|Current challenges and their implications on the regional insurance industry||2017-02-21|
Your Excellencies, distinguished guests, ladies and gentlemen
I would like to start by thanking the Central Bank of Bahrain for their kind invitation to speak at this year’s event. I was fortunate enough to speak at this event last year which was a great privilege, and I am again delighted to represent Lloyd’s at the region’s largest and longest running industry event which is now in its 13th year.
Bahrain holds a special place for me from when I worked here for a short period with RSA and it is always a pleasure to come back to the Kingdom.
However, all of that seems such a long-time ago, even more so when you consider that over the last 12 months the world has changed – almost unrecognizably.
Not many people, particularly those in Financial Services, saw Brexit coming and even fewer thought of a Trump victory in the recent US Presidency. The risk landscape continues to change at break neck speed driven by a multitude of factors not least been urbanization and new and more sophisticated emerging threats both manmade and natural - such as cyber, terrorism, resource depletion and climate change to name just a few.
There’s also the low-interest rate environment, which is continuing for far longer than expected and many of us underestimated and continue to underestimate the speed at which technology was going to – and is – changing our world. The fourth industrial revolution is in full swing – there is no doubt about that.
Only last week in Dubai, we had the announcement by the Roads and Transport Authority that flying driverless cars are planned to be introduced by July 2017 – yes, that’s only 5 months away!
As we all know, there are also more quantifiable challenges all around us - oil price, soft pricing, regional instability –- these are all areas that are acutely important to us here in the region but are arguably and in some cases very regrettably now becoming more ‘business as usual’ rather than ‘one off’ events.
So this morning, I want to try and bring all of this together and look at the challenges and opportunities these changes are bringing both globally and to the region, and then talk about some of the work Lloyd’s is doing to adapt to and take advantage of the opportunities we see out there.
Whereas there are undoubtedly some regional nuances what I would like to emphasize is that many of the challenges that we see are cross border and are as relevant for us here in Bahrain – as they are sitting in Mexico City, Bogota, Istanbul or London - I don’t think anyone would doubt that we are becoming, if not already are, part of a global, interconnected insurance/ reinsurance market and not a market that is operating unilaterally.
The first challenge to highlight is the change to distribution.
Low interest rates and tightening profit margins are forcing market participants to cut costs and look at alternative growth strategies.
There is striking evidence of this in the broker community. Deloitte research shows that 2015 featured a record 390 M&A broker deals, up from the previous record of 351 in 2014.
Companies are being snapped up by their rivals. For instance, recently we have seen Howden acquire RK Harrison, BB&T acquire Cooper Gay Swett & Crawford and you also had Willis Towers Watson and I should add Gras Savoye or Integro who have acquired several Lloyd’s brokers.
We have also recently seen non-insurance entities such as the BGC Partners buy out Besso in December and there are a number of other London wholesalers who continue to be engulfed in market speculation.
Here in the region, we have seen a small number of acquisition’s and it is clear, that despite pockets of progress, regulators and various stakeholders are continuing their calls for consolidation to help drive more critical mass in the marketplace.
There is no doubt that all providers should be prepared for a new era of disruption – not just within the broker space itself, but also within Bancassurance and online and aggregator channels, as they look to drive value amidst the ever increasing commoditisation of products.
Will we need brokers for personal lines insurance in a few years or will they be there just to service large scheme/ affinity business? Will Bancassurance become the dominant channel it has always professed to be? What is the overall impact of digitalisation on all of these channels - online portals, mobile aps, sms, real time data tracking/ mining, optimisation of backend processes, e-claims and so much more.
Distribution is changing and that is as relevant here in the Middle East as it is anyway in the world - and to some extent you could say even more so due to region having one of the world’s highest penetration rates of smart phones and tablets. How we react - and mange as an industry to this change - is fundamentally important.
[DISTRIBUTION – FACILITIES]
The rise of broker facilities is further evidence of the pressure traditional distribution models are under.
