The Arab Spring has brought down regimes in some Arab countries. Following the Arab Spring, the countries of the Middle East have entered an era of regional insecurity that might make long term and sustained investment look favorable. Eventually, international insurers and reinsurers have shown keen interest to enter the MENA region and for example open branches at Dubai international financial center because they found a lucrative market full of opportunities.
Munich Re has been founded more than 130 years ago and it has been expanding all throughout the years with excellent returns during the past years. Operating for more than 60 years in the MENA region, Munich Re is a shareholder of 10% in Jordan Insurance Company as well as a major shareholder in Saudi National Insurance Company in Bahrain. It is one of the world's leading reinsurers. The group operates in all lines of business throughout the world and is characterized by particularly pronounced diversification, client focus and earnings stability. It has a premium income of around € 28 bn from reinsurance alone.
Christian Kraut is Chief Executive and Managing Director for Middle East, Africa in Munich Re’s Germany, Asia Pacific and Africa Division. Christian has more than 25 years experience in the reinsurance industry. He joined Munich Re in 1989 as a Marketing Specialist in the Middle East, Far East and Australia Division and in January 2015 he will lead Munich Re’s Japan operations.
Before assuming his current function, he worked as Senior Executive and Client Executive in Munich Re’s MENA Department and for 7 years in Munich Re’s Taipei Office as Treaty Manager and from 1999 as General Manager.
He represents Munich Re in the Board of Directors of Saudi National Insurance Company, Bahrain, Jordan Insurance Company- Jordan and since May 2009 he is a Director at Munich Re of Africa, South Africa.
His apparent involvement in building big business – provides an excellent opportunity to review the career of a high-profile, powerful man, born to become an insurance industry leader and a strong voice for the financial sector.
BL: What are the latest news at Munich Re and what about its growth and profits?
Kraut: We published our second quarter figures in August. We posted a half-year profit of €1.69 billion ($2.42 billion), up 12% from the corresponding period last year. The group’s second-quarter profit surged 42% to €769 million ($1.1 billion) on a higher investment result. Performance in reinsurance was good as a whole, although the second quarter was marked by a random incidence of above-average major losses. Of course, the biggest concern not only for us, but for the whole industry is the abundance of capacity all around the world which drives prices down. . For Munich Re, price discipline and consistent cycle management are imperative in the present environment; besides this, Munich Re is increasingly developing individually structured coverage concepts for clients. In this market phase, Munich Re is benefiting from its broad diversification both in reinsurance and in the Group as whole. Our strategy remains geared to making profits through our underwriting business, not through risky investments, We have seen that in the Middle East, few companies in some markets, because of the low rates, couldn’t make money on their core business which is insurance, and of course on the investment side they were also under pressure because of the low interest environment. Thus, there is a lot of challenge also in the Middle East and on top of that there is the political situation.
BL: How far did the political situation in the Middle East impact the reinsurance and insurance industry? Will it increase the demand on the political violence and the SRCC?
Kraut: First of all, the political turbulences in the MENA region impacted the overall investment climate. So there are less investments in many countries. Less investments by oil-rich countries like Saudi Arabia, Qatar, and Abu Dhabi had and still have a negative impact on many industries within the MENA region. In some countries, available funds are not invested because of the uncertain political situation. That of course has an impact on insurance companies because there is less premium from construction projects, there is less work, people have less money to spend and also will spend less for insurance covers. Secondly, every crisis also offers opportunities. In some countries that have been hit by the political turmoil, rates, especially for risks which include political violence or SRCC should go up. But do they really go up? We often don’t see risk adequate prices, even for this kind of exposure. So we are careful with that business, but there are always opportunities and together with our clients we are looking for them.
BL: During the past few years, sharp debates broke out over on policy’s terms and conditions especially in the countries that faced wars and revolutions. Is it true?
