Forty-one per cent of insurance companies in Saudi Arabia and the UAE believe there is a need to improve their overall risk management framework, according to a new study.

Due to increasing regulatory requirements, risk management oversight has surfaced prominently on the agenda of the Saudi Arabia and UAE insurance companies’ boards, added the Mena Insurance Enterprise Risk Management (ERM) survey conducted by EY, a global leader in assurance, tax, transaction and advisory services and Munich Re, a Germany-based risk solutions expert.

“The Mena insurance market is continuing to grow on the back of government-backed infrastructural spending, large-scale developmental projects and compulsory insurance (motor and medical),” said Sanjay Jain, director, Mena Insurance Advisory Services, EY.

“The regulatory landscape has recently undergone a major transformation, led by the regulators in the Saudi Arabia, Qatar and the UAE. As a result of the changing market and regulatory landscape, risk management is high on the agenda of Mena CEOs. It is becoming increasingly important for the daily activities and long-term sustainability of insurance companies. However, a considerable amount of work still remains to be done as 40 per cent of the respondents in the UAE and the Saudi Arabia do not have a dedicated risk management department.”

At a recent ERM workshop conducted in Riyadh, Bernhard Kaufmann, chief risk officer, Munich Re, shared Munich Re’s global journey of implementing ERM within Munich Re, over the last 13 years. Over 20 insurers participated at the workshop from the Saudi Arabia insurance market.

Bernd Horsch, senior manager, Munich Re Mena said: “Well-defined risk policies and procedures are an extremely important element of an effective ERM framework. Four out of five of the survey respondents believe that they have an opportunity to improve their risk identification and assessment process, which means there is a lot of room for improvement.”

The survey identifies the maturity of ERM practices in the Saudi Arabia and the UAE insurance markets, identify risk management challenges that insurance companies face and take a view on the evolving risk governance practices.

Commenting on the importance of ERM, Andreas Pollmann, client executive, Mena, Munich Re, said: “ERM is not just something that is nice to have. There is increased pressure from regulators and rating agencies, as well as competitors.

“Insurance companies that move first to an improved model of managing their business and their capital resources economically, will see the maximum benefit. The global insurance industry is making the move and Mena is bound to follow suit. ERM is a large opportunity; boards, investors and governments have the option to improve underwriting, reserving and economic profit for their insurance businesses.”

The survey revealed that the basic building blocks of a risk management framework, i.e. risk governance, strategy and risk appetite, continue to pose a major challenge for many insurers. Even if some of the insurers have established an enterprise-wide risk appetite, many have not been able to effectively cascade it down to the operational level and embed it into their decision-making or insurance value chain.

Dr Sandeep Srivastava, partner, EY Financial Service Risk Management said: “While risk management is still perceived as a ‘tick-box’ exercise by some insurers, a few insurers are already working toward converting it into a business enabler. This can be achieved by integrating risk management into the key business areas of capital management, reinsurance strategy and risk-based underwriting. While most of the insurers agree with the need for integration, the common challenge remains with the actual implementation and operationalizing of the risk practices into the day-to-day business.”

Challenges differ for Saudi Arabia and UAE insurers

Saudi Arabia insurers rated “business taking ownership of risk” as the top challenge to strengthening the risk culture, whereas UAE insurers rated “lack of a strong regulatory regime and competitive pressures” as the top challenges for them.

There were a number of common issues highlighted with the UAE insurers, including significant exposure to riskier assets, poor ERM practices, lack of standardized accounting policies, and lack of robust reporting of technical reserves. However, a number of these challenges are expected to get addressed with the recently issued regulatory guidelines from the UAE Insurance Authority.

“Shifting the mind-set is a long-term change initiative requiring ongoing commitment of all stakeholders, including the regulators, shareholders, board of directors and senior management,” said Jain.

“The new rules introduced by the UAE Insurance Authority in February 2015 are expected to resolve some of these issues. When similar rules were introduced by Sama in Saudi Arabia in the recent past, insurers in the country faced initial challenges. A similar trend is expected in the UAE insurance market over the next few years.

"However, as proven by the Saudi Arabia example, these challenges are short to medium term in nature and such initiatives lead to overall development and benefit of the industry in the longer term,” he concluded. – TradeArabia News Service