According to one insurance journalist, on average up to 20% of business is now put into facilities by big brokers, with some brokers openly stating it will represent 20% of their entire book. For example 55% of terrorism with the big six is placed through facilities.
Yes, facilities can help reduce operational costs - if the uptick in acquisition costs is more than offset by a reduction in admin costs.
But brokers are using facilities to reduce costs by concentrating on more profitable relationships and dealing with fewer carriers.
From a Lloyd’s perspective, we have to consider whether facilities threaten the syndication of the risk or promote it.
We could embrace facilities or reject them on the grounds they are cyclical and encourage blind following. Or is there a middle way?
Another pressure is the increased competition in the sector, driven by market economics. One sign of this is the consolidation taking place among carriers: Ace and Chubb; XL and Catlin and MSI and Amlin, to name but a few.
Lloyd’s is not immune either, with 20% capacity having changed hands in 2015 and this trend is likely to continue in 2017.
Another source of increasing competition is alternative capital.
Low interest rates are driving investors to seek returns in the historically attractive reinsurance sector. At the same time, new data and better data analytics are allowing risk to be commoditised in ways not possible before.
Products such as catastrophe bonds and insurance-linked securities are increasingly attracting new capital into our market which is expected to gather pace into 2017. Aon Securities believes that 2017 catastrophe bond issuance will near record levels with Artemis noting that there are $8.57 billion of cat bonds that will mature in 2017. So the pressure is on to look at ways in which the reinsurance market can respond.
Earlier, I mentioned the speed at which technology is developing. Inevitably, it is disrupting the insurance sector. New technologies are allowing insurers to create and deliver new products in ways that were not possible, even five years ago.
In a list of the top 100 jobs most likely to be replaced by robots insurance underwriters came in at number five. With a probability percentage of 0.99%
I have been asked before, so for the record, number 1 on the list was … telemarketers!
There has also been a dramatic shift in the make-up of company assets over the past 40 years, other evidence of the influence of technology.
In 1975, the split of assets of the S&P500 market value was 83% tangible and 17% intangible. Today this has completely reversed to 16% tangible and 84% intangible. This means people, patents, IP, trademarks, technology are the greatest driver of corporate value.
The use of Big Data - telematics in car insurance to assess driver behaviour, or wearables to assess lifestyles for health insurance or home automation - the Internet of Things - for contents insurance – all the data being generated by these devices can be used to price risk and sell direct to the customer.
So we should ask ourselves – how can a business model that currently requires 40 cents in the dollar to match risk to capital survive in this changing world?
How can we as a region not only respond, but play a part in this change?
[THE CHANGING RISK LANDSCAPE]
There is another force changing our world and our region that I want to highlight – the evolving risk landscape.
This is partly due to Urbanisation, which by concentrating high-value assets in urban centres, makes them more vulnerable to systemic shocks.
We see this very clearly here in this region – whether that is in KSA, the UAE or here in Bahrain - we are seeing the changing face of cities. More infrastructure, power, mass transportation, swelling populations - The middle East will see its population rise almost 50% over the next 25 years - investments in schooling, housing, hospitals, a young and ambitious population coupled alongside an ageing population - all of this untimely requires risk management and mitigation to build resilience for the future.
The Lloyd’s City Risk 2015-2025 which was launched in July 2015, showed for the first time how governments, businesses and communities in 301 of the world’s major cities are highly exposed to systemic, catastrophic shocks that have the potential to significantly impact on their economic output from 18 manmade and natural threats.
The study found that in relation to the Middle East’s largest centers $367bn of GDP is at risk over the next decade – equating to around 15% of planed economic growth across those 18 threats. Man made threats including market crash, sovereign default, terrorism, power outage and cyber attach represent the greatest risk approximately 58% ($213bn) of GDP at risk.
