Insurance is perhaps not the most glamorous of industries. It is, however, essential to the success of others and to the economy it operates in.
An entrepreneur planning to start a business has to come to terms with a certain amount of risk. Understanding that risk and mitigating it reduces the cost of borrowing start-up capital and increases the business’s chance of success. An individual is not in a position to be able to take into account the myriad factors that might affect him in the future. Even a bank, which signs off on a loan, is not always best placed to assess the risk it is taking on.
Insurance companies make it their business to understand risk and to accumulate data from every conceivable source to enable it to make what amounts to a bet on the future. It forms an umbrella under which every other sector may shelter.
Civil unrest last year and in 2012 has further destabilised an already uncertain region. Just as the precipitous collapse of the Soviet Union took those who thought they ought to know better by surprise, the upheaval across the Middle East region seemed to catch everyone napping.
However, far from putting insurers off, the Arab Spring provided an unprecedented stream of information which exposed the weaknesses in the system of insurance and showed industry leaders how to tailor the services they provide to make them more robust against shock.
The insurance broking and risk management group, Marsh, produced a report which described 2011 as a particularly catastrophic year. Apart from the Arab Spring, floods in Thailand and earthquakes in Japan and New Zealand hit the industry hard. The outcome of these events were well understood in advance. What insurers struggled with was the scale of their impact.
For instance, denial of access cover, which compensates a business for losses caused by damage in the vicinity of a business that hinders access to that business, is usually for short-term events. However, in 2011, the denial of access continued for weeks and even months.
Similarly, interruptions to the supply chain, which are ordinarily covered by contingent business interruption (CBI) insurance, proved inadequate in the face of the sheer scale of the disruption encountered.
One of the lessons learned is that the wording of a policy is key. The media were and still are happy to refer to what happened in Egypt, Tunisia and Libya variously as the Arab Spring, the Facebook Revolution, civil unrest, popular uprising, terrorism, rioting and much else besides. For insurers, however, the exact definition is crucial.
The Insurance Federation of Egypt stepped in to clear up confusion when it directed insurers to consider the events falling under the coverage of Riot, Civil Commotion and Strike Perils.
This resulted in a great number of claims being settled, but a large proportion are still in dispute. The Federation’s ruling was non-binding, and the definition of ‘civil commotion’ and ‘terrorism’ broad enough to engender endless quibbling.
Disputes are ongoing as to which category looting falls under. Was a business firebombed as an act of terror, civil disobedience or wanton criminal damage? These distinctions matter.
What has become apparent is that the most common insurance policies in the region are inadequate for the type of event that the Arab Spring, or whatever you want to call it, was. After 9/11, business were understandably concerned about losses due to terrorism. Now they understand better the threats to them and it is up to insurers to offer products that fit. This is needed urgently if foreign investors are to be encouraged to return to the region they consider unpredictable.
Despite this, and, indeed, perhaps because of it, the outlook for insurers in the region remains positive. The Qatar Financial Authority reported that confidence in the industry is buoyant with the sector expected to outperform GDP across the GCC.
Major infrastructure projects in cash-rich countries in the region are helping to fuel growth in the industry, as is the fact that penetration is still low.
Political instability is still a concern, however, as is the perceived lack of a regulatory framework. In the latter regard, at least, governments have recently pushed through a raft of new regulations and there are more in the pipeline. The UAE, in particular, has wide-ranging proposals that will radically alter the environment insurers there will operate in, with a greater supervisory role granted the newly constituted regulator.
Insurers in the GCC have for some time called for greater harmonisation of regulations across the GCC region. Not only will this benefit the consumer by increasing competition, insurers’ costs would be reduced. Such harmonisation, though, is a complicated matter and there are currently no signs it will become a reality.
Premiums for a number of key industries in the Middle East are falling, despite concerns from some quarters. The region’s shipping industry is at risk from two major sources. Somali pirates continue to be a problem and sanctions imposed on Iran are also casting another shadow. However, at least in regard to piracy, the industry is taking steps to protect itself, so far to the satisfaction of insurers. The effects of sanctions are ameliorated somewhat by the capacity in the region. A single, catastrophic event, however, could reveal that the industry is over-exposed.
The insurance company, AXA, is getting ready to introduce marine risk modelling to the Middle East, which will, it is hoped, reduced costs still further by providing the industry with a broader range of data.
Aviation, too, is enjoying a fall in premiums, thanks to a number of positive indicators, including a good safety record and the value of each aircraft which is well in excess of the global average.
It seems that the insurance industry in the Middle East is coming of age. With the need for more sophisticated cover insurers that are quick to learn and to offer customers nuanced products have plenty of room to grow into. The better they are at doing this, the sooner foreign investment and local entrepreneurs can begin to innovate and grow the economies which, in some places, have been thrown into chaos by the pace of change.