Insurance Run-off:A new challenge in theMiddle East

www.pwc.co.uk

11 November 2015

PwC

Who We are

• Waqaar specialises in reviewing, advising anddelivering solutions to distressed businesses.

• He has 13 years experience of working with clientsin the financial services sector, and in particular theinsurance industry.

• He has supported clients in a variety of complexengagements including advisory work, corporaterestructuring, due diligence and M&A activity inthe UK, Europe and the UAE.

• Waqaar has extensive experience with insurancecompanies in run-off, both insolvent and solvent.He recently delivered an exit strategy for acorporate with over 1 million policyholders withc£1bn of liabilities.

• Waqaar also worked on the Lehman Brothersinsolvency where he negotiated settlements withmajor corporate banks and implemented a claimsresolution process.

• Waqaar has a proficiency in insolvency award fromInsolvency Practitioners Association and he is aqualified Chartered Accountant.

Waqaar RajaManager, Insurance Specialist

Tel: +44 (0) 20 7212 4707waqaar.raja@uk.pwc.com

• Alan specialises in corporate restructuring,accelerated closure and exit transactions in the non-life insurance sector.

• He is an insurance professional with 25 years ofexperience, the first 10 gained whilst working for aglobal insurance underwriter, with a particularfocus throughout on non-core discontinuedinsurance business.

• Alan advises clients on generating value throughthe strategic management of run-off business viatechniques such as commutations and via the use ofexit solutions such as business transfers, share salesand schemes of arrangement and has worked forclients spanning the UK, Continental Europe, theUSA, Bermuda, Australia and New Zealand.

• Alan was also involved in the formation andultimate wind-down of British Islamic InsuranceHoldings Limited, the UK’s first takaful insurancecompany.

• Alan is a regular industry speaker and contributoron run-off matters and is an Associate of theChartered Insurance Institute and a CharteredInsurer.

Alan AugustinDirector, Insurance specialist

Tel: +44 (0) 20 7804 4098alan.augustin@uk.pwc.com

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PwC

What we do

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About Us

Over 200 professionals dedicated to discontinued insurance experienced in the design and execution of innovative solutions

Team comprising of advisory, actuarial, tax and regulatory specialists

Advisory team recognised as thought leaders across the global run-off arena supporting clients to ensure maximum value iseither retained or unlocked from their discontinued business

Leading actuarial consultancy in the provision of high quality reserving, commutation, risk & capital, M&A, portfolio transferand scheme support

Experience

Significant experience of managing run-offs efficiently and effectively

Managing portfolios totalling over $5bn of liabilities and collected over $1bn of reinsurance and other assets

Advised on large high profile Solvent Schemes, insurance business transfers and M&A deals within

the non-life run-off sector

Resources

PwC can provide support with experienced consultants across all grades to help undertake complex reviews andimplementation plans alongside the day to day activities of the business

PwC

Key messages – market issue

Insurers feeling the strainTighter solvency requirements and regulatory pressure,combined with an unsustainable price competitiveenvironment, are putting strains on companies’ earning andcapital, and reducing their RoC.

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Time to re-evaluateWith an oversupply in the number of takaful and conventionalinsurers in the two largest GCC markets of UAE and KSA,companies need to consider new ways to improve earnings orworkout their discontinued books.

Run-off can be the solution not the issue

Proactive management of run-off liabilities to expiry or throughaccelerated exit can increase earnings, release capital andimprove RoC, along with providing other benefits that enhancevalue.

PwC

GCC is one of the fastest growing insurance marketsglobally

6.0 6.57.2

8.09.1

4.44.9

5.6

6.7

8.1

1.0

1.2

1.3

2.0

2.2

0.7

0.8

0.9

0.9

1.0

0.6

0.6

0.6

0.7

0.7

0.7

0.7

0.9

0.9

1.0

13.4

14.7

16.5

19.2

22.1

-

5

10

15

20

25

2010 2011 2012 2013 2014

Market Size and Growth (USDbn)

UAE Saudi Arabia Qatar Kuwait Bahrain Oman

Increasedpolicyholder

awareness

Increasinglevels of

compulsoryinsurance

Greaternumber ofproductsavailable

Improvedregulation

What is driving this growth?