New technology is also changing the risk landscape. Take driverless cars. Who is liable if there’s an accident? The software company? The vehicle manufacturer? The human in the car? As you know, the next Olympics will take place in 2020 in Tokyo – and, maybe over ambitiously, the Japanese government is aiming for Tokyo to be a completely self-driven city before the Olympics!
I mentioned flying driverless cars in the UAE but there is also the development of the Hyperloop, a 740mph near supersonic transport link that will go from Dubai to Abu Dhabi in 12 minutes and Dubai to Riyadh in 45 minutes.
As I mentioned at the beginning, these are not ‘other world’ issues, many of these new and exciting risks are happening here and how we tackle them will determine to a large extent what role this region will play.
The question for the insurance industry is how do we turn these challenges into opportunities?
Lloyd’s has articulated this in its long-term strategy Vision 2025.
V25 comprises eight strands, including, innovation, modernisation, talent and global market access and I would like to touch on a couple of them here.
In terms of innovation, we are working hard to close the innovation gap I mentioned earlier. Take cyber as an example: Lloyd’s currently writes 25% of all cyber premiums globally and last year the Lloyd’s market created more than 15 new products in this area. We also launched a European cyber campaign designed to help businesses better understand the threat, its implications and the value of cyber insurance.
That said, one of the challenges here is how to get insureds to understand the threats that they are facing.
As John Chambers the former CEO of Cisco, famously said, “there are two types of companies… ‘those that have been hacked and those that don’t know they have been hacked.”
Here in the region we write approximately $2.5m of premium for Cyber and whereas a significant jump it is still a small amount where there is such a concentration of risk here in the region.. As an industry we need to think about how can we lobby more effectively to drive awareness around the impact of a date protection breach and make it mandatory for companies to report details of cyber-attacks, much as businesses in the US do already.
Some of the biggest cyber security attacks of 2016 were here in the region. In Saudi Arabia a number of government agencies were targeted in a series of attacks over a two-week period in November, erasing data and wreaking havoc in the computer banks of the agency running the country’s airports and hitting five additional targets.
The region remains very vulnerable and cyber needs to be seen as a business risk and not merely as a technology risk as it threatens every aspect of an organisation, including and, most importantly, reputation.
[GLOBAL MARKET ACCESS]
Global Market Access is another important area of V25 as we look to protect and grow our business in both established and high-growth emerging markets.
From an emerging market perspective over the last couple of years, we opened offices in Beijing, Mexico, Colombia and in Dubai as well as seeing 15 years of work with the Indian Government come to fruition when in November we secured an onshore reinsurance licence.
These emerging markets are very important to us. So how are we doing in these emerging markets? Progress is encouraging.
The Middle East through Lloyd’s Dubai continues to grow with around $600m of premium coming from the region into the Lloyd’s market either via Dubai or directly into London. Specifically here in Bahrain, we continue to see good growth with nearly $60m of premium written in 2015 – the 3rd largest market for Lloyd’s within the Middle East after the UAE and Saudi Arabia.
Having a local presence on the ground has enabled us to get a better understanding of these markets. For example, one Lloyd’s market participant now provides Shariah-compliant insurance cover and Lloyd’s continues to be an active supporter of the Islamic Insurance Association of London – with the aim of growing this market in London and here in the region.
Of course, growth can be challenging in these markets, it is easier to grow by $100 million in the US than in emerging markets - but global market access is a long-term play so we are being patient. But we are also protecting and growing our business in established markets. Our on-going discussions around Brexit are a good example of this as we are working to create a EU subsidiary model that will secure access to the EU trading block. KPMG estimate that the European commercial insurance market will grow by £15bn over the next five years so access is important, not only to defend what we have, but also to capture some of that growth.
[EASE OF DOING BUSINESS]
Another key component of V25 is ease of doing business.
The overall programme of work – the London Market Target Operating Model (TOM) – along with Lloyd’s-specific elements - has the vision of making London an easier place to do business. Whereas a full review of TOM isn’t appropriate here, it is worth asking ourselves from a regional perspective what is coming out from TOM, what we can learn from TOM and what elements within TOM could help our market develop? Are we even looking at what is happening to better serve and develop our market?
