Dubai: For an industry that has risk assessment as its core area of expertise, one intangible — luck and oodles of it at that — seems to have helped it sail through what has been an intensely testing phase.
How else can one account for the Middle East insurance sector's emergence from the recent political turbulence and fears that the world is headed for another recession with equanimity?
By right, the region's insurers should have been grappling with the higher premium associated with risks they are taking into their books. However, except for a brief period in the aftermath of the Arab Spring earlier in the year, premium rates across all major insurance classes have held the line.
Can this good run continue for the industry? Or will 2012 present a vastly different set of realities?
Justin Balcombe, principal and insurance leader for the Middle East and North Africa territory at Ernst & Young, offers his risk assessment for the industry ahead of this year's Insurex conference, which opens this month in Dubai.
Gulf News: Surprisingly, the regional "situation" does not seem to have translated into an across the board firming up of premium rates, and even on cargo it wasn't anything dramatic. Could it be that the global insurance industry has taken the current Middle East risk situation in its stride?
Justin Balcombe: Premium levels will most likely increase across the board globally as we move into renewal season. The Middle East will not be immune to these increases, particularly in the re-insurance markets and specialty lines such as marine.
The number of major global catastrophes, including Middle East regional risks, has resulted in a significant increase in claims and associated costs for this calendar year, which in turn has placed constraints on some parts of the insurance market.
This, in turn, may result in both higher premiums as well as some market participants ceasing to write lines of business.
In addition, the demand on the insured, broker and primary carrier to ensure that risks have been correctly identified and rated, along with increase in regulatory oversight, will place additional financial constraints on ME Insurance companies.
For the annual treaty renewals, local insurers reckon they are not bound to be any major changes imposed by the reinsurers. Is there cause for their optimism?
The general sentiment from the annual Re-Insurance Rendezvous in Monte Carlo last month suggests that caution is the watchword and not optimism.
The market has still not absorbed all of the global disasters and is not yet at the end of the predicted risks such as [the] US windstorm season.
This year has, according to Swiss Re, cost the industry to date some $70 billion (Dh257.1 billion) in claims spend versus $25 billion last year, period on period.
The Middle East could consider increasing their risk appetite and the retention of risks inherent with the region rather than ceding to the global markets. This may well have a balancing affect on the region's premium market.
The insurance marketplace has not seen a rush of specialist insurers — particularly European players — seeking licences in Qatar Financial Authority or DIFC. What's holding them back? Or do you feel the free zones are more intent on targeting the banking industry and wider financial services providers?
The UAE has had a freeze on licences for some time now, which coupled with the global financial challenges, has meant that many insurers seeking new entry to the region had either postponed their activities or have sought other locations such as Qatar, Oman or Saudi Arabia.
In fact, there has been a steady increase of new entrants seeking access to the respective financial centres. However, whereas in prior years the dialogue was primarily on market access, now interest is on re-domicile and legal entity considerations, regulatory frameworks, tax and risk management.
There was a time when Bahrain was being given a serious look by some of the insurance majors. In the wake of the recent events, would that interest still hold?
The challenges in Bahrain are matters I cannot comment on. It is fair to say that many companies had policies that were enabled and saw them temporarily [relocate] to the DIFC or another similar entity. Clearly at some point those companies will consider a move back to Bahrain.
The only M&A activities related to the region seems be driven by the global names — Zurich and MetLife Alico. Do you see at some point regional players joining in?
While we had no real movement of regional and local insurers throughout 2011, there was a significant increase in the dialogue between interested parties. There is definitely an appetite for M&A activities.
However, the challenge to move the market forward is a complex one and requires many different levers to be applied, including [an] amendment to rules around foreign ownership of UAE listed assets.
Except for Saudi Arabia, the industry talks about the difficulty of getting new licenses. Could it be the main reason why many of unrepresented global names are giving the region the skip?
The majority of the global heavyweight insurers are now operating in this region. While the region presents its challenges in terms of operating models for insurers, this in turn presents them with the opportunity to enter the market in alternative and innovative ways such as joint ventures or through acquisition, which in turn stimulates the local markets.
Do you ever wonder whether the region's insurance sector could be headed for a hard place given the deteriorating asset quality on its books?
There will be a number of casualties at the low end of the insurance company scale. These companies are finding it increasingly difficult to operate and keep their head above water, particularly as regulators increase their focus on solvency margins and as accounting and international solvency standards continue to be implemented.
We may expect that technical services such as run-off — where an insurance company is unable to write any new business and therefore closes its books to new business — would start to become active in the tail end of next year.
This will be a positive move for the market and will help stimulate market growth as well as interest from companies that specialise in this type of business. The DIFC is ideally placed to capitalise on this activity.
