As the first major actuarial practice to establish itself in the Middle East, PricewaterhouseCoopers (PwC) offers the region its unmatched expertise in Islamic insurance products and risk management programs. Executive sat down for an exclusive interview with Bryan Joseph, PwC partner and global actuarial leader, and Camille C. Sifri, PwC country senior partner in Lebanon.
E Could you describe the recently launched actuarial services?
CS: Six months ago we set up an insurance advisory unit — an important element of which is the actuarial practice, which is something unique in Lebanon and in the Middle East. This unit has three partners, who are doing regional projects covering both the insurance and the banking industry. One of the things we’re doing as part of this unit is covering risk management projects, i.e. assisting financial institutions with their risk management systems, policies, and procedures. Other services we provide comprise undertaking due diligence, business valuations and assistance with the establishment of insurance companies in the region.
E How will this affect Lebanese consumers?
CS: This practice is directed primarily at the banking and insurance sectors. Both sectors are under tremendous pressure — maybe more so the banks — to install proper systems of risk management and controls. This is part of the drive to implement Basel II, which is now being required by both the central bank and the banking control commission. Banks are now forced to install proper systems of risk management, and this is where we believe our role comes in — to try to support this sector and give them whatever they need by way of consulting advice on proper structures to strengthen their control environment.
E Why did Lebanese banks not have such evaluation systems before?
CS: Lebanese banks have always had conventional systems of internal controls. Obviously the banks cannot survive without having a minimum, sound internal control system. What is new, and what is being driven by Basel II — globally, not just in Lebanon — is the importance risk management concepts have acquired in the day to day management of banks.
BJ: I think that one of the things that you are seeing globally is products have become more complicated, relationships between financial institutions became more complicated, and banks have become more global. Those three things mean that systems which may have worked in the past, may not be necessarily be fit for purpose in the future. So what’s happening here in Lebanon and globally, is an attempt to bring standards which are fit for purpose for the future years.
E You are working on risk assessment, but even some of the best financial institutions in the world have failed with their risk assessment; how is this different?
BJ: The how and why are different. The risk management systems in the past have attempted to vaguely link capital to risk, under new systems there is now an explicit link between risk and capital. It’s actually asking the directors and management teams to take charge of understanding their risks fully and explaining them to their regulators and ensuring that appropriate levels of capital are in place to support those risks. What has happened around the world is that companies did not necessarily always understand the risk that they were taking and indeed how those risks were being passed from bank to bank. Prior processes were not transparent; it meant that banks were left with more risk than they thought they originally had. Hence, once a lack of trust and the conflagration developed, the financial system was placed under pressure which led to further difficulties for institutions as trust decreased. The result for any company is inevitable once it has lost the trust of the public and its peers.
E After the crash of the US financial market, what is the impact on the Lebanese financial market?
CS: So far I would say that the central bank and the banking control commission have done a good job at sheltering the Lebanese banks and financial institutions from this crisis, by putting strict limits on what sort of trade such institutions could enter into. The supervision has been quite effective, and has protected the Lebanese sector from these international crises. So far we do not seem to have any major exposures. However, to the extent that the Lebanese market is not isolated from the rest of the world, and that banks are trading international products, I think it’s going to be critical for banks to have good early warning systems, good risk management, risk detection, and risk prevention measures to make sure that any such risks are mitigated.
E What are the trends in insurance practices in Lebanon and the region?
CS: I believe insurance companies in Lebanon are somewhat less exposed to fluctuations in the market value of real estate in terms of their insurance products than the banking sector. This is because such conventional insurance products are typically life or property insurance that do not expose the insurers to credit risk on mortgage loans held by banks. However, some insurers have invested part of their funds in real estate and have not so far experienced any significant losses resulting from adverse fluctuations in real estate prices.
BJ: Mortgages are just another asset class. Traditionally, mortgages have been looked at as a sound asset class, and insurance companies have held them as part of their asset portfolios. What you will find regionally as the global real estate market readjusts its new paradigm, is that companies will have to look quite carefully as to what assets they are holding on their balance sheets and making sure that they are properly valued; also making sure that the risk of loss is taken into account — and that goes for banks, insurance companies and for any entity holding mortgages as an asset class. Companies need to take into account that there is a risk that asset values decline as well as increase, which is something easily forgotten when asset values seem to be always on the way up.
E Where is the risk in the Lebanese market? Does it in any way resemble the US model?
CS: The Lebanese market is quite peculiar and does not necessarily follow the same pattern as the US model, especially in terms of the real estate market. Real estate constitutes an important part of the collateralized debts carried by commercial banks. Banks are therefore potentially susceptible to fluctuations in the price of real estate. However, the real estate market has withstood political pressures of the last three years pretty well and the financial sector has therefore not been adversely affected by the local situation.
E How can we learn from the fallout of Lehman Brothers and AIG?
CS: I think we’re back to a proper understanding of risk, proper identification of risk, proper management of risk, and proper evaluation of risk. I think the auditing profession has a major role to play in that, as well as the actuarial profession. Also, there is a major role for boards of directors, whose responsibility it is in the first place to have proper, solid, and robust structures to face the risks which such institutions face in their normal day-to-day business. I think it’s their prime responsibility, and they need to have the proper structures in place to be able to mitigate these risks.
E Do you think the Lebanese will efficiently absorb the proper notion of risk management?
CS: I think there is a major learning curve, through which everybody is going at the moment. The larger banks are making major efforts to get up to speed with international developments in risk management. The smaller institutions may be having some difficulty in keeping up with the pace of change. I believe there is plenty of room for an investment in learning, training and development in that area.
E What would you say are the most essential factors in successful risk management?
BJ: The first one, I would say, is the tone from the top. The board of directors has to set proper governance procedures and framework around risk and how it is managed and reported. Boards need access to the internal tools of risk reporting — via the chief risk officer and the internal audit process — to tell them what risks are being taken and how they are being managed. By setting the correct tone from the top, which says that ‘the sound management of risk is integral to our business’, that permeates down through to how the individual managers or underwriters look at risk and how they report risk upwards. So it is about the tone from the top; having the correct framework, having the correct governance procedures in place, and then having the correct tools to evaluate risk, to quantify it and to define their company’s risk mitigation strategy. And when all else fails, having a contingency plan in place, which will help your organization when things which are outside of ‘normal’ experience go wrong. With all that in place, then banks and indeed financial institutions themselves are more robust.