For example In 2016 we have seen fast adoption of electronic placement with 1600 risks being bound on Placing Platform Limited (PPL) for Financial and Professional lines with plans well advanced to move marine onto to PPL with Property, Casualty , Reinsurance and Aviation all earmarked.
There has been the Central Services Refresh programme as money is now starting to move faster and more efficiently around the market and there has been a number of Block chain Proofs of concept piloted along with Robotics, Internet of Things and Data. So as a region we need to understand and see what works for us, how can we embrace the change and adopt new practices which are clearly so important for the industry to survive. We should not see ourselves as operating in a bubble.
In conclusion, this combination of technology, the economic environment and the changing risk landscape is asking challenging questions of the global insurance industry and the Middle East.
As PWC 1 have highlighted, the Middle East is at the epicentre of five megatrends that are reshaping the world over the next few decades. We have touched on some of these today - demographic and social change, rapid urbanisation and technological advancement.
The region has a lot to be positive about despite the uncertainty and prevailing headwinds.. Growth is still strong and just recently both KSA and UAE markets have indicated continuing growth and an increase in profits for the 2016 year. We are a part of one of the most digitalised regions on the planet and we have a unifying collective will to make the region a global success. But we do need to recognise that this will not be easy. It is a journey and we need to be patient although we also need a roadmap for change.
This needs to be clear and the region needs to understand, and more importantly demonstrate, what role and what impact it wants to have in this new and emerging world.
At Lloyd’s we are managing change: we are modernising, embracing new market structures; driving innovation, growing in established markets, expanding into new ones and addressing the operational challenges of the market through TOM. We have reduced subscriptions for the new year and we are conducting a comprehensive review about how Lloyd’s is structured to ensure that we are providing the services the market needs and expects to remain competitive and enable the delivery of Vision 2025 more effectively and efficiently.
However, we need the region to play its part as well and my challenge to everyone is to have a full and compelling voice in that change agenda.
Thank you for listening and wishing you all a very productive forum over the next couple of days.
|Opening Remarks By Abdul Rahman Al-Baker||2017-02-20|
Your Excellencies, Ladies and Gentlemen – Good Morning.
It gives me a great pleasure to welcome you all to the 13th Middle East Insurance Forum. In its 13th year now, this forum has come a long way in supporting and strengthening the insurance industry. It has now firmly established its reputation as the region’s most influential annual gathering of the insurance industry leaders, supporting growth, excellence and innovation in the local and regional insurance industry. The Central Bank of Bahrain is proud to be associated with this event and will continue to support it in the future. I would like to thank the organizers, sponsors and speakers for supporting this important gathering.
The theme of this year forum is " The Current Challenges and their Implications on the Regional Insurance Industry”. This theme is important and timely as the insurance industry in the Mena region is undergoing transformation and there is a tremendous potential for the regional insurance market to grow and thrive.
As you are aware, the Middle East economies have expanded at a healthy rate over the last decade and have made a significant progress in a number of sectors such as petrochemicals, infrastructures and telecommunications. The insurance industry in the region has also experienced steady growth on the back of this economic development, improved regulatory environment, and increased public awareness.
The Mena insurance premiums have more than doubled between 2006-2015, with insurance premiums increasing to US$50 billion as of the end of 2015 compared to US$20.4 billion in 2006. This represents a compound annual growth rate of 11 percent over the period, although the growth in each market varies. Such growth in insurance industry is due to several key demographic factors like the economic growth, population expansion, as well as increasing the life expectancy which have impact on demand of insurance products in the region. In addition, Government investment in infrastructure projects have also provided new underwriting opportunities for further growth of the industry. For example, in the GCC countries, the healthcare spending has not shown any signs of pullback in spending as it has been one of primary sectors in the long-term vision of the GCC governments. One of the major force behind the industry's growth in recent years has been the implementation of compulsory health insurance schemes in various jurisdictions, especially the GCC countries, as well as the outstanding demand for Takaful products which create strong growth avenues for insurance companies in the region.
