Post Gonu, insurance companies are faced with two options - higher reinsurance rates or lower reinsurance commissions says AXA Country Manager Deepak Kamath

Excerpts from an exclusive interview to Oman Vistas immediately after the Gonu cyclone struck.

What phase is the insurance sector currently in, post Gonu? Has the cyclone affected insurance company bottom-lines?

All insurance companies are definitely in a difficult situation. We have all received a number of claims. I am sure no insurance company has been left with less than 100 claims. As far as AXA is concerned, we have received over 500 (as of June 18, 2007) motor claims. There are chances of this number going up.
I am not sure whether bottom-lines of many companies will be affected. It all depends on how well they have arranged their reinsurances. AXA’s bottom-line will be affected, simply because we tend to write a lot of the risk ourselves and reinsure less. We tend to take on more risk and therefore we will pay big and more claims.

But bottom-lines of other insurance companies need not be affected. Again, in the long run, it will affect the insurance companies, simply because the reinsurers tend to recover their money. They are here to pay the claims today, but they have to make a profit so reinsurance rates will go up; or reinsurance commissions will go down. This is the future scenario.

Give us an idea of what went on at AXA immediately after the cyclone?

We had our internal management meeting. We checked with AXA corporate immediately. We decided on an action plan. We knew that we would be flooded with claims. We thought we will simplify the procedures. We said that we would do away with a lot of requirements. You know people might have lost their cars along with a lot of papers. So, we doubled the number of people in the claims department and even that was not enough. We made sure that every customer was well treated, spoken to nicely and handled well. We requested patience from them because it was not in our hands to do everything at one go. First we wanted to receive the claims and then we wanted to see how to process them.

Have you ever been caught in a similar scenario?

I have been in the insurance industry for over 25 years now, but this is the first experience that I have had. Very frankly, we were not prepared for this. We didn’t think it would happen to Oman. I don’t think the entire AGCC government was prepared for this. Gonu was not a major cyclone, in the sense that it was Category 5. I understand it was Category 2 or Category 1 when it hit Oman, so it was not a really big one. If it was, imagine the devastation it would have caused.

AXA has experienced these types of scenarios in other parts of the world, so we could draw on their resources and expertise to quickly establish ourselves, but despite that, there are other issues. First, there are hundreds of claimants. We need to treat all these customers. We have to reassure our customers that their claims are going to be covered; those who had the coverage, that is. Then we need to tell them what we can do, and when the process will start.

We had a lot of logistical problems: there were no roads, no water supply and the towing trucks could not handle the cars. Some of the vehicles were loaded with debris and they just couldn’t move. So we had to clear the debris before we could even touch the cars. Some of the sophisticated cars had their wheels locked, so you had to have special vehicles for towing them away. Even ten or more days after Gonu hit, we were unable to lift all the cars. We told car owners who had their cars at their residences to keep it there. Most of these cars will be total losses. Once the water reaches the steering of the cars, it is difficult to clean and repair it. We needed people to handle all these jobs and so it has been really work on a disaster footing.

So, will the scenario change?

Well, that is the big question. Yes, but I don’t know what will be done. A lot of people had no escape covers. Insurance rates for STFs (Storms, Tempests and Floods) will go up! It is very clearly understood that pricing in Oman is very low, so most of the insurance companies here need to reexamine their own underwriting strategies and decide on pricing. And AXA will definitely do that.

Not many people are completely aware of the STF cover. Are they?

This is going to be a very sensitive issue. There is something of a misnomer with the word ‘comprehensive’. When you tell someone that you have a comprehensive insurance, he/she understands that everything is covered. A comprehensive coverage actually means that your car is covered for own damage and third party.

Insurers do not, or are not in a position to, cover all types of risks. Comprehensive insurance means that a vehicle is covered for own damage for certain perils and accidents, which is logically expected to happen when you are driving the car - for example, a fire, lightning, a theft, etc.

Then there are certain perils, which are generally not expected to happen, like the act of God (storm, tempest, earthquake and flood), so these are not insured. You can buy them by the coverage. There is a proposal where the question is asked, do you want to buy this insurance or not.

But most often this is in fine print, right?

I don’t know. But, as far as AXA is concerned, I can assure you that it is not in fine print. Even if the customer says no, we try to tell them that this is a very important coverage available for a small additional premium. We tell them to be careful when they say no because Oman is prone to STF.

So, are you saying that the client as such should not plead ignorance now?

