The merger of the three largest state-owned insurance companies is set to create a national giant, controlling three-quarters of the insurance market. Is this the beginning of a government-created insurance monopoly?
Holding a 25% market share would be a coveted position in a well-developed market. A 50% share could be considered a license to print money, not to mention a permanent dinner date with antitrust regulators. What then would one call a business with a 75% market share? Hint: It starts with "M" and ends with "onopoly."
When Dr. Moawad El-Habashy, chairman and managing director of Misr Insurance, outlines details of the coming consolidation of the state-owned insurance sector one that will create a business with a 75% share of the local market it is hard not to think of the m-word.
"We are a leading insurance company," he says. "Misr Insurance currently has 50% of the general insurance market. And after the merger with El Chark Insurance this market share will top 75%." In a liberalized economy, governments normally break monopolies, rather than create them.
With expected capital ranging between LE 2.5-3.5 billion and a 75% share of the general insurance market, the new company is to put it lightly sure to be the dominant force in the local insurance market for some time to come.
Creating a Giant
The combined force of the united Misr Insurance, El Chark Insurance and Egypt Reinsurance will be massive. As if the huge market share isn't enough, El-Habashy adds another impressive statistic. "In the life insurance market [the core market of multinational and private insurance companies] we will have an estimated 50% market share."
Though the market is turning into an oligopoly around him, Tim Shields, vice chairman and managing director of AIG Egypt, is not worried. "With the new entity, we have two less companies to worry about [laughs]. This merger will definitely present us with more opportunities."
Shields argues that the Ministry of Investment is looking to develop the entire sector, rather than one specific company. "The ministry wants to expand this emerging market it currently represents less than 1% of GDP, while its neighbors stand at 5% of their respective GDP," he says. "Add a population of 77 million to the mix, and the market has massive potential. The other part is that the government wants to make these state-owned entities more commercially focused, which will result in realistic claim prices. The idea is to make the new entity achieve better underwriting and streamline operations to achieve higher market efficiency. The end-game is for the market to mature."
El-Habashy gives more insight into the specific reasons for the merger. "Misr Insurance and El Chark Insurance are both state-owned and offer basically the same portfolio of insurance products, while serving the same market," he says. "Recent price wars have undervalued many of our products, which is not in the best interest of either entity, thus the decision to effectively halt this competition through the merger. We will definitely benefit from the economies of scale that this merger will present, effectively lowering our prices, especially in the life insurance division.
"As for Egyptian Reinsurance, it was essential to include it in this merger, as Misr Insurance also does reinsurance, but Egypt Reinsurance is more specialized, thus providing the new entity with the expertise needed to become more efficient and effective with our reinsurance."
The merger is now in its final stages, according to El-Habashy. "The paperwork and legalities are expected to be completed before the end of 2007, maybe as early as the beginning of December. This is stage one in the merger, where process, procedure, paperwork and financial statements are unified under the new entity name; it is a fairly easy and simple step. Step two will be the formation of committees that will ensure the coordination and smoothness of the merger as branches, departments and specializations are unified under the new entity.
"I don't see any problems happening we are going about this merger in the smoothest way possible, as not to disturb both Misr or Chark operations and day-to-day business," El-Habashy concludes. "The big challenge will be to translate the targets written on paper to real life."
Historic Strengths
Misr Insurance was founded in 1934 by the economic nationalist Talaat Harb, becoming the first Egyptian insurance company. Ironically, the company's website states that one of its founding purposes was "eradicating monopoly" in the sector.
"Misr Insurance is a leading insurer in the region," says El-Habashy. "We have a complete insurance portfolio; we could insure almost anything, regardless of size. Our position as the biggest insurance company in Egypt allows us to be the company of choice when it comes to gas and oil, aviation, maritime (hull and cargo) and engineering insurance products for local companies. The main reasons for this is our large resource base and the stability in the market, as these insurance services are very high risk and have an even higher coverage cost."
Although the company does offer consumer-level services, such products are subject to much greater competition. "We offer life and fire insurance products on a much smaller scale," says El-Habashy. "But in this particular market, multinational and private insurance companies pose a higher threat, especially in that their growth rates are much higher than ours. But Misr Insurance is maintaining its current market share, with sufficient growth."
