Whether the title is general manager or chief executive, or the role is niche player or regional rover, the best way to dress for survival as an insurance company in the Middle East is clad in proper corporate governance. According to the International Association of Insurance Supervisors (IAIS), the global umbrella organization for regulatory bodies in the industry (Lebanon is a member), insurance providers should have a corporate governance framework installed, and company managers and boards have a duty to prove their integrity and competency.
The reality for Lebanese and regional insurers is perhaps inching, but certainly not speeding, toward alignment with this paradigm. The majority of local players appear to shy away from the cost of corporate governance. Family-owned insurers, as most are in Lebanon, do not face pressure from their stockholders to scrutinize their directors, audit their figures or publish key ratios. Many insurance executives dislike what disclosures can do to a competitive advantage, but forget that the opportunity cost of not investing into a governance framework can be the real profit killer.
Proper governance firstly protects the stockholders in the company against catastrophic financial surprises, as can happen when employees expose the company to losses from unauthorized, high-risk investments or when senior staff members fall prey to the temptations of embezzlement.
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Beirut-based Arabia Insurance, one of the first insurers in the region to embrace corporate governance, was spurred on by an incident of corrupt financial behavior within the organization. But the decision to create an internal audit function and an internal audit committee at the board level was also a great step toward improving overall performance and creating increased trust with all stakeholders, says Chief Executive Fady Shammas.
Corporate governance is not just a question of making sure that no employee can abscond with money that belongs to the company; it is plainly “a better way of running the company,” Shammas says. “There are so many issues at stake, and if you don’t put the right policies and structures and procedures in place, you get lost.”
A lasting foundation
According to the conventional wisdom on corporate governance, its success hinges on the board’s commitment to implement it.
In Arabia Insurance’s case, Shammas says, implementation was a gradual process that spanned several years, during which a risk committee, an investment committee and a remuneration committee were installed. Besides the duties implied in their names, Arabia’s risk committee covers compliance and the remuneration committee covers the board’s nomination.
Board committees represent the icing on the cake of the underlying corporate functions. At Arabia, the risk department was set up with two reporting lines, one to the chief executive officer and the other directly to the risk committee at the board. “From that point on, enterprise risk management started shaping up and this played a huge role when Arabia was rated by [specialized global insurance ratings agency] A.M. Best,” Shammas says.
Strong ratings by international agencies are important when dealing with regulators, but they are even more important to clients as they consider an insurance provider for a large contract.
Costs of corporate governance and all affiliated systems are not petty change; in Shammas’ estimate, Arabia, as a region-wide operating company, has been spending about $1 million annually on corporate governance since 2000. This factor includes all costs, including fees for committee members and experts, investments into business intelligence software and the depreciation cost of the information technology system, which has full redundancy between Beirut and Dubai.
These investments do not generate short-term payoffs. “You start seeing benefits after a year and onwards,” Shammas says, adding that the cost and benefit curves intersect after sustained investment in corporate governance.
One may not be able to quantify the payoff of the investment in terms of share price stability on the Amman and Saudi stock exchanges, where Arabia trades. But Shammas says that the commitment to corporate governance was generating “positive vibes from many shareholders. It was a very large boost in the relationship and trust. You can feel it.”
New building codes
Insurers will face more stringent corporate governance requirements in the upcoming regulatory frameworks, most notably the European Solvency II regulations. This framework will have far-reaching consequences in the behavior of insurance companies even though, curiously enough, the process of devising Solvency II is to its critics far from an example of smart or proper governance.
Currently stuck in another consultation round of innumerable reviews, Solvency II is now expected to come into force around 2016, after a delay of three years.
With corporate governance becoming a necessity for companies that want to attract investors and business, Lebanese and regional insurance companies will find less and less wiggle room if they don’t align themselves with global standards. In Shammas’ view, only a handful of locally-owned insurers — mainly affiliates of banks but also a few family firms — have so far embarked on this road, but chief executives who do not do so needlessly complicate their own lives. “Although it is not easy at the beginning, when you have to prepare the charters of the board committees, appoint the committee members and establish the whole system, once it is up and running, these committees are a big relief for the CEO.”