region as the market is mostly driven by reinsurers.

The insurers in the region who were expecting tightening of strings during this renewal season have therefore heaved a sigh of relief when most of the treaties were renewed smoothly. Unlike the last three years post September 2001 the year past has been a gratifying one for the industry with both direct insurers and the reinsurers doing business in the region making handsome returns on their investments.

For the direct insurers, their results were augmented by the excellent investment income most of them made through judicious use of surplus funds dabbling in a booming stock market. In the coming months when the insurers come out with their annual report cards, we are likely to witness some unusually pleasant surprises; some of the major players in the region would be generating up to 80 per cent of their total premium as investment profits. The net profits for some could even exceed their total premium income!

In recognition of the financial boom experienced by the region and the economic deregulations being unwrapped by the authorities here, we are also witnessing the extra interest displayed by some key regional and international reinsurers in opening up new offices and sparing additional capacity for the region.

While Alliance Re and Takaful Re (a subsidiary of Bahrain headquartered Arig Re) and Watkins Syndicate from Lloyds have set up offices in DIFC, General Insurance Corporation of India has opened a branch office in Dubai. Generalli, the Italian major which ceased operations in the region few years back, are reportedly planning a come back to reap the benefits of the newfound confidence in the market.

Solidarity Re, based in Bahrain, is another major regional reinsurer sparing enormous capacities for the risks in the region, especially for the new markets being opened up in Saudi Arabia. Within Saudi Arabia too, a local reinsurer Cooperative Re is being planned to be set up with 300 million Saudi riyals as capital.

The clients in the region therefore can continue to look forward to soft market conditions prevailing for the whole of 2006 as many insurers would like to pass on some benefits from the booming investment climate to the insuring customers.

The insurers and reinsurers in the region, however, should be more cautious in pricing the risks as the tendency to subsidise the technical costs from the investment profits should be curbed to the maximum.

It is better to be reminded of the old maxim that core competence is derived by efficiently running the core operations underwriting in the case of insurers and make technical profits out of insurance for the continued prosperity of a going concern.

- The writer is Deputy General Manager with Al Rajhi Company For Cooperative Insurance, Riyadh. The views expressed herein are his own and not necessarily subscribed to by his employers.