From the 21st of December 2012 European insurers will no longer be able to use gender as criteria when assessing risk factors to price premium plans. The European Court of Justice ruled a decision in March 2011 determining that insurance policies reliant on gender factors were incompatible with the prohibition of discrimination under the European Union. The final Article prohibits:
“…any results whereby differences arise in individuals’ premiums and benefits due to the use of gender as a factor in the calculation of premiums and benefits.”
Initial plans for the Gender Directive began in 2004, with the goal to enforce equality for men and women when accessing goods and services. The Directive would dismiss the use of actuarial factors related to sex when insurance companies determined the provision of insurance to clients. Individual plans could no longer be calculated using gender as a factor. Despite the campaign, the court ruled that insurance companies could continue to identify sex as a determining factor when defining differences between premiums and benefits.
The insurance industry seems to be going through a lull. Things are quiet, with few major news events, no major catastrophes rocking the industry and a general sense of calm. How much of this is merely the swimming duck effect, with the appearance of calm on the surface, but energetic kicking happening under the water remains to be seen – but there is certainly a lot going on behind closed doors.
In Europe, the insurance industry is still working hard to effect amendments to Solvency II. As far as it is concerned, the proposed legislation is still far from the final draft, even after almost 10 years of planning and negotiating. Solvency II is going to force the industry to implement measures that will simply become an extra burden, with proposed capital requirements completely out of proportion to actual risks. One example often cited by opponents of the current version of the legislation, is that of Hurricane Katrina in 2005, which caused widespread damage resulting in US$40 billion of claims. While this was the most expensive mega-catastrophe in recent years, the insurance industry was able to absorb this hit and recover rather quickly.
Indeed, according to a recent report published by the Universities of Leeds and Edinburgh, the expected financial losses linked to natural catastrophes such as hurricanes and earthquakes are not of the magnitude to “justify substantially high capital holdings against catastrophe underwriting risk.” The report focused on U.S. insurers, but the findings apply to all those potentially affected by the regulations.
While negotiators and lobbyists in Europe and North America are working feverishly to keep the insurance industry as legally unfettered as possible, the sales and marketing departments also have their work cut out for them.
The current economic climate is putting a lot of pressure on insurance premiums, with many Europeans currently underinsured when it comes to life cover. One of the main reasons for underinsurance is that the products are seen to be expensive, and customers are looking much more closely at what they are spending their hard earned pennies on. This trend can safely be extrapolated to other types of insurance, as the economy is affecting individuals as well as businesses and organisations of all types and sizes. In the life cover market alone, Swiss Re calculated that the protection gap amounts to EUR10,000 billion across the 14 EU countries. This gap is basically the difference between projected amounts of money needed by dependents in the event of a person’s untimely death, and the financial provisions put in place to cover such an event.
In light of this, there is much work to be done to develop innovative products that offer clients an attractive deal. With such a stagnant economy, sales teams are going to have to work not only harder, but much more intelligently to improve their figures. There is certainly untapped potential in the European market, but without new products and bold strategies, only a small percentage of this potential will be realized. Insurers in the USA and EU are facing a lot of legislative uncertainty, especially so in America, as the government rolls out a raft of healthcare and health insurance changes, along with new taxes and regulation for insurers and re-insurers on the horizon. There is certainly a long uphill struggle ahead, but opportunity is often found in the midst of adversity. Although the demand for insurance will not be going away anytime soon, the nature of the business is changing somewhat, and insurers will need to adapt to stay in the game.
Emerging markets offer a whole lot of new opportunity, albeit with some risk and a lot of uncertainty. As the global shift eastward continues, money is flooding into Eastern Europe and Asia, which means access to a whole new set of customers, along with new cultures and completely different environments. Traditional insurance is doing very well in the developing world, and insurers are using strategies such as bancassurance very successfully to help them penetrate these new markets. However, because of the flexible and entrepreneurial nature of emerging markets, where many things are still in flux, traditional insurance companies are also having to face new challenges on a regular basis. Developing countries are not afraid to try something new, and have the luxury of being able to draw on the experience of more developed countries and businesses. For instance, there is a lot of interest being shown into using captive insurance as a solution to risk management and financing, especially based on the experience of large companies like BP in dealing with large scale disasters like the Deepwater Horizon spill in 2010.
