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الاثنين، 30 نوفمبر 2015

3Solutions for the tough 2016 Insurance Year...

Negativity, negativity, it’s all negativity when it comes to 2016 economic forecasts, especially in the countries where their GDP rely extensively on Oil and Petrochemical industries!! With the pessimism about oil prices remaining at their lowest intervals, and some governments decreasing their investment expenditures (even if not announced), all studies show that GCC will run on deficit GDP for 2016.


Disregarding, the economic, political, and social reasons that led to these results, and lack of proactive measures, we have to concentrate on the consequences on all sectors to minimize the implications.
Having said that, how does this impact the overall performance of (re)insurers operating in this area? I’m not writing about the MNCs which have  never-ending options to reverse the figures positively on their balance sheet, and keep their Economies of Scale advantage along with their strong financial stability (especially with the M&A option already in the pipeline for some major players). This article is targeted to Local & Regional players to absorb this strategic issue.
First and obvious solution is to cut down expenses, but is it a strategic one? Of course not, because most of the time, the credentials taken in this solution, might affect the overall operations when this black cloud passes. Therefore, I recommend having joint efforts between the regulators & insurance companies on the Sales side to ensure stable premium flow. Below are 4 solutions on the Macro and Micro levels:
Solution 1:  Imposing a strict collection policy by the regulators and to be implemented on an industry scale.
I always tell my team that is far more profitable to issue 1 million dollar ofcollected premium rather than issue 10 million dollars of premium on credit basisin the market. This statement is applicable anywhere anytime and with a tough year ahead in terms of cash flow, this rule should the golden one for sales operations.
Unfortunately, once a company decides to implement it to protect its balance sheet, you will find another one benefiting from the free market conditions, and offering long credit facilities in order to increase its market share. This practice will hurt both firms as the first will lose the account, and the other will increase its receivables figures, thus affecting profitability margins.
One solution is there to stabilize the market, and it should be enforced by the industry board in each country under the direct supervision of regulators: “A mandatory credit policy for Retail, SME, and Corporate accounts”.
Once it is effective, all companies are obliged to follow and each company will protect its market share against such threat. No need to mention the risk of uncollected premiums to the re-insurers on the country’s reputation globally.

My recommendation is to issue all policies with the below payment terms:
1.     Retail policies: 100% upfront payment upon policy inception;
2.     SME policies: 50% upfront payment upon policy inception, and the remaining balance in 30 days period (all endorsements to be paid within 30 days also);
3.     Corporate policies: 50% upfront payment upon policy inception, 25% within 30 days period and the final balance within 60 days period (all endorsements to be paid within 30 days).
If the client fails to finalize the payment within the above periods, a 15 days Cancellation Notice will be sent immediately as no company should handle any unpaid premium against a defaulted client.
That way, the insurer will cover a huge portion (if not all of it) of the reinsurance premium upon policy inception, so the financial liability will be minimized while having reasonable market practice.
Solution 2: Emphasizing on Retail & SME product.
You emphasize on a corporate account that will generate your monthly 5 digits premium, and with one small move or better offering from the competitor upon renewal, you will lose and all your budget and target forecasts will evaporate. Not a smart move!!!
With the above credit policy already in place, insurers should move their focus on retail and SME segments. Let’s split this section into two windows:

a- Marketing:
With over 40 years of experience managing our family pastry shop, my father always tells me: “I prefer to have 10 customers spending 10$ each, than having one customer spending 100$ alone, because only then you will realize that you have a successful business”.
The same principle is applicable in our industry. Approximately, every individual client is a source of an SME or Corporate account if properly serviced by a competent, well-trained executive, and that ladies & gentlemen is how you increase your market share from scratch.
b- Technical:
In my humble opinion, Retail & SME portfolios should compose merely 70% of the insurer’s total portfolio. One reason is that you will secure that 70% of the premiums are collected within a maximum 30 days timeframe. Another reason is that you will have sufficient cash flow to support all Operating Expenses which is crucial nowadays with the increasing number of stakeholders.
 Solution 3: Diversification of Distribution Channels (i.e. E-Insurance, Bancassurance)

For decades, insurers have relied on 3 distribution channels to promote their products:
·         Direct Sales
·         Agencies
·         Intermediary/Broker
During the last decade, a new channel aroused and proved to be a hit in terms of market exposure and profitability, which is: “Bancassurance”.
Since the insurance company is using the bank’s customer base to sell its products, this channel gained large power and reliability as premiums are collected upon policy issuance, and both entities are earning their profit share. One of the largest examples worldwide for the effectiveness of Bancassurance is the 15 years strategic agreement made between Standard Chartered Bank and Prudential plc for the Pan-Asian market where Standard Chartered CEO Peter Sands, expects to have a total of 300 Billion $ of Assets Under Management (AUM) by 2020.


Another channel that can generate instant profits is: “Online Insurance” for direct sales.
Insurance Companies have focused their IT Investments over the Intermediary channel to make their life easier (Online Portals, etc), and eventually streamline the customer experience. However, how about to skip this step and investing in the client himself by offering Online Insurance purchase like it is implemented in some companies in India (i.e. Oriental Insurance, SBI Life)?
With only 1.5% Insurance penetration in the GCC area, there is a big responsibility on insurers to increase their investments throughout the direct channel, by having awareness campaigns, advertising and PR plans.
The same can be implemented on the broking side, by linking the websites together and earning normal commission same as the client was sitting in the POS issuing his policy.
This innovative idea will secure direct payments to the insurer/broker/agent, and penetration will be increased exponentially for all product lines.
Again, don’t put all your eggs in One Basket!!!

Despite the negativeness that all the forecasts gives us for 2016, let’s look at it as a stress test for our Business Models and rely on innovative measures to survive it. Who knows? Maybe 2016 will be a business Black Swan after all!!
My industry peers... Your comments are always welcome for public benefits.

By : Anthony Bechara