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25 March 2010
Insurance IndustryInvesting Insurance Surplus Assets
Andre Rohayem
Strictly Private and Confidential
Table of Contents
Page
1 Are ME Insurers overcapitalised 1
2 Financial return impact 6
3 Back to basics 10
Section 1Are ME Insurers overcapitalised?
Insurance Industry • Investing Insurance Surplus Assets
Insurance companies in the Middle East are currently considered to be overcapitalised when compared to international companies
2
Surplus ratios of selected international insurance players
183%161%
126% 127% 123%
256% 265%239%
169% 160%
0%
50%
100%
150%
200%
250%
300%
Aegon Allianz Aviva Axa Generali ING Munich Re Prudential Sw iss Re ZFS
Although still highly capitalised, GCC insurance companies have experienced a significant drop in their surplus due to severe losses incurred from investments
Surplus ratio
731%
333% 303% 335%
1200%
469%280%
174%292%
890%
156% 106% 105% 123% 160%
0%200%400%600%800%
1000%1200%
UAE KSA Bahrain Oman Qatar
2007 2008 2013
Section 1 - Position of ME Insurers
Source: PwC Analaysis
Insurance Industry • Investing Insurance Surplus Assets
Indicative ratios
3
GWP/Equity
65%
157%
75%
144%
61% 46%
100%
258%
141%168%
72% 68%
0%
50%
100%
150%
200%
250%
300%
UAE KSA Bahrain Oman Qatar Kuw ait
2007 2008
Technical reserves/Cash & cash equivalents
495%
189%291%
125%
448%
245%352%
84%
0%
100%
200%
300%
400%
500%
600%
UAE KSA Bahrain Qatar
2007 2008
Section 1 - Position of ME Insurers
Insurance Industry • Investing Insurance Surplus Assets
GCC insurance companies are overcapitalised due to high regulatory capital requirements
4
NYUSD17.3MnUSD17.3MnKuwait
N
Y
Y
N
N
Composite allowed ? (Y/N)
YUSD10MnUSD10MnQatar
NUSD13MnUSD13MnOman
YUSD13.3MnUSD13.3MnBahrain
NUSD27MnUSD27MnKSA
NUSD27MnUSD27MnUAE
Risk based capital ? (Y/N)Non-lifeLife Country
Capital requirements
High capital requirement combined with low GPI contribute to increasing GCC insurance companies’ surplus assets
Section 1 - Position of ME Insurers
Insurance Industry • Investing Insurance Surplus Assets
Low insurance penetration rates require lower levels of capital
5
KSA 0.01%
Kuwait 0.10%
Oman 0.20%
Qatar 0.30%
UAE 0.40%
Bahrain 0.60%
Africa 2.34%
USA 4.01%
Worldwide 4.02%
Europe 4.27%
Asia 4.44%
Low
High
Life insurance penetration
Kuwait 0.50%
KSA 0.60%
Qatar 0.80%
Oman 0.90%
Bahrain 1.40%
Asia 1.51%
UAE 1.60%
Africa 1.80%
Europe 2.93%
Worldwide 2.94%
USA 4.58%
Low
High
Non-life insurance penetration
GCC
Internationalmarkets
Section 1 - Position of ME Insurers
Section 2Financial return impact
Insurance Industry • Investing Insurance Surplus Assets
GCC insurance companies do not have a clear investment strategy
7
-30%4%6%60%Company 5
-
27%
-
13%
-
23%
Debt securities
-5%8%60%Company 6
13%
20%
41%
25%
5%
Unquoted equity securities
20%17%50%Company 7
28%37%15%Company 4
-9%38%Company 3
-58%17%Company 2
17%20%35%Company 1
Real estateQuoted equity securitiesCashLeading insurance
companies Investment mix
Highlyliquid
Illiquid
Hig
h ris
k ap
petit
eLo
w ri
sk a
ppet
ite
Section 2 - Financial return impact
Insurance Industry • Investing Insurance Surplus Assets
Financial return account for a significant portion of companies’ results
8
Major GCC insurance companies' results
105141 53
129
22
104
24
(100)
(50)
0
50
100
150
200
US
D in
mill
ions
(31) (4)
23 16
6
102
8
(100)
(50)
0
50
100
150
200
USD
in m
illio
ns
KSA insurer
Kuwait insurer
Abu Dhabi insurer
Dubai insurer
Bahrain insurer
Qatar insurer
Oman insurer
2007
2008
130Mn 141Mn 90Mn 173Mn <4Mn> 136Mn 19MnProfit / <Loss>
45Mn 18Mn 57Mn 68Mn <1Mn> 148Mn 10MnProfit / <Loss>
Net underwriting income Net investment income Other income-gain / (other expenses-loss)
Section 2 - Financial return impact
Insurance Industry • Investing Insurance Surplus Assets
Takaful companies face additional challenges due to the nature of their business model
9
Policyholders' contributionsPolicyholders' contributionsShareholders' capitalSources of funding
Limited availability of long term Islamic bonds to match products like annuities and pension plans