Another area where there is a lot of upheaval and change in developing countries is in the area of healthcare. In 2011, the WHO’s 193 Member States committed themselves to reforming their health financing systems to move towards universal health coverage. The goal of universal health coverage is that all people can use the health services they need without being exposed to the financial hardship often associated with paying for them.
In the developing world, where a large majority of people live on a subsistence basis, very few can ever afford any kind of healthcare, yet these are precisely the people who need assistance and public provision of healthcare services.
Developing nations face this problem almost universally, and much work is being done to study possible ways to finance universal healthcare and to develop models that provide a better bang for their buck.
Currently, public healthcare is provided based on variations of two basic strategies.
In the first type, a country provides universal healthcare based on a single risk pool, of which all eligible people are members, and funds its system through general taxes. Usually, in this kind of system, healthcare is provided by publicly owned facilities. The NHS in the UK is a good example of this strategy.
In the second type of system, a government provides healthcare to its nationals via mostly private providers, and funds the system through payroll taxes. The government essentially pays for private healthcare on behalf of its citizens. There are usually a few different risk pools, which means that different classes of citizens pay differently and possibly also receive different treatment. The German system works according to these principles.
At the moment, a majority of developing countries have public health systems that use multiple risk pools, but the current trend is definitely towards broader and larger risk pools. Many feel that consolidating pools mean lower administrative costs and less fragmented and possibly unequal treatment. The general consensus is that bringing everyone into one pool can make healthcare more equitable because everyone is entitled to the same set of benefits.
The role of the private healthcare industry varies, but in a majority of developing nations, private services are incorporated into their systems, with the state buying private care for their citizens when the public services cannot provide the necessary treatment.
This would be the best system from the perspective of the patient, as excluding the private sector from a universal healthcare system generally produces double standards, where the poor go to publicly funded facilities and receive basic care, while the rich can afford the very best treatment in private hospitals and clinics.
Developing nations have a their work cut out for them, but at the same time they have a huge advantage with “greenfield” development opportunities – unhindered by archaic and inefficient systems, and generally, a public healthcare system which can only really improve.
Of course, the biggest concern when talking about health services anywhere in the world revolves around finances. Many countries remain uncertain as to how to finance universal health coverage. Medical services have an amazing capacity to consume budgets, and universal coverage seems to be simply unaffordable to many.
Pre-paid schemes such as health insurance, provide one solution to this problem. The WHO hold the view that health insurance and other prepaid health financing mechanisms, are a key route to universal coverage. Every year, out-of-pocket payments force millions of people into poverty. Larger risk pools, combined with a larger percentage of the population contributing to a healthcare fund, would make it affordable for most developing countries to extend a basic standard of care to all their citizens, and even provide subsidies for more advanced services at private facilities on a more limited basis. Increasing taxes or funneling revenue from national resources like oil or minerals for the specific purpose of providing improved healthcare is not a hard sell, as long as citizens eventually feel they get what they pay for. Not all countries will be able to start with a full range of medical services, but getting the ball rolling through pilot programs and incremental extension of public healthcare will mean that they can grow their systems in a controlled fashion, experimenting with new solutions and strategies as they go. Assuming that health ministers can keep their departments on course and free from the ubiquitous bureaucracy, the goals of universal health coverage might just be within their reach.
During his inaugural speech of the 6th FICCI HEAL (Federation of Indian Chambers of Commerce and Industry – Health Enterprise and Learning) 2012 annual international conference in Delhi this week, Indian President Pranab Mukherjee noted that there is a “high variance” in the quality of service available in public and private sector hospitals, and that the country’s healthcare system should be developed to meet medical requirements of all sections of the population.
“There is a high variance in the quality of service available. Some private hospitals provide world class facilities, so much so that people from third countries come here for treatment giving impetus to medical tourism. On the other hand is the lack of access to even basic medical care for many people, particularly the poor and disadvantaged.”