Source: Alpen Report GCC Insurance Industry report 13 October 2015, Swiss Re

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PwC

Challenges of the UAE Insurance market

Lowprofitability

Local Insurer

mindset

Lowcustomerretention

levels

Challenginginvestment

space

• Too many players in themarket

• Overly competitive pricing

• Poor claims handlingservices (claimleakage/fraudulentclaims)

• Over half of insurers are localfamily business

• Local insurers have lowappetite for risk

• High proportion of risksreinsured

• Investment mix skewed towardsrisky assets (real estate and

equity)

• Increased exposure to economicdownturn as a result

• Greater focus placed oncustomer attraction thanretention

• 32%^ of UAE insuredswill change insurers in thenext year

^ Source: Alpen Capital GCC Insurance Industry report 13 October 2015

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PwC

What the industry might face in the future

More risk basedpricing

Tighter regulationsMarket

consolidation

Macro-economicrisks

Strong economic /social outlook

Continuing lackof local technical

expertise

• Tighten regulation and poorprofitability expected to be acatalyst for marketconsolidation

• Population expected to grow2.4%^ per year until 2020

• GDP growth forecast of 2.3%^per year until 2020

• Is the necessary skillset there to develop andenhance the market?

• As the market matures and regulations tighten, thefocus will move to more risk based pricing methods

• Introduction of solvencyrequirements likely to cause

some insurers to struggle

• Change in investment policyshould stablilise insurers

balance sheet

• Sustained low oil prices,reducing government

spending on infrastructureprojects

• Geo-polictical instability

• Tightening liquidity markets

^ Source: IMF

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PwC

Europe – overview of a mature market

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According to the latest PwC survey of discontinued insurance business in Europe:

• Effective release of capital is a key strategic objective

• Regulatory change is significantly impacting the market

• More effective capital management is once again expected to be the main driver of restructuringactivities

• Orderly run-off is priority in run-off plans

The size of the non-life Europeanrun-off market is approximately

€235bn.

Source: PwC - Survey of Discontinued Insurance Business in Europehttp://www.pwc.com/gx/en/industries/financial-services/insurance/publications/survey-of-discontinued-insurance-business-in-europe-ninth-edition.html

PwC

What are your strategic objectives?

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Focus oncore

activities

Reduceearnings

volatility/drain

Reducerating

pressure

Operatingefficiencies

EnhanceRoC

Enhancevalue

Redeploycapital into

liveunderwriting

Reduceregulatory

capitalrequirement

Reducecompliance

risk

PwC

Unlocking value through run-off

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Objectives

Enhanced value

Define Run-off

Assessment of existing business and optionsanalysis

Run-off to expiry Accelerated exit

Run-off centres of excellence

PwC

Defining ‘run-off’

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Run-off liabilities can be defined in many different ways, for example:

• Entities that no longer write business;

• Portfolios within an entity that are no longer written;

• Lines of business within a portfolio that are no longer written;

• Clients whose policies are not renewed

• Underwriting years where no pure IBNR is expected; or

• Underwriting years where all risks are expired

How European survey respondents defined run-off business

85%Lines of Business

which are no longerwritten

15%Business

whichgenerates no

furtherincome

15%Other

20%Business with a

party where there isno on-going

businessrelationship

Source: PwC - Survey of Discontinued Insurance Business in Europe

PwC

Options Review

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An options review could typically take 3 to 5 weeks.

