There is a need for more disciplined underwriting and prudent investments.
"We are looking to close our property insurance line of business because one or two catastrophic losses have created such huge losses that all of our premiums have been wiped out. The line of business is not volume driven, which calls for insurers to properly calculate premiums to reflect the risk. Unfortunately, the problem is that this line of business is not underwritten properly - there is too much competition which means that prices are two low and bear no proportionality to the risks faced when losses occur. We have therefore decided to recall this product from the market".
This was a snapshot of a conversation I had with an underwriting manager recently in a frank and free social context. But the theme is a recurrent one which I have heard on a number of occasions.
Underwriters in the MENA region are faced with a difficult landscape following the global crash; the significant political unrest in the region with the advent of the 'Arab Spring'; and slow economic growth.
Although considerable progress has been made in the past decade, the low insurance penetration rates in the MENA region signal a need for change. The changes must be implemented both by insurers in terms of their underwriting practices and risk selection as well as the external regulatory framework within which they operate.
The four primary disciplines of underwriting are:
- An understanding of all risk exposures that might cause a policy to incur losses
- A conservative evaluation of the likelihood of any exposure actually causing a loss and the probable cost if it does
- The setting of a premium that will deliver a profit, on average, after both prospective loss costs and operating expenses are covered
- The willingness to walk away if the appropriate premium cannot be obtained.
The problem with the first two disciplines is that in terms of risk selection, insurers are dependent to an extent on the information provided by external producers and agents. Often it is difficult to screen policyholders and undertake an accurate risk selection process if the information available is incomplete.
The sanctions available to insurers by way of repudiation of a claim or avoidance of a policy on grounds of non-disclosure are also weaker in the MENA region where the laws are inclined to favour policyholders. Often insurers will effectively have to prove that breach of a policy condition has caused prejudice in order to rely upon it to avoid a policy or to repudiate a claim.
Insurers can also fall foul of the third and fourth disciplines in the pursuit of volume business, even if it means writing business at "inadequate prices".
The insurance industry is overcrowded, premium rewards are typically lower than in the emerging market and there is also no standard regulatory model in the region. In the absence of proper regulation, insurers relying on inadequate risk management systems can enter the market with 'cheap' products, resulting in under-pricing and under-provisioning. This often has the effect of pushing highly rated insurers out of the market.
In order to meet growth targets and to manage retention, underwriters are often reluctant to simply walk away from potential business notwithstanding inadequate pricing. The soft pricing environment for insurers is therefore in many respects a self-inflicted wound.
The growth in insurance claims reported in the UAE in 2012 signals a warning that, despite slow global economic growth, claims inflation will continue. This is due to the fact that the market is still in a fairly nascent stage taking into consideration the low penetration rates. Lines of business or market segments that are not established carry the risk of unforeseen loss experience, particularly in higher value claims which can cause significant fluctuations.
It is therefore essential to maintain a disciplined approach to underwriting in the coming years to achieve the target of a balanced underwriting result over the claims cycle.
This article was first published in MENA Insurance Review in August 2013.