India’s healthcare system reflects the country’s massive rich poor divide very accurately. The public healthcare system is barely able to provide essential services to the urban population, while there are many rural areas where no public health service is available at all.
The private healthcare sector has taken up some of the slack, and currently accounts for more than three quarters of total healthcare spending and a similar percentage of the country’s total hospital beds. While private hospitals provide a critical service, the majority of hospitals are based in large urban centres.
The rural population is generally also significantly poorer than the urban population, compounding the problem of availability of medical services with that of affordability. According to Future Generali India Insurance, only about 320 million, or 26% of the population, are covered by some type of health insurance and many pay for medical treatment out of the family’s savings.
Improving the affordability, availability and quality of healthcare available to India’s billion-plus population presents both a massive challenge and enormous opportunities. India’s government is actively pursuing Public Private Partnerships to try and tackle the problem, with the goal of leveraging the scale of the public system with the efficiency and quality of the private sector.
Some examples of these Public Private Partnerships working successfully already exist. The Urban Slum Healthcare Project in Andhra Pradesh is a partnership between State Commissionerate of Family Welfare and NGOs. Outsourcing of emergency transport services in 14 states where state governments are in partnership with private providers has proven to be very successful, as has the partnership between GE Healthcare and public hospitals to set up diagnostic centres within the hospitals.
While some work is being done to alleviate the plight of the currently underfunded and short staffed public system, many hospitals are feeling the pinch and have not seen any government action for years.
For instance, the state run Gandhi Hospital in Hyderabad currently has an extreme shortage of anaesthetists, extending waiting times up to two months and preventing hundreds of operations from being performed.
The shortage is causing some departments to close down, despite long waiting lists, and while the hospital is still managing to handle all emergency cases, elective surgery has been all but suspended.
The hospital usually operates five days a week, but currently has no anaesthesiologist on duty for two of those five days. Even for patients already admitted, the waiting time for procedures has gone up from three days to two weeks. According to Dr. Upender Goud, head of anaesthesia, an average of 40-53 surgeries per day are performed at Gandhi Hospital.
“The number of surgeries is not the criteria. What matters is the quality of work. Even a small mistake can cost the life of the patient. We are overburdened and hard-pressed,” says Dr. Goud.
Several representations by the anaesthesia department have been pending with the state government for nearly four years. For the time being, the officials said that they are planning to outsource a couple of specialists and are hoping that there will be some improvement to the situation within a month.
India spends only about 0.9% of its GDP on healthcare, and it will require a lot more investment than that to bring the 30 year old health system up to date. There is a shortage of more than 6000 doctors in primary care facilities across the country, while there is only 1 public hospital bed for every 2000 people. A leading government think tank recently produced a report proposing some changes to try and tackle this massive healthcare conundrum. The report suggests some radical changes in the current system. One of the major proposals is for the government to relinquish its role as the nation’s primary healthcare provider, leaving that role to private facilities, and focus on administration and management of the healthcare system It envisions a situation where the government pays private healthcare providers fixed rates for providing medical services to the public. These proposals have not been well received by the Health Ministry, which prefers to try and bolster the public system and use private resources to fill in the gaps.
It hasn’t been suggested how much such proposals would cost to implement, but in a country with such a large part of the population living in poverty, one wonders where the money will come from. India not only needs to make some major investment in its healthcare infrastructure, but its road network is falling into disrepair, the railway system is ancient and the electricity grid needs massive investment as well. While the current government is promising to spend USD1 trillion on infrastructure upgrades by 2015, the healthcare problem is far greater than a mere lack of facilities, with issues that are not so easily solved.
The situation in private hospitals is far better, the problem is that very few can afford treatment in them. With almost a billion people having to pay for any healthcare costs out of their own meagerly filled pockets, it is absolutely certain that private healthcare will stay out of reach of the vast majority of Indians for the forseeable future given that only around 6% of the population is covered by private medical insurance.
Compounding the affordability problems of healthcare, the private insurance company, Future Generali India Insurance, sees medical costs in the country increasing at an average of around 15 per cent annually. Currently only about a third of all hospitalization costs in the country are covered by health insurance, meaning the inflation in medical expenses will progressively put quality healthcare further out of reach of a growing number of Indians.
