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Thu 15 Apr 2010 04:00 AM

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Risky business

Too much competition in the UAE insurance sector will be bad for the consumer, AXA Gulf chief warns.

Risky business
Led by its Gulf CEO Jean-Louis Laurent Josi, AXA is arguably the biggest international non-life player in the GCC.
Risky business
The lack of insurance penetration even in the busiest parts of the region such as the UAE and Saudi means that AXA sees the GCC as being a structurally sound prospect mid to long term.

Too much competition in the UAE insurance sector will be bad for the consumer in the long run, warns the head of AXA Gulf.

If you're under the impression that insurance is nothing more than a tax tagged onto your monthly outgoings - think again. In March, reinsurance giant Swiss Re published its annual figures on the cost to human society in terms of natural catastrophes and man-made disasters in the previous year.

In 2009, this came to $62bn, of which insurers paid out a total of $26bn. And this, Swiss Re says, was a relatively quiet year, with history showing a tendency towards an upward trend; in 2005, the losses to insurance firms due to this bracket - not including your ordinary claims - amounted to $117bn. That's a little more than the estimated GDP of Kuwait in 2009.

In short, the risk to the biggest businesses is increasing, and more of these firms are putting a focus on emerging markets. In terms of size, they don't come much bigger than French behemoth AXA, which has been active in some Gulf markets for as long as 60 years. AXA, which placed 74th in the Fortune 500 list of the world's largest corporations, describes itself as the biggest international non-life player in the GCC, despite the fact that the global firm is primarily a life insurance outfit. In a market that is littered with local players, AXA posted surprisingly strong results last year.

"While 2009 was a challenging year, we increased profits by nineteen percent, which compares favourably with our competitors," smiles the affable AXA Gulf CEO, Jean-Louis Laurent Josi. "And it terms of growths in our premiums, that figure was up by almost 8.6 percent."

When asked to put these figures into context, Laurent Josi points out that, to the best of his knowledge, the profits made by his competitors in the GCC actually dipped during the course of 2009. So how come AXA's figures were up by almost a fifth? The CEO believes that two factors have contributed to the healthy figures.

"We are extremely strong in terms of our technical profits, as well as our financial profits," Laurent Josi explains. "Our technical profits derive specifically from the people we insure, which means that we are successfully finding the right risks and putting the right tariffs on that risk. We shouldn't be ashamed of our high profits in this regard, because that's our core business."

In insurance terms, technical profits refer to the money an insurance company specifically derives from the combined ratio on its policies - what one might call its core business. But on top of that, insurance firms also take the money accrued from premiums and invest it, the results of which provide the full financial results. That explains the fluctuating profits posted by those insurance companies more devoted to playing the markets rather than focusing on their core business.

"Other insurance firms might rely on their full financial results, which have tended to drop as a result of the downturn," Laurent Josi continues. "But at least 20 percent of the profits for AXA are always technical."

The other key reason for a successful year is, the executive believes, the rationale by which both customers and brokers gravitate to what are perceived as more stable and healthy companies in difficult times, thus lowering their risk.

"People need to know that their claims will be paid," he explains. "It's unfortunate that there is a perception of insurance as a tax; people tend to forget that the main purpose of insurance is to be there when people are in trouble."

But while regional results were generally excellent, a closer look shows that a large Dubai-sized hole has made something of a dent in some otherwise stellar figures. If the UAE is removed for the GCC figures, growth in premiums rocketed by between fifteen and 20 percent. Inside the UAE, Abu Dhabi premiums rose by more than a quarter, while Dubai sank by around four percent. However, those results aren't solely due to the problems that the UAE's largest city has recently faced."While Abu Dhabi performed well, it was still not enough to compensate for Dubai," Laurent Josi indicates. "Dubai is far more penetrated in insurance terms, even if there is still under-penetration compared to the more mature markets. Let's not forget that this market is also very fragmented."

Recent data from consultancy Value Partners has hailed the growth in premium volume in the GCC generally, which reached 28 percent year-on-year in 2009. But the fact remains that observers think that the market is still not growing as fast as it could be.

"Insurance penetration, for example aggregate insurance premiums over GDP, stands at one percent for the GCC countries," says Santiago Saguto, managing director of Value Partners' Dubai office. "In contrast, the developed insurance markets in the US and Europe register penetration rates in the range of five-fifteen percent. GCC giant, Saudi Arabia, has a particularly low penetration of only 0.6 percent, dwarfed in absolute size by its smaller neighbour, the UAE, which has a penetration rate of two percent."

But the fragmentation of the market is a key issue here; at the last count, there were some 57 operating insurance companies in the UAE. In order to differentiate themselves from their competitors, these outfits often resort to the only obvious option - lowering the price of their policies. This may be a great position for the consumer to be in, but it's AXA's belief that long term, this could be damaging, particularly if that insurance company is in fact quietly passing the risk onto another firm. "A lot of companies are ‘fronting' the business in the region," the AXA head says.

"While they might ostensibly be insuring the client, they can pass the risk onto a reinsurer for, say, 90 percent of the premium - which is hardly ideal for the customer. Before this crisis occurred, customers just didn't care who was actually covering them, but they worry about who is managing their claim, because it has a big impact."

Although the plethora of players has not yet resulted in any one operator finding itself in the position where it is no longer able to pay out claims, Laurent Josi believes the end-result of the situation is likely to be consolidation, or even firms dropping out of the market. "That's my feeling," he says. "At the end of the day, I see no reason why this region should evolve in the same way that more mature countries have, which means consolidation."

As a result, like other firms across the business spectrum in the UAE, AXA is focusing on customer service, by revamping its web offerings and playing close attention both to client retention and satisfaction, which its latest data shows stands at 88 percent.

And compared to more mature markets, the lack of penetration even in the busiest parts of the region means that AXA sees the GCC as being a structurally sound prospect mid to long term. "For me, the easiest thing to do last year would have been to lay off people, cut salaries and cut bonuses, but the last thing I will disinvest is the people," Laurent Josi claims. "So we increased salaries, and we increased our employee base in GCC by more than ten-fifteen percent during the crisis. On the other hand, we have looked at making savings and modifying processes - so in 2008, we were very cautious in terms of investments, with no material impairments."

Such a bullish approach to the recession in Dubai has no doubt been aided by the exceptionally strong results reported by the firm's parent, the AXA Group. The French company posted a $1.1bn profit in 2008, a figure that rocketed to $4.8bn in 2009. This is backed up by a solvency margin - (ie) the extent to which a company's assets outweigh its liabilities - of 171 percent.

"Populations in the GCC are growing, and let's not forget that these are all wealthy countries," continues Laurent Josi. "If you take all these elements into account, companies operating under these conditions in Europe and the US would be absolutely delighted."

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