Kraut: I cannot comment on what competitors have done. Our approach is very clear transparent; we are in the business together with the local insurance companies or local reinsurance companies. There are often terms and conditions that need clarification when it comes to claims. Of course, we are checking together with our clients how the terms and conditions have been phrased. In general our approach is to apply international interpretation, of terms and conditions and based on the result we quickly meet our obligations. Evidently, sometimes you have difference in opinions, and that happened after the revolution in Egypt and in Tunisia in some cases where there had been different interpretations. It was a problematic situation because local opinions are often driven by political interests and less by insurance regulations and insurance laws. That is a big problem for international players because we calculate the price which is based on our understanding on how the international laws are applied. But in general, the quality of an insurance policy can only be judged when it comes to a claim because if you buy cheap, you might struggle when it comes to a claim. To ensure an appropriate coverage insurers should think about it, when they buy the cover. The problem in the Middle East, but also in other areas, is that people often buy cheap and expect a full service.
BL: Egypt was offered policies with special terms and condition and political violence and war coverage were included for free and without calculating its risk. Suddenly, reinsurers realized that Egypt is facing revolutions and political violence. What are your comments?
Kraut: When it comes to Egypt, our own exposure to the claims following the revolution was very minimal and was almost non-existent because we reduced our business over the years substantially, long before the revolution. But in fact, the coverage of the polices were extremely comprehensive. Additional coverage was given for free because historically, nobody ever experienced such problems taking place in Egypt. When the loss occurred, the reinsurers who didn’t get any money for that cover had to pay for the claims. What happened afterwards, reinsurers had to increase the prices of the exposure.
We face a similar problem of coverage in Dubai. There is considerable earthquake exposure in Dubai; we said that because of various fault lines in Iran. Do the insured pay for the earthquake exposure? No, because so far they have no experience with major earthquakes causing damages in Dubai. And today, if there’s a major earthquake there would be serious damages. Do reinsurers get premiums for that exposure? No! If they tried to put that into their pricing, insurance companies would complain and say “this is not fair”. But in the long run reinsurers, like Munich Re can only provide adequate coverage if we receive premium for the exposure.
We have to be realistic about the current competitive environment. There’s enough capacity available for risks without considering every angle of exposure.
BL: Does excess capacity has a negative or a positive impact on the insurance companies?
Kraut: Excellent question. In the short term, it’s great and you insurers can save money because when there’s a lot of capacity, you get cheaper insurance and reinsurance and you get perhaps even higher commissions. If the management has good contracts the increased profitability might lead to higher bonuses. In the long term, this cannot be sustainable because claims will come and aggressive players will start to lose money. Then the capacity will shrink. If I look at my book, when I joined Munich Re in 2005, our Arab book expanded profitably, rates were reasonable and business growth was good. When rates started to go down, we had to cut it down our portfolio. I think as a reinsurer we had to react. We see a lot of our competitors going into the markets, even the rates were falling and far below technical requirements, especially in fire insurance. In some of the big countries in the MENA region the support of major reinsurers has been reduced over the past years and with it also the necessary know-how transfer. Where should the local companies get their know-how from in future? Can they get it from the local reinsurers? Sometimes yes, but in general the support of international will give them a competitive advantage as well as the chance to further train their own staff. Therefore, in the long term, I think the current development is not beneficial for the MENA insurance industry.
BL: Let’s talk about the Levant area, like Syria, Lebanon and Jordan, are these countries well-regulated? What about the risk of earthquakes?
Kraut: We have scenarios for each and every exposure, be it in Iran, Lebanon or in Israel. Actually, we have it also for Saudi Arabia and based on these scenarios exposure rates are calculated. This is important for exposed markets like Lebanon which has been hit by major earthquakes plus tsunamis long time ago.
Compared to our calculations we are of the opinion that the prices for natcat exposures are not risk-adequate,
From my point of view there is a more important issue than prices: Do companies buy enough reinsurance coverage? We have seen that especially after Thailand’s floods, that various companies did not buy enough coverage. In the MENA region, inadequate coverage might lead to failure of insurance companies. In general when a company fails, it’s economically nothing unusual. But then the policy holders won’t get their money and this has a bad impact on the reputation of the insurance industry as a whole. Who in such a case has to help the policy holders? Will the government help? You have certain countries where governments have enough funds but in some other countries, governments do not have money. Thus good risk management and accumulation control and reinsurance protection is essential.