The demand for health insurance coverage in India is very high. Getting more people covered by health insurance may help with removing the urban bias in the accessibility of health care, and may also improve the standard of medical services for all Indians. If the government does decide to step back from being a healthcare provider and chooses to use the private sector to fulfill that role, the demand for private healthcare will obviously increase. As we have seen in other countries who have similar systems, there will always be a market for premium medical services, away from the throngs of people, queues and budget constraints that feature so strongly in public healthcare.
The health insurance industry is expected to grow at a rate of 16-20 per cent per annum for the next five years. The potential for growth is high but for insurance companies it is still a loss making business. Basic loss ratios, which only take into account premiums to claims, have been above 100 per cent and combined ratios which are a measure of ultimate profitability are above 120 per cent. Some of the factors making it difficult for insurers to turn a profit are a high ratio of fraudulent claims and almost no regulation of private healthcare providers, meaning that private hospitals can charge whatever they like. Furthermore, the Indian system of using third party administrators (TPA’s) to act as a kind of broker between insurers, hospitals and policyholders is prone to abuse and fraud. TPA’s are supposed to ensure that claims are dealt with smoothly, by helping the customer file a claim, working with the healthcare provider to settle bills directly, and referring clients to doctors who are able to deal directly with insurers. The reality is that currently, TPA’s are often delaying payments, offering to settle only partially, leaving policy holders with large unexpected bills, and some are even processing claims for fictional treatments at non-existent hospitals. There have been calls to regulate the role of TPA’s more strictly, but no new measures have been implemented to date.
In an effort to increase market exposure and improve efficiency and ultimately, profitability, insurers are developing strategic partnerships with banks. In one such recent move, Tamilnad Mercantile Bank Ltd, in partnership with United India Insurance Company Ltd, has launched a co-branded family healthcare product, to offer customised health insurance policy for the bank’s customers. “The cost of healthcare is going to increase rapidly in the coming years and insurance is a requirement to meet the cost of healthcare for each individual. This co-branded product will give our customers a fine risk coverage at a low premium,” said KB Nagendra Murthy, managing director and CEO of the bank.
Indian health officials have some big decisions to make. They could choose to simply try and improve the current system by investing in public healthcare infrastructure, increasing training facilities and using the private sector to simply fill in where it cannot provide care, such as in super specialized facilities or experimental treatments. Another option would be to step out of the healthcare provider role altogether, as outlined above, and simply pay private healthcare providers set amounts for treatment. This option is fraught with potential dangers of overpricing and overdiagnosis, as is the case in the USA, where providers are paid per treatment, and the more they do for a patient, the more they get paid.
The PPP model seems to be the most promising, and if done right can play into each sector’s strengths and existing infrastructure. Whichever route India decides to take to deal with its healthcare challenges, working out affordable solutions will definitely be a challenge. However, India has a reputation for innovation, creativity and adaptability in business, let’s hope they have politicians brave enough to implement the changes they need.
The International Association of Insurance Supervisors (IAIS) recently published a consultation paper titled, “Assessment Methodology for the Identification of Global Systemically Important Insurers”. In the paper, the IAIS proposed criteria which will be used to classify insurers as “global systemically important” and invited public comment until 31 July 2012. The paper was endorsed for consultation by the Financial Stability Board (FSB), which has been tasked with coordinating the overall global set of measures to reduce the moral hazard posed by global systemically important financial institutions.
“This proposed methodology results from intensive and thorough discussion within the IAIS based on the expertise from supervisors around the world,” said Peter Braumüller, Chair of the IAIS Executive Committee. “Based on a recommendation by the G20 Leaders and the Financial Stability Board, the IAIS has accomplished an important piece of financial sector reform.”
The system proposed by the IAIS is very similar to that used by the FSB to identify global systemically important banks, with some modification to reflect the difference in the Insurance business model. The intention is to be able to classify those insurers who have global significance and then, through relevant and effective legislation and continuing oversight, to maximize their stability and to minimize the effect of any financial disaster the insurers may suffer on the rest of the global economy.
