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23 February 2024

Size of risk to value of premium imbalance in need of correction

Abdul Muttalib Mustafa CEO, Oman Insurance Company (IMAD ALAEDDIN)

By Mohammed Elsidafy

The UAE's insurance firms are strong enough to weather the impact of the international financial crisis, according to the top executive of one of the largest insurers in the region – Oman Insurance Company.

In an interview with Emirates Business, Abdul Muttalib Mustafa, CEO of Oman Insurance, denied reports that the losses of the insurance sector might reach 15 per cent. It is still very early to arrive at any real figures, he said.

Insurance companies should take advantage of the positives of the international financial crisis, he said, and work according to correct systems, in which the volume of resources and commitments are defined.

What are the reasons behind the collapse of AIG? What implication does this collapse have on the insurance companies in the region?

I do not have accurate details about the real cause for AIG's collapse. However, since property loans are the reason behind the US financial crisis, the US insurance company might have collapsed due to the imbalance between resources and commitments. Also, there might have been faults in the systems applied in the company and perhaps warnings about the imbalance went unheeded. Regarding the repercussions of AIG's collapse on the region's insurance companies, there is undoubtedly a big effect in the region. The American giant had relations with several outfits in the region.

What is the effect of the international financial crisis on the insurance sector in the UAE?

If the banking sector is the first wing of the economy of any country, the insurance sector is the second wing of that economy. The insurance sector is the one that protects resources and available money. Banks now complain about the shortage of liquidity and that shortage was due to the expansion in all forms of loaning in a way that exceeded expected resources. That led to an economic downturn, which was alleviated only due to government intervention through the provision of liquidity and guaranteeing of bank deposits. As long as we work according to the principle of an open economy, we are not isolated from the global economy and that means the insurance sector in the UAE was affected by the international financial crisis.

Some projections say the losses of regional insurance sector were 15 per cent. How authentic are these projections?

It is still very early to determine the effects of the international financial crisis on different sectors, especially as accurate figures have not been released by any responsible official body. I think all the figures released so far are random.

What about the losses of insurance companies listed on stock markets?

The stock markets have borne the brunt of the crisis. Insurance companies listed on the stock markets are definitely affected. But the impact on these companies depends on their activities in the market and the volume of their investments.

Are there any companies on the verge of exiting from the market?

I have not heard of any insurance or re-insurance company in such a difficult position. The situation of insurance companies in our country is good, overall.

What are the lessons to be learnt from the crisis?

A crisis always generates some positive things. So, we should limit the negativities and look at the positives. The companies should revise their accounts correctly and according to the developments.

In the light of the collapse of top international firms, they should work according to correct systems, where the volume of resources and commitments are defined and expansions are well planned. In the meantime, insurance companies should improve the performance of slack sectors and search for new alternatives, such as personal properties, life insurance and home insurance. People should be educated on the importance of all forms of insurance.

Do you think the insurance sector in the country needs mergers?

If the merger were with a company working outside the country, it would create new opportunities. But if it happened with a domestic company, it will be an acquisition rather than a merger. So far, the position of insurance companies in the UAE is good, as is their financial situation. So, there is no need for acquisitions.

What is the total number of insurance firms here, both national and foreign?

The total number of companies is 52. Twenty-eight of them are national companies and we hear there are still applications pending for entry of new companies into the local market. In the volume of insurance premiums in the country, the share of national insurance companies is 70 per cent – around Dh7 billion to Dh8bn.

What are the challenges you think the insurance sector faces?

The most important thing is to get out of the crisis with the least losses and to transform the negatives in the market into new opportunities. We also have to improve our performance to develop the profession.

A regular renewal of insurance agreements will be done in the beginning of 2009. Do you think the companies will be stricter in the new contracts?

The re-insurance companies have the right to make profits from their operations. Until recently, profit margins of re-insurance companies were almost non-existent. So, it is natural that these companies will come up with stricter conditions of renewal, especially as the general situation of local market is more competitive now where prices are concerned.

What is your take on current prices?

If we compare the size of the risks covered with the value of premiums, we would find the equation does not balance. So, a revision is required to create a new and more just equation to enable the insurance companies to maintain their level of services.

With the increasing number of fire accidents, the Civil Defence Department has asked for companies and institutions to bear part of the fire-fighting cost. What is your take on that?

This is a futile suggestion. We should search for alternatives to prevent fires rather than distribute the cost of fire fighting.

How do you evaluate the performance of the Emirates Insurance Association?

The association is a consultative body and performs its role as an entity having insurance companies under its umbrella. We, as insurance companies, make ourselves heard by the bodies concerned through the association.

What is your opinion of the growth of Islamic insurance?

I am looking forward to the presence of true Islamic insurance. What is available currently needs a revision so that the 'Islamic insurance' companies carry out their business correctly, not repeat the practices of traditional insurance firms.

What are the reasons for the failure of Emiratisation in the insurance sector?

The Emiratisation rate in the insurance sector does not exceed seven per cent. This is attributed to many reasons, including the sector's need for more than the present number of qualified nationals who apply for work in the insurance firms. In addition, some nationals are unwilling to work in the sector.

Out of 52 companies working in the insurance sector, there are around 24 foreign ones. There are also applications pending for the entry of new foreign firms. What is your take on that?

I do not have objections to the entry of foreign companies into the UAE as long as these firms add new ideas to the market.

What is your evaluation of re-insurance companies?

The conditions of re-insurance companies do not differ much from the conditions insurance companies are experiencing in terms of investing financial surpluses in different investment fields. Most re-insurance firms were affected by the fall of investment returns. I think these firms will apply stricter measures revolving around the reduction of capacity or they would apply more professional measures to attain better results.

Do you support the idea of "liberation of insurance sector"?

I, of course, support the liberation of insurance sector but this should be according to certain regulations. The client should be the first and last governor and it is necessary to deal with the clients on a value-added basis, not on the basis of low prices, which is applied currently. The provision of safe and comfortable climate for the clients by insurance companies will lead to high costs, which the clients should bear. This will not come through legislation but through a modern and progressive thought.

What about the results of Oman Insurance Company during 2008 compared to 2007? And what about your expectations for 2009?

We have a growth rate of more than 50 per cent at the level of operations size in the insurance sector. Our profits also rose in 2008 by 100 per cent compared to 2007. I currently do not have the accurate figures in the field of investment but I think the investments in 2008 fell by 30 per cent due to the international financial crisis and I think the investments will slightly fall in 2009. Regarding the rate of insurance operations in 2009, I think they will fall or rise by 5-10 per cent. The companies should follow developments through the creation of alternative opportunities and diversification of products to attract clients.

PROFILE: Abdul Muttalib Mustafa CEO, Oman Insurance Company

Mustafa has 34 years of work experience behind him in Kuwait, Abu Dhabi and Dubai. A career finance professional, he joined Oman Insurance in 1975 and was subsequently promoted to the post of General Manager. Since then, he has achieved sustainable growth for the company and made it a well-recognised brand in the insurance sector in the region.

Mustafa is 58 and a Jordanian. He obtained a Bachelor's degree in Commerce from Egypt's Einshams University in 1972.