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Sink or swim: Gulf Re’s CEO, Michael Gertsch
Insurance regulators outside of DIFC aren’t doing enough, says Gertsch, adding that overcapacity in the industry won’t be resolved until the existence of companies come under threat.
July 17, 2011 11:57 by kippreport
With an office at the Dubai International Financial Centre (DIFC), Gulf Re is equally owned by Gulf Investment Corporation (GIC) and Arch Capital Group. The reinsurance specialist company hopes to continue its development and further build on the strong initial performance it has recorded since its launch in 2008.
Michael Gertsch is at the head of this relatively young GCC-focused reinsurer. Gertsch is a well-respected voice in the industry, known for his forthright views that could only have come from long years of experience in the insurance arena.
The following are excerpts from his interview with Policy magazine:
Q: What is the impact of political instability on the insurance industry?
For an insurance company, a crisis is always an opportunity. At the moment it is mainly North Africa and in the Middle East—outside the GCC—that has been affected. People should differentiate more between the GCC and the broader Middle East and North Africa, politically there are totally different issues.
For local insurance companies this could create an opportunity as so far political violence is not a product that has been sold in this region and on a worldwide basis it didn’t really sell over last couple of years. Most international companies will not give SRCC (Strike, Riot and Civil Commotion) coverage but I think one should differentiate.
I wouldn’t agree on giving SRCC cover in city centres that are exposed in countries with certain issues like Bahrain for example, but I would look at a power plant that is 30km outside of Manama that is very well protected has good security. I think those companies should be able to get coverage they need. So we will differentiate whereas some international companies are saying ‘no more’. Again as I said for local companies I think it is an opportunity.
Q: Which industry holds more promise?
Going forward, I think energy holds a lot of promise simply due to the fact that there is such a high demand for water and power, not just in the GCC but the Middle East and North Africa. If there is no water and power all of the plans for the future will not materialise. Energy is very important but you have to differentiate between power (producing electricity and desalinating water) and oil and gas products. I think the oil and gas side will continue to increase but there is also a move to alternative energy right now as these natural resources will be used up at some point.
Q: The market is talking about consolidation. What’s your reading on this?
We are getting to a point where shareholders will lose patience. As long as you get a 25 percent return on the capital that you have invested, you don’t want to merge with or buy anyone. If suddenly you have negative returns so actual capital is being destroyed, shareholders will say ‘this doesn’t make sense anymore we are either buying somebody else or we are selling our assets.’ There is a younger generation coming up that has been educated abroad. They are economically very savvy and they analyse the returns that are being made on capital very much the same as it is being done in Europe, the USA and Asia and on that basis change will come. Large reinsurance companies will try to go for acquisitions going forward. It’s a new thing for the region but it will happen.
Q: What do you think regulators should be doing now?
If I use the UAE as an example, you have two different environments. One is the Dubai International Financial Centre (DIFC) that is regulated by the DFSA which has very strong requirements for companies and the other, which is everything else outside the DIFC. The regulator outside the DIFC has not been very active so far. I think that regulators should look at the minimum capital that a company needs to hold versus exposures. Going forward, companies will need to take a closer look at the actual capital that they are allocating to certain exposures and the return they are making on that capital. I think the regulator should introduce certain minimum risk based capital requirements. The minimum requirement at the moment is very low. We have $ 200m in capital paid in and a further $200 million authorised, which makes us one of the best capitalised companies in the region. I think in an ideal world a company would realize that they need a certain level of capital, it shouldn’t be the regulator that enforces it, it should be management and shareholders who realize that the capital they have is not sufficient and that they are putting the company at risk. But I don’t see this happening yet.
Q: What’s your advice to your peers to stay afloat?
Companies have to realise that the current demand for continued growth is unhealthy. The market it going to get to a point where if reinsurers and insurers want to get international reinsurance coverage they are going to have to have higher retentions than what they do right now. Some of the companies are going in that direction already. If they are in control of their underwriting they can retain a bigger portion net and actually make technical a profit.
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