Under the proposed IAIS criteria, insurers are categorised according to 18 indicators in 5 broad categories: size, global activity, interconnectedness, non-traditional activities, and substitutability. Four of the five categories are the same as for the banking sector.
The Financial Stability Board, a group of regulators tasked by the G20 nations to establish measures preventing another financial crisis as in 2008, will be using the criteria to examine a total of 48 leading insurers to determine whether they should be placed on a list of “systemic” financial institutions along with leading global banks. AIG, Allianz, Axa and Prudential are all seen as potential candidates for inclusion on the list. Insurers deemed to be high-risk could be forced to hold extra capital under new safeguards being drawn up by the FSB.
The insurance industry supports improved regulation, however, according to the International Association for the Study of Insurance Economics, commonly known as The Geneva Association, the proposed measures are still using too many banking-specific indicators, and have not been adequately modified to account for the fundamental differences between banking and insurance companies. The media and politicians tend to lump insurance and banking together under financial service companies, but the reality is that the two are fundamentally different businesses. In their response to the IAIS proposal on Monday, the Association highlights the fundamental differences between banking and insurance, and argues that research has indicated that the most accurate and efficient method for assessing risk in insurance is to focus on activities, instead of the institution as a whole.
While banks have “callable” funds, in that creditors can claim access to their deposits at short notice, insurers only have liability when an insurable event has occurred. Insurers also receive payment up front, while banks provide credit up front, and receive repayments later.
The difference between insurance and banking is clearly illustrated in how the same criteria indicate different situations for each industry. Diversification and global activity is a good example. In banking, an increase in the size and global activity of a bank means an associated increase in risk and global impact. It is precisely the opposite when it comes to insurers, because insurers use increasing numbers to lower risk.
John Fitzpatrick, the Secretary General of the Geneva Association, elaborates,”We know that if we add more size or diversify by line of business or geography, it further reduces risk. So rather than these being indicators of systemic risk, we think they’re indicators of stability and strength.”
Size and global activities carry up to 20% weight in the assessment of indicators, but this is contrary to the nature of insurance, since size and global operations decrease risk. The new proposals do not properly take into account the enhanced stability gained by insurers when they diversify into multiple international markets.
“The insurance business is based on the law of large numbers – the larger number of units that you insure, the lower the volatility of the portfolio,” explained Geneva Association Secretary General, John Fitzpatrick.
The report points to recent research by The Geneva Association which has identified two activities that do have the potential to create systemic risk as defined by the FSB’s criteria, namely speculative derivatives trading on non-insurance balance sheets and the mismanagement of short-term funding. It recommends that, “when collecting data for this methodology, focus should be given to companies engaged in potentially risky activities.
Mr. Braumüller’s makes it clear that the IAIS understands this and has taken the different risk profiles into account, “The potential for systemic risk within the insurance sector needs to be considered where insurers deviate from the traditional insurance business model and more particularly where they enter into non-traditional insurance or non-insurance activities.”
However, it seems that the Association feels that the considerations don’t go far enough. “The system must make the best possible use of regulatory capacity by focusing on activities that can create systemic risks and not misallocate capacity and resources on areas that do not.
We believe that traditional insurance activities should be removed from the process and that noninsurance activities be given a higher weighting than they are currently.”
During the financial crisis, the areas in the insurance sector which were directly affected were not related to the primary business of providing insurance coverage, but other non-insurance activities, like banking, credit issuance and mortgages.
The Association agreed that these speculative activities should face tighter controls and higher capital requirements, but stressed that it was important to recognise the difference between hedging against risk (which insurers do as a matter of course) and speculative investing.
The report called for greater clarity in how the IAIS calculated the weighting of the interconnectedness category relative to the banking and insurance industries. Banks in the current banking system are very interconnected, as was highlighted by the LIBOR scandal. However, in their assessment of the banking system, the FSB have assigned 20% weight to the interconnectedness of the institution. Insurers are not nearly as dependent upon each other or so closely connected, yet the FSB have inexplicably assigned a 30-40% weighting to interconnectedness for the insurance industry.
