Globalization, boundaries wide open to each other, largest cultural interaction in human history, new & complex risks arising everyday (cyber, financial, commercial, political, etc) …. The big question is: “Is our insurance practice equipped to manage these new factors?”
Talk of town these days is about the “Internet of Things (IoT)”, and its impact on all insurance principles thanks to Big Data usage especially for Actuary and Underwriting principles.
No doubt that it will have a huge impact for the amount of information transacted every second throughout the hundreds of billions of devices connected to the servers. Disregarding the disastrous risks associated with IoT on International & Individual levels which I will detail it in another article, I would like to discuss in this one, the evolution of underwriting practices for the in face of such a global transformation.
I was discussing with a peer of mine earlier this week, about the expectations of his company and future projects for 2016. He replied, that the Senior Management decided to cancel new projects, because they are expecting a low income on their equity investments, and don’t expect an increase in premium turnover on the other side.
It is very unfortunate to see one of the best performing local market players in Oman is having this strategic view of its own operations – and the chain goes on to other companies with the same thinking.
This crisis is a snowball, getting larger & larger as it goes down, and will surely not leave any sector without direct & indirect effects. As insurance professionals & risk specialists, how can we modify our practice to overcome nowadays strategic challenges? The below ideas are the results of my brainstorming which can be discussed further:
If M&A isn’t an option for some local players to create economies of scale, then clustering might be an applicable solution. This option will allow two or more insurance books to create a cluster against the reinsurer, in order to provide better reinsurance terms. The cluster can be managed by a special committee from all the members to develop mutual goals. Usually, such option is applied when firms want an M&A testing period without legally having it, because the clustering will open hidden cards for all members. Technically speaking, the clustering will give the members much enhanced terms from the reinsurers since the business volume exponentially, so the insurers are in a better negotiation conditions for the guidelines.
Micro-Insurance is a financial arrangement to protect low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved.
Micro-Insurance is one of the best insurance lines that generates high premium turnover, which creates a premium pool that can be used for other projects, especially that the risks associated with Micro-Insurance are minimal comparing to other ones, so the reserves levels are also to the favour of the insurer.
Examples of Micro Insurance products are:
· Life Insurance;
· Critical Illness Insurance;
· Property Insurance;
· Crop Insurance, etc
Increasing the Micro-Insurance portfolio will let the insurer hit 3 Birds in one stone:
· Increase the premium pool, hence Profitability;
· Increase Market Penetration; and
· Funding for other lines.
Already this strategy is implemented by some players due to appetite decisions taken by the underwriting management, but instead no alternative is being provided, thus the company will lose its chance of gaining the current query, and the client/broker in return will not approach it for any future needs ---- The whole portfolio will be lost.
A whole new approach should be considered for these accounts especially that most of them fall within the SME sector, and this is the most developing channel in the MENA region in terms of premiums turnover, and penetration potentials.
MNC’s already have such strategies such as AXA & AIG, but I’m discussing local players operations in this article, which has smaller economies of scale. These companies should revise their reinsurance treaties, and develop multi-risk combined products that will allow them to increase their portfolios (i.e. Property Multi-Risk insurance that combines property insurance, public liability, employer’s liability in one policy).
Operationally speaking, local insurance companies have a larger manoeuvre margin than MNC’s because the underwriting authority level is local and the organizational structure is flatter than their international competitors.
Last but not least, local players should rise up to the challenge ASAP, and join efforts to face these Global threats, or else they will face disastrous results in terms of Economies of Scale and Solvency, therefore empty the market to the huge giants....
By . Anthony Bechara