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Sun 20 May 2007 12:00 AM

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Risky business

Dennis Mahoney, CEO of Aon Global - takes Andrew Mernin through the Middle East's ever-changing risk climate.

Brimming with anecdotes about the many weird and wonderful insurance claims he has read over the years, Dennis Mahoney clearly enjoys his job. One tale depicts how the flush of a toilet caused an extensive damage to an industrial plant, while his repertoire of humorous motoring stories show the lengths some people will go for a handsome payout.

As the first chairman of the World Insurance Network and a former president of the Insurance Institute of London, Mahoney is a man who has devoted his entire career to the game of risk. In his role as chairman of Aon Global, he is a major player in one of the largest insurance networks on the planet and one of the most dominant risk forces in the Middle East. "We've been on the ground here for over a quarter of a century and we're certainly the largest broker in the region by a considerable amount," he tells me at the Middle East Energy Insurance Conference (MEEIC) in Dubai. Driven largely by opportunities in energy insurance, the group continues to strengthen its presence in the region. In Q1 2007, the EMEA market brought in US$434m in revenue - a 16% climb on the previous year. This compares to global profits in the same period of US$2.4bn, a 10% climb on Q1 2006.

The refiners are getting bigger, the drilling wells are going to deeper water, and there is new technology being applied all the time, so your risk standpoint is always an interesting challenge.

With some US$100bn expected to be spent in the Middle East on power projects over the next ten years - and demand from China and India showing no sign of slowing down - the opportunities in energy insurance are obvious. The International Energy Agency predicts that demand for oil and gas will increase by 42 and 67% respectively by 2030.

There is no doubt that energy insurance is certainly a high-risk, high-reward operation. In 2005, the insurance industry paid out in excess of US$10bn in losses in the energy sector although, according to Aon, an annual average of between US$4 to US$6bn is much more common.

As Mahoney explains however, the region has far more to offer Aon than the energy sector. "The whole region is important to us," he says. "Of course most of the opportunities tend to be in the energy sector but there are also the booming tourism and financial service industries - Abu Dhabi is really stepping up its financial services sector." According to Latif Al Rayes, chairman and CEO of Aon Middle East, the opportunities in the region for what he calls "value-added brokers" are driven by: "the buoyant new projects market, the expansion of insurance risks, structural reforms in health and pensions, numerous new IPOs and the introduction of new regulations."

Currently, Aon's impressive list of clients in the region includes Saudi investment giant Saudi Basic Industries Corporation, Abu Dhabi National Oil Company and Kuwait Petroleum Corporation. Mahoney is eager to tell me that he Aon sees the region in a "total sense, without focusing solely on one particular country," although he admits that the group alters the way it does business between various different Middle East nations. Despite residing in Bermuda, the Aon Global chief is well tuned into the Middle East market having made numerous visits to the region over the years. And he has witnessed at first hand the evolution of the region's insurance climate. Mahoney cites "keeping up with the risks that you have to insure" as the biggest challenge for Aon over the last 25 years in the region.

"The refiners are getting bigger, the drilling wells are going to deeper water, and there is new technology being applied all the time, so your risk standpoint - the recognition of those risks and the insurance of them - is always an interesting challenge," he explains. While a region populated by refiners buoyed by high oil prices looking to exploit untapped, harder to reach resources may present Aon with considerable challenges, it also brings a number of significant advantages for brokers over other resource-rich areas.

The Gulf is free from natural threats like hurricanes or earthquakes and, with such huge investment being pumped into the region's energy projects, there is an eagerness from energy chiefs to cover any risks.

For the insurance chief - who admits to being "amazed" at the pace of change in the UAE - the biggest shift for Aon's Middle Eastern operations has been the nature of its workforce. "25 years ago many of the people we started out with were expats, so the biggest change has been the gradual decrease in the number of expats employed and the increasing utilization of local people," he says. Over the last few decades, Aon has also accommodated the shift of the region's traditional family businesses towards modern risk management.

"Absolutely," he says when asked whether Middle Eastern family businesses are becoming increasingly open towards risk management services. "The experience and technical knowledge has grown in the region, so there is a huge amount of local expertise in banking and finance now, to bring the benefits of insurance to all businesses and individuals. We are involved across the spectrum."