I think innocent clients may plead ignorance if it is not communicated to them properly by the people concerned. I have no idea about how this is being communicated to the clients by other parts of the industry, whether he is aware there is an extra to be paid or not. But I would tend to think that most insurance companies would highlight this, and not in fine print. It would be up to the insured to decide whether he needs coverage or not.

I am a bit surprised to know that there are a lot of people who do not have STF cover. In one way, I think it will be very difficult if a whole lot of people tend to plead ignorance now. On December 2nd and December 14th, 2006, we had minor floods. On March 18th, this year, we had a major flood. At that time, many people would have realized that they did not have this cover and could have bought it then. So, the subject had come up then.

With Gonu, I think all the equations have gone because more than 10, 000 cars have been affected. This is my overall assessment, based on what AXA has suffered and what my market share is.

Could you quantify AXA’s losses?

AXA’s loss would be in millions of rials. We are still counting the number of claims. But, we have already started settling claims. Still, there are other logistical issues, like where the vehicle should be transferred, whether it is to a company name etc., before the checks can be issued. We are settling all the finance company checks, immediately - as soon as the vehicle has been declared a total loss. So, as far as we are concerned, we see that the customer is taken care of and decide on how best to handle the claims.

What has Gonu taught the insurance sector and the insurance bearing populace in Oman?

Well, it taught us that we should not mess around with God! I think nobody ignores the fact that we are all just human beings. And, the might of God is beyond anyone. We just cannot insure or really be prepared for anything. Because anything can happen!

So, will the climate of uncertainty continue?

I think, yes. Global warming and the over usage of natural resources, cutting down of trees, etc., would definitely have a lot of effect on the way weather patterns are going to change. The great thing is that Oman has faced this very stoically. Most people have accepted the fact and others have had the courage to say that we can manage this calamity ourselves – I think the country, the citizens and residents have all risen to the occasion.

Reports earlier noted that Oman’s insurance sector was going through a transitional phase; is this true; what would you call it now?

No, Oman’s insurance sector is not in a transitional phase. I think it is a very mature industry in this part of the world. And Oman has been in the forefront of loss and other things. I know that every few years the authorities concerned works with the insurance sector to make sure that the rules and regulations applicable to the insurance sector are updated. Recently, I received a draft guideline, regarding solvency requirements and a few other things. It was excellent.

Market premium for 2006 was around RO145 million to RO150 million and it has been growing fast. This is mainly to do with the industrial and property boom. Sohar is an example, where I think last year itself around US$8 billion to US$10 billion of construction activities were launched, which is phenomenal.
Then there is a downstream industry also, so the premiums are going to come from all sides. I feel that the growth rate in the insurance sector would be around 10 percent to 15 percent per annum, and I am not including ‘life.’

The ‘life’ insurance chapter is something that has not been penetrated in this market. Market awareness of life insurance is not there, so if you exclude life, I would say that there is 10 percent to 15 percent growth. With Gonu and with anticipated increase in price and premiums, I would think 15 percent would be a right estimate.

What is your opinion about the low insurance penetration in Oman?

Yes there is low insurance penetration in Oman. It is low by international standards too. People buy motor insurance because it is obligatory by law to buy third party insurance. When you buy a brand new car, the finance company insists that you have a comprehensive insurance and now this is where the danger lies because I don’t think the finance companies or banks have looked at this very closely, as to whether the comprehensive cover also includes STF. I heard of one case where a brand new Mercedes car was insured with an insurance company where no STF cover was made.

Are national insurance companies getting the better slice of the cut as opposed to multinationals?

National companies have an advantage, because they have better capital and have access to government projects; they have better market reach. But, if you ask me, I don’t see any discrimination against foreign companies as such. It is up to us to see how we can grow and how fast we can grow.
The biggest threat is the number of insurance companies that have opened up recently, which will simply depress the rates. I can understand the government allowing new companies to be launched as long as they fulfill the criteria. The World Trade Organization, the Free Trade Agreements being signed, would mean more companies would be coming.

But if we see the volume, which is RO150 million, it is just not enough for more and more companies to come and play here. So what is going to happen is that the rates are going to be depressed, which is good for the individual customer in the short-term, but not in the long-term for the health of the industry or consumers. Very low rates also don’t help because you don’t get the quality of service and you don’t get the real products. I am sure the government would be looking at increasing the capital requirements of most insurance companies and then we will see how we all will survive in this market.

What are the positive trends that you see in the market?

I think the insurance sector has risen very well to Gonu. Many insurance companies have come out officially and stated that they will entertain insurance claims; they will settle them and I think this is a very good sign reflecting on the maturity of the insurance companies in Oman. And there is real support given by the government to ensure that all claimants would be taken care of.