Factors to Consider

Typical Options

Options Assessment

1 2 3

An initial review of the current and forecast financial position including an analysis of insurance and othercontingent liabilities, together with an assessment of the available exit options

Identification of the exit options available, including a risk assessment and estimated indicative financialoutcome of each option, taking into consideration the company’s objectives

A run-off to expiry, including any options for an accelerated run-off strategy

A sale of the business, portfolio transfer mechanisms or reinsurance

An immediate closure or liquidation plan

Consider the impact of relevant legal and regulatory requirements oneach of the identified options for all stakeholders

Consider the options for mitigating financial and reputational impact ofthe different alternatives

PwC

Possible elements of an exit strategy

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Run-off to expiryAccelerated exit

• Reserve review and commutation strategy

• Claims efficiency

• Asset strategy

Outcomes have been:

• Up to 30% of redundancy identified inbooked reserves

• Reduced capital requirement by up to 20%

• Reduced annual costs by up to 50% evenwith increased claims experience

• A focused, motivated workforce working tospecific objectives

• Sale / business transfer

• Reinsurance

• Guarantees/ Securitisation

• Novation

Outcomes can be:

• Transferring risk to a 3rd party

• Possible early release of reserves

• Capital release

• Future administrative cost savings

PwC

Run-off to expiry vs Accelerated Exit

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• Could achieve a greater return than a sale

• Control maintained

• Interests of policyholders are protected

• Less disruption from the regulatorsperspective

• Still need resources to deal with it

• Might not possess the expertise locally

• Run-off may distract management

• Longer to extract returns as run-off is overa longer time frame

Accelerated ExitAdvantages Disadvantages

• Risk transfers to a 3rd party

• Early release of any redundant reserves

• Capital return

• Future administrative cost savings

• May not achieve value sought

• Loss of control

• Potential reputational damage

• May not be able to sell some or all of thebusiness

Run-offAdvantages Disadvantages

PwC

Run-off to expiryKey components of a run-off plan

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Portfolio Analysis

Claims and Costs Efficiency

Liability Management

Asset Maximisation

Communication

Resourcing

PwC

Run-off centres of excellence

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There are challenges, but significant benefits can be gained by having a well plannedand operated process of putting business into run-off and having that businessmanaged by a specialist team

Bringing a specialist team and resources together to collaborate and use best practices to drivebusiness efficiency and achieve value driven results for stakeholders

PwC

Outsourcing

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The contracting or subcontracting of activities to a specialist provider to free up, staff, management time and obtain access toshared service facilities in order to gain a competitive advantage.

Benefits

Reduced overheads througheconomies of scale from outsource

provider

Less management distraction

Access to technical expertise andtechnology

Challenges

Availability and competence ofproviders in the region

Loss of control

Oversight responsibility remainswith the company

PwC

About PwC

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PwC

How PwC can help

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PwC can provide considerable support with every aspect of a company’s run-off strategy:

• Initial discussions to assess strategic business objectivesregarding run-off business

Strategic discussions

• Conduct an exercise to facilitate a greater understandingof the composition of the business by entity, territory,claim type etc

Run-off health check

• Assess nature, performance and costs associated with eachportfolio and the impact on entity level earnings andcapital

Assessment of existing business

• Establish a set of possible options that will be consideredfor each sub-portfolio

• Perform analysis to understand and compare the impactof adopting different run-off and accelerated exit optionson both capital and future earnings

• Select option(s) that most effectively meet objectives

Options analysis

• Support with the creation of a Centre of Excellence,including setting strategy and implementation

Centre of Excellence

• Support in all areas of run-off best practice, including

• Data analysis

• Claims efficiency

• Liability management

• Asset maximisation

• Communication

Run-off to expiry

• Design and implementation of exit solution

• Consider external views (e.g. regulators, rating agencies),practicality, taxation and reputation risk

• Identify credible third parties

• Run exit process

Accelerated exit

PwC

We have a track record of success in helping the insurance sectorwith clear recommendations and options support

British Islamic InsuranceHoldings Limited (BIIH)

BIIH was the first takaful insuranceprovider to enter the UK insurancemarket.

We worked with the Board andmanagement team to develop andimplement an IPO process to raisefinance and advised the Board ongaining the regulatory approvals.We developed service levelagreements with suppliers andcustomers and advisedmanagement in negotiating a majoroutsourcing contract to support itsvirtual business model.