A lot of insurers in Lebanon, especially those who are involved with banks have good risk management and regularly discuss the adequacy of their reinsurance coverage with their reinsurer.
Again, I think insurers in the MENA region should use knowhow of modeling agencies or major reinsurers.
BL: Are these countries well-regulated regarding the insurance and reinsurance?
Kraut: If you want a short answer, “No”. We have seen attempts to improve regulations in these 3 countries, Syria, Lebanon and Jordan. We have seen that in Syria in the early days with a very committed regulator tried it and then left. In Jordan for many years strong regulator was very active, but also left. Which way the regulation in Jordan will move remains to be seen under the new structural changes of the supervisory body. I think Lebanon is a society that is based on a lot of compromises by different pressure groups. So it is always difficult for the regulator to improve the market conditions. Accordingly, Lebanon’s insurance market would need more regulation, but we have to be realistic. Under the current circumstances we cannot expect significant changes from the regulatory side in the near future.
BL: Christian, what are the present challenges of Munich Re?
Kraut: Let’s focus on the challenges for Munich Re in the Middle East.
The biggest challenge for us is to select the right partners and the right markets. We have done that over time as part of our long term approach to the MENA region. With the right partners a long term co-operation is beneficial for both sides. That’s all not new, but the challenges for a reinsurer like Munich Re are increasing because of so much additional cheap capacity is coming into the region which makes it more difficult to maintain that relationship with our partners. The question is how much is the value for an insurer to work with a reinsurer like Munich Re with the excellent services, the reputation and the security?
A second challenge is of course the assessment of the political situation in the Middle East which is very difficult. Last year, we thought that Iraq might have a positive economic development but unfortunately now the situation has turned the other way. We don’t see any end to the problems in Syria. Lebanon is constantly struggling with the political situation and its involvement with the neighboring countries. I think as a reinsurer, we have to be close to the clients, close to the market and understand what is going on and only then we can be successful over time.
BL: Did Munich Re pull out from certain areas in the Middle East?
Kraut: No. Ten years ago, Munich Re on the non-life side was the leading reinsurer in the MENA region. Munich Re today in life and health is still the leading reinsurer in the region, but not in non-life anymore. Why is that? Because prices , especially in property insurance went down. We tried to figure out solutions with our clients. In many cases we were successful; in some we could not continue our business. Did we withdraw from UAE? No, but, for example we currently don’t have treaty business in the UAE anymore. The situation was so competitive that our former clients decided to look for other possibilities. We still do selectively facultative business in these countries, but currently in some countries, we think market conditions do not allow us to write business.
Munich Re is not withdrawing from the MENA region. We still have a strong team, the local circumstances will change one day and we are keeping the contacts and one day we’ll lead the region again.
BL: What about your business in Saudi Arabia?
Kraut: We still have shareholdings in insurance companies and we’re still directly involved with various insurers. We are still leading some of the major local insurance companies and we are in close contact with The Saudi Arabian Monetary Agency (SAMA) to assist them to further improve the overall regulations in the market because also in Saudi Arabia, companies suffer a lot from the excessive competition. Our responsibility is also to assist SAMA to improve the overall market situation. So the market will benefit, which should be also beneficial to an international player like Munich Re.
BL: What is the biggest claim you faced in 2014 until now?
Kraut: The biggest claim that Munich Re faced is snow damage in Japan in the first six months of 2014. The snow hit an area close to Tokyo where usually we never have snow damage there; it shows again the exposure we are facing in certain areas. Of course, it can snow there, but there was so much snow that a lot of roofs collapsed and it’s a considerable insurance claim for Munich Re. It was the biggest claim in the first half of 2014 and it shows that also the unexpected is going to happen.