The substitutability measure is also called into question. Insurance products do not require immediate substitutability, unlike in the banking sector where a catastrophic failure in the payment processing and credit facilities of a bank has immediate and systemic impact. The global financial system is not dependent upon the services of insurers and an interruption in insurance coverage of hours or even days would not necessarily create the same kind of consequences. Governments have stepped in before to provide cover during crisis situations, and would be able to do so again without causing systemic interruption.
It is widely accepted that the current string of regulatory changes is a good thing, but the insurance industry is concerned that some of the measures being put in place are either politically motivated, or are being thrown together without due consideration because of pressure from the media, governments and general public. Unintended consequences of regulation can be quite serious, and if we take into account the fact that the FSB is not the only regulatory body pertaining to the Insurance industry, some nervousness in the industry is to be expected. EU officials and industry regulators are currently working through the details of Solvency II, another package of EU-wide regulations set to come into effect in January 2014.
According to a survey by the Geneva Association, 73% of leaders in the insurance industry have significant concerns about the effects of inappropriate regulation. Chairman of The Geneva Association and Chairman of the Board of Management at Munich Re, Dr Nikolaus von Bomhard, said, “The insurance industry plays a vital stabilising role in society and in the world’s economies both as a significant participant in financial markets and as a shock absorber for individuals and companies that suffer an insured loss. The results of this survey reveal that leaders of some of the world’s largest insurers are concerned that inappropriate systemic risk regulation will needlessly affect our ability to play that role.”
About the IAIS: The IAIS is a global standard setting body whose objectives are to promote effective and globally consistent regulation and supervision of the insurance industry in order to develop and maintain fair, safe and stable insurance markets for the benefit and protection of policyholders; and to contribute to global financial stability. Its membership includes insurance regulators and supervisors from over 190 jurisdictions in some 140 countries. More than
120 organisations and individuals representing professional associations, insurance and reinsurance companies, international financial institutions, consultants and other professionals are Observers. For more information, please visit www.iaisweb.org.
A report released on Monday by the Healthcare Reform Office in China announced that the 3 year plan to improve some of the fundamental parts of China’s healthcare system completed its objectives on schedule. The Chinese Central Government spent almost US$71 billion between 2009 and 2011 in efforts to improve healthcare services to the public, build primary care medical facilities and new hospitals. Much of the effort was focused on extending coverage and providing medical services to the rural population, and the report claims that 95% of Chinese are now covered by public medical insurance.Read the rest of the Healthcare in China: The Overhaul that Underwhelmed article.
Insurance brokerages across Europe expressed frustration towards the European Commission’s (EC) latest revision of the Insurance Mediation Directive (IMD II), and specifically the component that makes remuneration disclosure in a transaction mandatory.
While not all of the regulations introduced were negative, broking organizations will not give up pressure on the EC to modify the rules until the IMD II is officially finalized and published sometime next year.
The European Federation of Insurance and Financial Intermediaries (BIPAR), and one of its members, the British Insurance Brokers Association (BIBA), were pleased to see their lobbying efforts recognized through the incorporation of other insurance distribution methods, such as travel agents or price-comparison websites.
However, BIPAR and BIBA along with various other European brokerages are not so happy with the EC’s plans to create a “level playing field”, by requiring all brokers in the general insurance line to disclose their commissions, before the end of a 5 year transition period. They claim that these rules ignore all of the advice and recommendations from the Financial Services Authority, HM Treasury, the European Insurance and Occupationla Pension Authority (EIOPA), and all leading insurance brokers in Europe.
The mass disappointment is supported by the fact that insurance companies selling directly to customers will not be subject to the same mandatory disclosure.
Head of Compliance and Training at BIBA, Steve White, expressed that his organization is happy with a number of areas of concern the EC addressed in the IMD II. Yet, the main concern lies with the rules mandating disclosure for brokers only, and the importance of establishing a “level playing field” when comparing to insurance companies selling direct.
