The underwriting division of the regional insurance industry is expected to expand substantially over the next year, as companies reeling from the effects of the global financial crisis concentrate more on their core business of writing risks rather than on the increasingly dismal investment side of the industry, which has already given the industry quite a beating. “In 2008 the poor results are due to [losses in] investment income,” said Farid Chedid, managing director at Chedid Re. “What we are expecting is that because of poor investment income and the negative investment environment in general, insurers and reinsurers will to look to increase their underwriting profits to sustain all the damage that was created by the global financial crisis. Hence, we are expecting more profits on the insurance [underwriting] side.”
But even if regional companies are intent on a paradigm shift in priorities from investment to underwriting, the transition will take time and, as the saying goes, time is money. “I think the trend will be that we will go back to technical profitability and not concentrate too much on the financial income aspect of the insurance business,” averred Elie Nasnas, director general of AXA Middle East. “It’s a medium-term trend and it will not happen overnight.”
Governments in the region have been keen to push mandatory insurance requirements but are viewed by many in the industry as lacking the foresight to encourage voluntary insurance, such as life insurance, through regulatory reform and by raising individual awareness levels of their populations by offering incentives to first-time insurance buyers. But in terms of incentives, “[governments] want to do it and they are afraid to do it. We need tax incentives to enhance the potential of the life insurance sector,” said Nasnas. This job has now been left to the companies themselves who, while keen to increase awareness, can only do so much in an environment that is not yet conducive to increasing insurance awareness across the region. The notion that the long-term benefits of insurance growth and awareness will outweigh the short-term costs of providing incentives to local populations seems to evade regional governments. Thomas Schellen, publishing editor and researcher at Zawya Dow Jones, said “Understanding that providing incentives to increase insurance penetration, even though it costs money now, will be more beneficial to both the state and the individual is a major problem.”
On the business side
Traditional regional coverage areas associated with the energy sector will remain strong. “The many challenges facing the energy sector in the Middle East also constitute great opportunities for long-term, diversified and innovative (re)insurance players,” wrote Loredana Mazzoleni Neglén, director of Europe, Middle East and Africa at Swiss Re IRI’s Energy & Power Industry Practice, in Middle East Insurance Review. “The region’s massive oil and gas projects will fuel the engine of its growth, particularly in the Gulf states, and (re)insurance will be an important catalyst to support this undeniable potential and boost the Middle East’s economies in the upcoming years,” she continued. However, the recent fall in oil price is seen as a real impediment to insurance growth because of the effect that decreasing prices will have on disposable income in the region. According to Chedid, “If you have a drop in oil prices, there is a slowdown in the regional economy […] Therefore, with less disposable income there will be less demand for insurance.”
Areas such as real-estate development have also seen promising growth rates in 2008 and look to continue into 2009. “Products related to urban development, where the Middle East is now establishing itself as a world leader — from the drawing board to final implementation, city building and the Middle Eastern drive to develop new urban identity modules — come with specific insurance needs that will have a stronger role,” Schellen said. Nevertheless, this growth should be taken with a grain of salt as these areas are expected to see a contraction in 2009 due to the high leveraging of the regional real estate sector coupled with the global financial crisis, in particular in places like Dubai where the real estate industry has been one of the cornerstones of economic development in recent years.
“Prices have gone down [in the real estate sector] and projects are delayed due to the fact that the economy in Dubai is based on real estate,” said Michael Bitzer, CEO of Daman. “There will be an impact on the GDP and then indirectly on the insurance sector.” Moreover, a looming real estate crisis brought on by the global financial crisis could have dire consequences for the insurance industry as well as the regional economy.
“I think the worst thing that can happen in the region is to have a real estate crisis,” said Chedid. “For insurance companies it immediately has a negative impact. If the real estate industry is in trouble, they will be looking to save on risk management.”
Overall, the business segment of the regional insurance industry is set to decrease in line with the contraction of regional and global economies. The focus for the next few years will have to be on retail underwriting and companies will look to improve their product offerings and cut costs in order to stay competitive in the regional market.
“Companies will start to think in terms of the bottom line and concentrate on technical underwriting as well as practice further cost cutting,” Nasnas said. This is good news for retail consumers who can expect better products and services from their insurance providers in 2009 and beyond, even though companies will increasingly feel the crunch. “Clients will expect the same level of service if not more and companies will have to cut their costs accordingly,” Nasnas concluded.