The real strength of the new entity will lie in its 100% share of the petroleum insurance sector, along with 98% of aviation insurance, 65% of medical insurance, 61% of maritime and 58% of ship insurance markets. These big, complicated, highly profitable accounts will be the bread and butter of the new company.
Private Players Stay Positive
Shields, meanwhile, says AIG has an ambitious plan for growth in the local market. "The current market size is $500 million, which is very small. Our plan during the coming five years is to double our sales," he says with confidence. "Today, we make $33 million our expected profit five years from now will range from $75-80 million."
Shields' plan is not unrealistic, especially given the trillion-dollar asset base that supports AIG's operations. "Our strategy is based on finding and tailoring products," he says. "We have five big commercial accounts, including Orascom and Vodafone. We are targeting SMEs [small and medium enterprises], while expanding our geographical footprint. Such clients want simple and quick products. Nothing off-the-shelf, rather more customized products. They also require quick payments and settlements if God forbid a crisis happens.
"The trick is to apply the same standards worldwide, which is easy, given that we are the number one insurance company worldwide," Shields adds. "We are currently seeing state-owned entities going to us with their insurance, as they are no longer forced to insure with other state-owned entities. On the individual front, we are focusing on products such as insuring home contents. We want to increase the retail insurance business; these products must be innovative and provide this target market with simple and affordable products. We offer mobile phone insurance on a global scale and we are the only ones that could do it.
"Our overall growth will be organic, from within. We have seen similar development patterns in Turkey, Greece, Asia and South America. Accordingly, we are going to apply the lessons learned there to continue our growth. We are not interested in expanding market share over our competitors; this will drive prices down, which is not good for the sector; rather we want to grow the pie it's more profitable. As they say, 'the more the merrier.' We see that today insurance is done via agents. I expect that in three years time, banks will account for more than half of insurance claims."
Shields sees significant structural challenges in the market, but remains optimistic that the sector is heading in the right direction. "We see the greatest weakness as being the lack of the 'protection of assets' concept, as well as finding suitable talent. On a bigger scale, there are some worries that the government doesn't follow through with some changes, but from what I am seeing, the market is heading for international standards."
The Insurance Market
The local insurance market is divided into two main submarkets: insurance and reinsurance. "General insurance is the normal insurance that all people know of," says El-Habashy. "The client individual or corporate -- seeks to transfer his risk to the insurance company, and in return, the company pays a premium: the bigger the risk or coverage, the higher the premium.
"Insurance companies then reinsure hence the name 'reinsurance' with other companies to transfer the risks onto them. In aviation insurance, for instance, we keep only 1% of the insurance risk and transfer the remaining risk to overseas insurance companies," he adds. "This is a worldwide practice, and is a two-way process, the overseas company will reinsure with us in the same manner."
Although consolidation of the state-owned insurance businesses is likely to be followed by liberalization of the sector and increased competition, El-Habashy takes the view that his business benefits from foreign competition as much as it is threatened. "Multinational companies have such a wide variety of products and services in life insurance, because it is their main business focus, because of their use of technology and marketing techniques that we don't have," he says. "We must keep a close eye on what they are doing, and try to better their products every time. Our strength comes from our huge resource base, which allows us to have a much faster reimbursement process.
"Retention is very high in this market, and the potential of losing a client will come only in the event of a client crisis and the insurance company's inability to reimburse them quickly enough. In addition, our workforce and management are highly experienced in the field of insurance in the local market.
"Life insurance is what most multinational companies target because their products target individuals with a certain type of education and social level, who are thus attracted by their value proposition. These multinational insurers also target multinational companies via their mass insurance program. We target the base majority those who insure with as little as LE 1,000. As we go higher up the ladder, private-sector presence becomes more apparent. We also have a powerful position in mass insurance, as local companies prefer our size and resources when they come to insure their employees.
"The market is generally a closed one. AIG, Allianz and ACE, to name a few, are all multinational companies who operate in Egypt their presence is not denting our own market share. I don't forecast any serious competition in the foreseeable future."
By Tamer Hafez
© Business Today Egypt 2008