David Strachan, Co-head of the Deloitte Centre for Regulatory Strategy, also shared White’s skepticism about the ability of IMD II to carry out its purpose. Strachan noted that the IMD II is meant to clear up any conflicts of interest among different sales modes. However, the difference between intermediated and direct insurance sales should be stressed to customers, because remuneration varies between the two services. Consumer clarity on the issue is vital to ensuring that the IMD II is a successful in its goal.
In the meantime, the Chief Executive of BIBA, Eric Galbraith, said that his association will cooperate with BIPAR to voice their perspectives as the Council of Ministers, European parliament, and European Union co-legislators, near the final publishing processes of the document.
On the other hand, other means of insurance distribution will also be affected, to many European brokers’ satisfication. After the implementation of the IMD II, sales channels such as price-comparison websites will also be under stricter regulation, in the EC’s attempt to provide greater transparency through all methods of purchasing insurance.
Currently, the IMD focuses on intermediaries, but the IMD II will incorporate a much wider scope.
Norton Rose LLP partner David Whear said that the most promising changes revolve around the kinds of groups and organizations that the new directive will regulate, such as loss adjusters, claims managers, and price-comparison websites. This ensures that much attention will be diverted from intermediaries, which may have been unfairly monitored before.
According to the EC, the revised directive will allow customers to receive complete transparency from the seller when purchasing insurance products. It claims that the purpose of the IMD II is to enhance customer rights and protection within the insurance sector, by implementing set standards and honest advice among insurance sales. In this way, business for intermediaries across borders will not be as much of a hassle, and therefore encourage an internal insurance services market to develop.
Although the revised IMD cannot be called a complete flop, European insurance brokers are about to enter a period of significant struggle, as the looming EC regulations threaten to hurt and complicate future business.
A recent study by the Qatar Financial Centre Authority, entitled the GCC (Gulf Cooperative Council) Insurance Barometer has revealed that prospects for the growth of the insurance industry in GCC countries are extremely bright. The GCC includes the nations of Bahrain, Saudi Arabia, Qatar, Oman, the UAE, and Kuwait.
The study conducted by the Qatari organization was conducted through a number of interviews with more than 20 senior executives of leading local and international insurance companies and was intended to gauge their forecasts for the relative health of the peninsula’s insurance market over the coming years.
Over 60 percent of the individuals and companies surveyed stated that they expect the insurance industry to grow over its current levels by 2015 – the GCC’s insurance market is currently valued at US$ 15 billion.
While the market is situated to lead GDP growth in the nations represented in the GCC, this should not be seen as an indication that higher premiums are over the horizon; more than 70 percent of respondents to the study stated that they believed the premiums associated with insurance products in the region, across all business lines, would remain relatively stable for the next 1-2 years.
An example of the dynamic growth currently being demonstrated across the Arabian Gulf can be seen in Bahrain’s insurance market.
In 2011 insurance sales contributed 8 percent of Bahrain’s GDP, up from a mere 3 percent in 2003. This massive upswing in the relative value of the Bahraini insurance market as part of the GDP follows on from increased local penetration for domestic insurance products which grew from 1.95 percent to 2.55 percent from 2002 to 2012.
On top of increased penetration levels the insurance industry of Bahrain, a country of only 1.2 million people according to the 2010 census, actually tripled in size between 2003 and 2012; the Bahraini insurance sector grew by a staggering 335 percent during that period.
The types of insurance products being purchased in Bahrain have also experienced a shift in the last decade, which may account for the increased levels of growth being demonstrated in the market. The sale of medical Insurance products grew by a staggering 1840 percent which may be due to the proposed legislation to mandate employer provided health coverage in the country; however, Marine and Aviation products saw a loss, shrinking by 13 percent during the same period.
The number of providers entering the Bahraini insurance market has grown in tandem with the industry’s overall growth levels.
In 1995 Bahrain had issued 109 insurance licenses, by 2010 this had jumped to 171; a massive 57 percent increase in the number of registered insurance companies legally allowed to do business in the country.
The growth in the number of insurers is indicative of a trend which is being felt across the GCC region – foreign insurance giants, increasingly feeling the burden of struggling markets in western countries are ever more turning to the Middle East and Asia as key development prospects.