BIIH’s establishment in the UKwas not sustainable as a result ofdifficult market conditions andwe advised on the Company’sdevelopment of its Scheme ofOperations plan when it enteredrun-off. We continued to supportthe Board through a sale of theinsurance business and assistedthe Directors in completing arestructuring and wind up of thetrading entity.

Capital raising & windup of atakaful insurance provider

ARIG UK

The UK subsidiary company wasexperiencing significant financialdifficulties and the Bahrain parentwas considering its options incontinuing to support the business.

However, we recognised that whilstthe financial pressures that it facedwere challenging, preserving thebusiness outside of an insolvencyprocess would bring benefits for allstakeholders.

We designed, developed andimplemented a restructuring for thebusiness under a very tighttimeframe whilst advising thedirectors on their personal positions.

A scheme of arrangement wasvoted on and approved bycreditors and resulted in partpayments being treated as“payments in full” allowing allliabilities to be crystallised andfinality attained by the UKsubsidiary.

Controlled wind down (viaScheme) of an ARIG subsidiary

Regional takaful Company

We were assigned to perform afeasibility study and business plan fora regional takaful company tooperate in 12 countries in the MiddleEast, Asia and North Africa.

Our team conducted acomprehensive analysis of thecountries' macroeconomic profile,regulatory framework and insuranceand takaful industry. We carried outcountry rating and benchmarking, toassess the available marketpenetration options.We developed the strategy for thenew takaful companies (businessmodel, operations, organisationstructure and governance).

We were able to advise the clienton the optimal feasibility of thenew established companies andavailable financing options.

Feasibility & Business plan fora Takaful company in MENA

Large Omani-based insurer

PwC was engaged by a large Omanbased insurance company to reviewand comment on the appropriatenessof the methodology and assumptionsused in the calculation of statutoryreserves as at 31 December 2012.

The scope included a review of themethodology and assumptions usedin the calculation of the actuarialreserves, a review on the calculationof the discount rate as well ascommenting on the accuracy of thereserve calculations performed bythe insurer.

We provided the Board withassurance over the liabilitynumbers within the report &accounts. This was important asthe actuarial function wasoutsourced and the Board wantedindependent validation of theprocesses and practices used.We also highlighted tomanagement the areas where theirmethodology was out of line withmarket best practice .

Independent review of actuarialreserves

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PwC

Some of our Middle East insurance clients who trust our advice

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PwC

What the market and our clients say about us

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We were extremely pleased with the project teambecause we got what we wanted and that’s the numberone test isn’t it? But I would go further and say this. Ithink that PwC played an incredibly important rolebecause they were able to show us how to do things thatthey had done before and my team had not done before.If the right opportunity came along, I would be very keento use the PwC team again.

I have been dealing with PwC for many years and have alwaysbeen very impressed with the knowledge of the market withinthe Solutions for Discontinued Insurance Business team. Theyhave established a very professional team and provide themarket with new solutions and always look for new ways toensure that the best value for money product is offered to theirclients.

The culture and the attitude that PwC manifest andlive by and deliver to are a strong combination oftechnical excellence but also very practical groundingto come up with solutions. The ethos of the firm is verymuch a practical, can-do attitude. Here’s a problem,let’s work out the best solution for the circumstances.

History shows that PwC have been at the forefront of innovativeintroductions affecting discontinued insurance operations, manyof which now represent mainstream practice.

Client focus appears to be a way of life rather than just a management consultant's favourite phrase and it is ingrainedbeyond the team leader, throughout each level and within each team member. The team members seek imaginative andpragmatic solutions to complex issues and they communicate effectively with all the key stakeholders. More recentexperience shows them to be tenacious and resolute. They are probably the market leaders in this field – with goodreason – and I believe they are used as the key reference point by competitors aspiring to displace them from thisposition. In my experience the team is honest and diplomatic, hard working and professional.

We have no hesitation in recommending PwC toany company thinking of appointing a managerto dispose of run-off liabilities and we wouldlook forward to working with them on anyacquisition project.

PwC

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