Overall, the positive growth outlook on the region and the low insurance penetration, which is considered to be the key opportunity for future growth, will continue to attract insurers, both domestic and foreign, to invest in the Mena insurance markets, but this is likely to increase the competition and put even further pressure on the profitability in the sector. However, the insurance companies in the region are generally strongly capitalized and possible future pressure on profitability is unlikely to reduce the credit strength of the sector in the medium term.
Given the positive trend for global insurance market, the insurance market in the MENA region will continue to see growth in premiums of around 5% for non-life lines and a growth that exceed 5% on the life side. Currently, the non-life insurance premiums represents almost 85% of the US$ 50 billion premiums of the insurance market in the Mena region and the life business continue to play a relatively minor role at 15% share of the market. Motor insurance is still the largest segment in the major markets such as the GCC, Morocco and Egypt. However, over the past few years, personal accident and health insurance have been the fastest growing segments. The main drivers behind this spectacular growth are legislation, in particular compulsory insurance requirements and population growth.
For life insurers in the MENA region, premium growth reached 4.2% in 2016. However, there are still signs of optimism for life insurers in the region. Increasing awareness should continue to further enhance the demand for life insurance products, while the ongoing rise in incomes will lead to more demand for wealth protection and accumulation products.
Furthermore, there are several challenges facing the insurance industry in the Mena region which include competition due to the increase in the number of insurance companies in each market which put pressure on the profitability of the sector. Also, the current global economic uncertainty has posed substantial challenges to insurance companies by creating volatility in investments values and returns. Public Awareness about insurance and its benefits is also another challenge as many fail to recognize insurance as an effective means of wealth protection, saving and security.
However, as the Insurance industry expands, the need to further enhance the regulations in the Mena region, in terms of core regulatory standards and market conduct requirements, is of paramount importance.
The regulators all over the Mena region need to work closely to further strengthen their regulatory framework in order to create greater harmony amongst the different jurisdictions so that the industry could capitalize on the growth opportunities. The financial crisis has been a reminder that markets need effective regulation if they are to operate properly.
As a regulator, the CBB always believes in continual enhancement and improvement of its regulatory framework for the growth and betterment of industry. The CBB has always played an important role in launching new initiatives to develop the insurance industry both locally and regionally. The issuance of the Takaful model is one of these initiatives in reaffirming Bahrain as the jurisdiction of choice for all the Takaful/ Retakaful companies globally. As you may aware, the main objective of the new Takaful rules, which is implemented starting January 2015, is to facilitate a faster growth of Takaful business in Bahrain while protecting the interest of all stakeholders, vis-à-vis participants, shareholders, and Takaful operator. It is also expected that the implementation of the Takaful rules will attract new entrants to the market and will foster competition for the betterment of the consumers.
Furthermore, it is necessary that the insurance licensees continue to improve the level of expertise and professionalism of their workforce. The CBB is keen to see that all insurance licensees do their utmost to provide adequate training and development opportunities for their staff.
Looking ahead, we expect further growth in the insurance industry in the Mena region driven by moderate economic growth, despite slower than expected oil price recovery. Sector growth will continue to be supported by large investment in infrastructure and construction projects in the Mena region, further enhancement of regulatory and supervisory standards, as well as the support of the governments in making an increasing number of insurance products compulsory. Also, innovation and financial technologies is another big factor that insurers should keep an eye on in the coming years to upgrade their business and to grow the sector. All of these are expected to further enhance the insurance activities and growth of premiums in the Mena region.
Ladies and Gentlemen, this brings me to the end of my remarks. All that remains is for me to wish you an interesting and productive forum, and to thank you all for your kind attention.