While Aon has established a deep-rooted presence in the Middle East, it has also witnessed at first hand, an ever-changing climate of risk. According to Mahoney, the effect of political instability in certain pockets of the Middle East on the region as a whole are not as dramatic as some analysts would suggest. "The troubles in Iraq or Lebanon last year haven't had an effect on the risk climate in the GCC," he explains. "I was asked recently whether the huge hurricanes in the American gulf and the big losses they caused to the petrochemical companies affected the petrochemical industry in this region and the answer was yes and no."

"Clearly it reduced the capacity of the industry because there was US$20bn paid in losses but that didn't mean the exposures in this part of the world would be viewed in the same way," he continues.

When it comes to risk, Mahoney believes there is a common misunderstanding among outsiders about its dynamics in the Middle East.

"There's a misconception out there that if there's an issue in one particular country in the region, it leads to a problem in another part of it and that's just not true. It would be great if more people outside the region could appreciate the size and stability of it," he adds.

While Aon employs 43,000 globally in 600 offices from over 130 countries, it currently has ten strategic locations in the Middle East.

With US$600m of premium handled in association with local markets the group is the leading insurance broker and risk management consultant in the Middle East. According to Mahoney one sector that the company could increasingly get involved with in the region is nuclear energy as GCC governments gradually turn their attention to the controversial energy source. "We're already involved with it [in other parts of the world] and it's not unusual for us to be called in as experts in the insurance of energy and as consultants to those sorts of projects," he says.

It’s a misconception out there that an issue in one country in the region... leads to a problem in another part.

"I think most people would concur that the relative safety of nuclear plants has clearly improved over the last two decades, and it is ultimately safer than it used to be."

So how does the risk master assess the threat posed by terrorism to business in the GCC and Middle East as a whole? "It varies enormously - it wasn't long ago that London was a terror risk because of the actions of various groups such as the IRA. Clearly there's a lot of instability in Iraq today but that doesn't necessarily mean there will be more terrorism in the region," says Mahoney.

"We have a whole group of people around the world who are specialists in political risk insurance and the analysis of terrorist risks," he adds.

Addressing over 350 delegates at the MEEIC, Magne Seljeflot, chairman of Aon's Natural Resources Global Practice Group, highlighted the huge potential for energy insurance in the region and urged more integration within the sector. "Risk management will become more sophisticated as it becomes increasingly integrated with the financial and strategic planning of individual companies," he said.

"Multi-million dollar projects invariably require external finance, which need a much stricter focus on risk management. The supply chain is greater than ever so if something goes wrong the consequences are far more severe than if they would have been 20 years ago," he added.

Mahoney agrees that integration and debate is key to the ongoing development of the Middle East's risk management sector. "We think that by encouraging the relationship between the buyers and the sellers we can encourage a much healthier atmosphere between the two parties, mutual respect and understanding of what it is each is trying to achieve. Our job is to be the advocate between the client and the buyer."

As our meeting draws to a close Mahoney reverts to unloading some more of his many entertaining anecdotes from a career spanning back to 1969. "And people say insurance is boring," he says.

Dangerous world

The cost of natural disasters

According to combined estimates by Sigma, RMS, and S&P, the most expensive disaster in modern history in terms of insured loss was 2005's Hurricane Katrina that devastated parts of Louisiana and Mississippi, amounting to US$55bn. The insurance research group AIR Worldwide predicts that the first US$100bn insured event could happen at some stage in the near future however. According to its reports - as quoted by Mahoney at the MEEIC - if a category 5 hurricane was to hit Miami today, insured loss could stand at US$155bn (residential and commercial losses only), with this figure rising to US$500bn by 2020 if demographic trends continue. A Richter 8 earthquake in San Francisco could cost around US$200bn while a Richter 7 quake in Los Angeles would reach around US$140bn. Mahoney told attendees at the MEEIC that a US$100bn event would have the short term effect "of primary issuers having to increase premiums to replace reinsurance cover". He also suggested that reinsurance capacity would likely be restored fairly quickly because of low barriers to entry and the ability of surviving reinsurers to access capital markets.

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