Financial Lines—MENA

NEIL DAWSDirector

Lockton MENA Limited+971.420.7933.2077

neil.daws@uk.lockton.com

L O C K T O N C O M P A N I E S

Market Update April 2012

PLAYING THE LONG GAME

A review of the financial lines market in the MENA region and

the potential for growth.

Wth regulatory zeal spreading across the globe following the economic downturn of the past few years, regulators now have more teeth and are increasingly keen to use them. The result is that companies face an increasing array of liability risks.

The MENA (Middle East and North Africa) region is not immune to these changes—both locally and internationally. In the Middle East, regulatory bodies, such as the Dubai Financial Services Authority (DFSA), the Saudi Arabian Monetary Authority (SAMA), and the Central Bank of Bahrain (CBB), have imposed some fairly stringent regulations on financial services companies operating in these territories. Kuwait also has plans to enhance its regulatory powers.

Internationally, there are a plethora of regulations, such as the U.S. financial regulatory reform Dodd-Frank Act, the U.K. Bribery Act, and the Foreign Corrupt Practices Act in the U.S., which impact on companies based in the Middle East. Although these companies and their directors are waking up to the need for good corporate governance and risk management procedures, the penetration levels for financial lines liability insurance are still very low across the MENA region.

Market Update, Financial Lines—MENA Lockton

Claims Are Starting to Drive Awareness

Traditionally, Middle Eastern banks have focused on buying bankers’ blanket bond cover to provide first-party loss cover. But as lawsuits emerge between financial institutions, companies, and their shareholders, including employees, and with regulators starting to issue penalties which range from significant fines to prison sentences, the spectre of third-party losses is being raised. As with most insurance—“you need a claim to feel the pain”—and with claims starting to come through, financial services companies in MENA are beginning to implement compliance, risk management, and risk mitigation policies that include a broader range of financial lines insurance products.

Many banks and financial services companies with a progressive culture are starting to recruit trained risk managers and compliance officers, and this is resulting in an interest in financial lines insurance products such as directors and officers liability, professional indemnity, employment practices liability, and warranty and indemnity.

Risk Management Becoming More Commonplace

Traditionally, companies in the Middle East have been privately owned and often family-run, and as such have not been overly concerned about corporate governance and internal controls. However, as the region becomes a magnet for international business—and many Middle Eastern companies are looking to expand internationally—lack of internal control is no longer a sustainable option. The forward-looking companies are starting to implement risk management strategies

to meet regulatory standards, but there are some that continue to manage their companies as though nothing has changed.

Historically, local business practices have been problematic and are often not in line with internationally accepted working standards. This has resulted in an increase in claims linked to these practices—especially against financial institutions. But the move to employ international-style risk managers and drive a best practice and a compliance culture through a number of financial institutions in the Middle East, along with local companies looking to attract investment from foreign partners and investors, is resulting in improved working practices—in particular in the more progressive and ambitious companies.

Price-Driven Purchase Mentality Needs to Change

Traditionally, the region tends to be very price-driven when it comes to buying insurance. This attitude will need to change if insurance is going to offer the levels of risk mitigation required. Buyers need to understand that buying on price alone is not sustainable in the long term. When claims start to come through, insurers will exit the market if they cannot make the required returns on their books of business.

Market Update, Financial Lines—MENA Lockton

Another problem with buying purely on price is that clients will find their cover is not sufficient, and they are left financially exposed. Companies should look to use the assistance of specialist brokers who can advise them on the appropriate coverage levels for their particular business, on how the policy will respond in different jurisdictions, what deductibles are appropriate, and the overall suitability of the cover for the company and its executives. Currently, premium prices remain very competitive across the region, as increasing numbers of international insurers set up operations in the MENA region and the competition for business intensifies.

Increasing Interest in Professional Indemnity

Professional indemnity, especially for companies working in the construction industry across the region, is becoming increasingly popular, and policies are often written to provide extended guarantees for up to ten years after the completion of a building. This is an area where claims are already being experienced, often as a result of the speed at which a number of buildings “sprung” up during the building boom in places such as Dubai. There is currently a large-claim, high-profile case in the courts which is alleged to be a design error by an architect. The argument over who pays continues to rumble, and all the while the legal costs escalate.

Employee Payouts Result in More Claims

Employment practices liability is also another area for potential growth, and there are a number of claims for wrongful dismissal, discrimination, harassment, and other employee-related issues emerging. As these stories emerge, so claims are likely to escalate as employees realise their rights and the potential for lucrative payouts.

It is unlikely that employees in the Middle East will become anywhere near as litigious as in the U.S. and parts of Europe, but changes in this area are happening.

Economic Upturn Is Likely to Drive Demand

Interest in other products, such as warranty and indemnity insurance, is also on the increase. The economic downturn precipitated a drop in demand for insurance, but as economies strengthen, there is an expectation that this form of cover will increase in popularity for Middle Eastern companies looking to merge or acquire other businesses.

Going forward, the pressure will build from governments and regulators on financial organisations, and in particular the banks, to face up to their corporate responsibilities and to commit to improving their operating and risk management procedures. There will come a point when the poorly run entities must realise that they cannot operate in an isolated manner, and that they should seek external assistance to give them the required knowledge and specialist advice to improve their working practices and bring them in line with internationally recognised standards.

Market Update, Financial Lines—MENA Lockton

© 2012 Lockton, Inc. All rights reserved.Images © 2012 Thinkstock. All rights reserved.

Takaful Not Always What It Appears to Be

Takaful solutions are also very popular, and many Islamic banks are keen to have pure Takaful policies. Money is often an issue, as pure Takaful policies tend to be 30-40 percent more expensive than traditional market policies, and so cheaper alternatives are often sought. However, cheaper so-called “Takaful” alternatives are not always what they appear to be on the surface, and the reinsurance of the products is often not Takaful.

The Challenge

Finding the correct equilibrium of providing the required level of coverage, with a quality and financially stable insurer/reinsurer at an acceptable price, continues to be a challenge in the MENA region. Encouraging transparency and openness is also another problem.

As brokers, we need to work closely with our clients and highlight the importance and necessity of frank, honest, and open financial disclosure in order to allow the appropriate information to be used to assess the level of coverage required and to give underwriters a full understanding of the business and its risk mitigation needs.

Another key to success going forward is to draw the attention to our clients of different and alternative products and their benefits. Also, we need to help them understand how they work and their true value as well as how to wean clients off judging a product purely on price. We need to help them to recognise the benefits of having wordings tailored to their local needs and having efficient claims-handling processes.

The upswing in interest in financial lines insurance is happening, but progress is slow and penetration levels are still very low. As the region increasingly becomes a magnet for international investment and Middle Eastern companies look to adopt international standards for internal controls and corporate governance, the demand for products will increase. All the pointers indicate that these products, which were previously little understood or purchased in the Middle East, will eventually become standard elements of quality Middle Eastern companies’ insurance programmes, but just when this will happen remains the big question.