In fact, according to the GCC Insurance Barometer Study, approximately 60 percent of those surveyed stated that they expect foreign insurance companies to increase their market share by 2014.
The fact that the GCC has an extremely health expatriate community will not hurt the Foreign insurers in terms of market penetration, as locally based expatriates prefer to obtain their coverage from organizations which they are familiar with in their home nations.
According to the CEO of Arig, a Bahraini based insurance company, Yassir Albaharna, “Foreign insurers continue to show much appetite for the GCC region and increasingly teaming up with local partners rather than establishing a green field presence.”
Other respondents to the Insurance Barometer study cited foreign companies’ higher levels of technical expertise, customer focus, distribution networks, and financial backing as key reasons why these organizations, and not GCC based insurers, would be best placed to capitalize on the recent success of the region’s insurance sector.
A majority of respondents expected to see strong growth in the region’s Takaful Market. However, contrary to this expectation, Takaful insurance, products adhering to Islamic Muamalat laws, have been one of the weakest lines of business in Bahrain. Takaful products have seen a loss each year for the last decade, except during 2010 when Takaful lines posted a 32 percent overall profit.
A number of the organizations and individuals surveyed for the GCC Insurance Barometer study, while not in the majority, indicated that they felt Takaful was falling short of the expectations which local providers had hoped this line of business would achieve, and termed the performance of Takaful products “disappointing.”
While not totally sidelining the possibility of a Takaful resurgence in the coming years, as the products did in Bahrain during 2010, it was indicated that Takaful insurers would need to develop compelling business models in order to realize success in the vibrant GCC insurance sector; a lack of compelling business models has been highlighted as the prime reason for the relative under-performance of these types of products.
In general, the future is bright for the insurance industry throughout the Middle East. With a number of initiatives on the cards, including mandated employer-provided health insurance for a number of countries in the GCC bloc, and improved regulation of domestic insurance markets in these countries, the Middle East can be said to be a shining opportunity for insurers globally.
Indian insurance regulator IRDA (Insurance Regulatory and Development Authority) is currently drafting guidelines which would allow Indian insurance and reinsurance companies to open branch offices, subsidiaries or joint-ventures overseas.
IRDA is currently circulating preliminary draft guidelines on what would be required of Indian insurance companies in order to allow them to open operations overseas. As the drafts circulate among domestic insurance companies, IRDA is asking for feedback from insurance companies before the end of 2012.
Many of the preliminary guidelines appear to be aimed at ensuring that domestic Indian insurance companies seeking to commence overseas operations are on solid financial footing to do so, and that doing so would not pose risks to local business and policyholders. As it stands now, domestic Indian insurance companies are not permitted to expand overseas, either through branch offices or investment in foreign firms, while foreign companies can currently own stakes in domestic insurers of up to 26 percent.
The draft allows for insurance companies of any category to apply to the regulator for permission to open foreign businesses after the insurers have been in operation domestically for 10 years. The proposed regulation would allow domestic insurers to start a foreign operation in a number of ways, either by opening branch offices, the formation of foreign subsidiaries by controlling the board or owning 50 percent of the paid-up equity capital, or by starting a foreign joint venture.
While many insurance companies in India have joined with foreign insurers to make joint ventures, any company that a domestic Indian insurer engaged with overseas to create a joint venture outside of India would not be allowed to enter into the domestic Indian insurance market.
Although there is a drive to make certain that Indian companies wishing to start operations abroad will have the financial wherewithal to do so without putting domestic business at risk, there are no concrete financial guidelines at the moment, whether with regards to the minimum net worth necessary to apply to the regulator for authorization or the capital requirements for establishing joint-venture’s overseas. However, the guidelines do mandate any losses incurred or capital requirements that must be met by foreign branches must be paid for by shareholder funds only, so as not to interfere with the policyholders’ funds in the domestic Indian business.
This could open a doorway to many opportunities for Indian insurance companies to globalize their business. In many places such as countries in the Middle East, there is a sizable Indian Diaspora which some insurers may already be considering tapping in to, however the opening of an office would also allow them to underwrite local business as well as expatriate Indians.