Lack of clear and strict regulatory requirements in some countries do not restrict companies from aggressive investment behaviours nor subject them to solvency margin requirements
Takaful operators have to remain liquid to be able to provide Qard Al Hassan facilities
Challenges
As an alternative to long term Islamic bonds, companies invest in real estate
Companies generally hold significant equity positions
Overcapitalised companies do not always maintain sufficient short term and liquid assets
Current investment behaviour
GCC Takaful companies' investments
Shareholders' funds
Policyholders' funds
General funds Family Takaful funds
High risk investments due to illiquid and volatile classes of assets
High risk investment positions due to highly volatile class of assets
Inefficiencies in portfolio management
Risks and implications
Section 2 - Financial return impact
Section 3Back to basics
Insurance Industry • Investing Insurance Surplus Assets
The financial crisis has come as an unwelcome jolt for customers, investors, regulators and governments, creating scepticism and uncertainty and spurring the stakeholders to take a harder line with insurers
11
Customers Regulators
Investors Government
Insuranceindustry
Faith of customers and confidencein financial institutions have givenway to shock, disillusionment and caution
The pursuit of innovation and capital efficiency has given wayto a focus on stability and risk management
The intensity of supervision is increasing and the crisis has ledto a review of the mark-to-market valuationAlthough governments are
eventually likely to divest theirholdings in supported insurers, their influence across the sector will persist
Section 3 - Back to basics
Insurance Industry • Investing Insurance Surplus Assets
PwC’s and CSFA Insurance Banana skins survey highlighted a shift in risks perceived by insurance companies following the financial crisis
12
Risks 2009 ranking
Investment performance
Equity markets
Capital availability
Macro-economic trends
Too much regulation
Risk management techniques
Reinsurance security
Complex instruments
Actuarial assumptions
Long tail liabilities
Interest rates
Managing the pricing cycle
Managing costs
1
2
3
4
5
6
7
8
9
10
11
12
11
13
26
-
1
14
27
19
8
7
22
5
2007 ranking
Total sample
2
1
3
4
6
8
8
9
7
5
Middle East and Asia
2009 ranking
Section 3 - Back to basics
Insurance Industry • Investing Insurance Surplus Assets
The insurance industry lifecycle and the financial crisis have changed the industry’s landscape, and there are direct implication on where should Insurance Companies direct their investments in the long term
Main features of the new environment
13
Two Three
Five
Increasing Insurance
Awareness
Four
Six Eight
Focus on Underwriting Profitability
Awakening of M&A
Nine
Reducing Cost
Five
Increasing Insurance
Awareness
Six Eight
Focus on Underwriting Profitability
Awakening of M&A
Nine
Reducing Cost
One
Manage Risks
Two Three
Improving Investment
Management Function
Invest in Human Capital
Four
Update Sales & Distribution
Models
Section 3 - Back to basics
Insurance Industry • Investing Insurance Surplus Assets
A reshaped industry – Where to Invest
Emerging trends in the GCC are emphasising on the need for risk management as a key learning outcome from the crisis. Key trends are:
• The financial crisis uncovered to insurers that they lack a comprehensive view of their risk exposure
• Insurers are seeking to improve or maintain their rating
• Regulators and rating agencies are requiring insurance companies to establish risk management frameworks
Managing Risks
Implication • Measure economic capital to generate an optimal capital allocation (applied to insurance and investment operations)
• Establish effective Enterprise Risk Management (including risk profile and risk appetite)
14
OneSection 3 - Back to basics
Insurance Industry • Investing Insurance Surplus Assets
A reshaped industry – Where to Invest
As a result of the general decline in investment markets, insurance companies investments have been subject to significant impairment losses.
Equally, a mismatch between assets and liability did not allow an optimal investment strategy in addition to a liquidity risk that companies could face.
Improving Investment Management Function
Implication
15
• Define clear investment strategies in line with overall strategic objectives
• Link insurance operations and investments mix through robust asset liability management while optimising investment returns
• Improve asset quality identification process and investment performance measurement.
TwoSection 3 - Back to basics
Insurance Industry • Investing Insurance Surplus Assets
A reshaped industry – Where to Invest
Coping with business growth, more sophisticated demand, and increasing requirements from regulator is becoming very challenging with the number and level of available resources.
The insurance industry requires specialised technical and behavioral skills that cannot be easily developed from experience outside the industry
Such lack of availability of insurance human resources is one of the main challenges facing insurers in the region
Invest in Human Capital
Implication
16
• Manpower planning to properly manage growth
• Invest in employees training programs
• Focus on talent management and performance appraisals to retain top talents
• Embed employee’s satisfaction within Companies’ strategies
ThreeSection 3 - Back to basics
Insurance Industry • Investing Insurance Surplus Assets
A reshaped industry – Where to Invest
Insurers in the region have weathered the economic downturns better than other financial institutions mainly due to the sector’s strong fundamentals (low penetration rates and market potential)
Nevertheless, the market growth is less than expected due to the crisis.
More importantly the market is becoming increasingly competitive and gaining market share requires appropriate strategies to be implemented backed by enhanced sales methods
Update Sales & Distribution Models
Implication
17
• Increase speed to market through customer segmentation, process optimisation and automation supported by robust CRM tools
• Leverage on bancassurance distribution channels, introduce adequate remuneration schemes and appropriate pricing strategies
FourSection 3 - Back to basics
Insurance Industry • Investing Insurance Surplus Assets
A reshaped industry – Where to Invest
Current low penetration rates in the GCC countries are the main driver for future growth. For penetration rates to increase, customers should have a more risk and insurance awareness culture. This awareness is currently increasing.
As new insurers are being established, marketing of insurance products is becoming more effective and customers are exposed to an increasing insurance environment
This may lead to changes in existing large insurers market shares, leading to a significant reconfiguration in the list of leading players.
Increasing Insurance Awareness
Implication • Investments in Marketing tools such as CRM to establish strong market position and brand awareness will enable companies to reach out to customers and create loyalty.
18
FiveSection 3 - Back to basics
Insurance Industry • Investing Insurance Surplus Assets
A reshaped industry – Where to Invest
Regional insurance companies have had low retention ratios and their profitability mainly driven by reinsurance commissions and investment income
Focus on Underwriting Profitability
Implication • Moving forward, insurance companies should focus on improved andsustainable underwriting profitability through:
– introduction of new products and innovative distribution channels,
– enhanced product pricing through robust pricing engines,
– robust underwriting philosophy differentiating between new and renewal business,
– optimised reinsurance programs, and
– recruitment of appropriate human resources.
19
SixSection 3 - Back to basics
Insurance Industry • Investing Insurance Surplus AssetsSide 22
A reshaped industry – Where to Invest
There are strong underlying rationales for consolidation and restructuring within many markets.
Most markets are still in their early maturity stage and consolidation would be expected following increasing maturity levels.
Awakening of M&A
Implication Insurers are expected to actively search for attractive opportunities to acquire insurance companies/portfolios in order to achieve:
• Growth in market share and economy of scale
• Increasing investments in core operations
• Synergies
20
SevenSection 3 - Back to basics
Insurance Industry • Investing Insurance Surplus Assets
A reshaped industry – Where to Invest
Many companies reacted quickly to the financial crisis with attempts to align revenue and costs
However, broad-based cost cutting efforts could have damaging tactical and strategic consequences, both in the short and long term.
The foundation of any effective cost cutting initiative is a systemic understanding of people, processes and technology, with a primary focus on carefully adjusting cost drivers.
Reducing Costs
Implication Introducing cost reduction initiatives contribute to enhance profitability through increasing efficiency allowing optimal positioning in ancompetitive market.
21
EightSection 3 - Back to basics
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