Category: Insurance

Progressive Auto Insurance has a rich history of implementing effective, cost saving and efficiency enhancing information technology solutions. The company’s everyday operations are technology driven in a bid to not only improve revenue and saving costs but also to improve customer service.

In August 2011 for instance, the company launched the “Snapshot” in Florida, a pay as you go device that helps drivers make considerable savings in insurance through discounts that come along with use of the device. This device is a next generation gadget in the area of usage-based insurance. More importantly, it provides personalized insurance rate system that solely relies on the driving habit of customers.

The device helps Progressive Auto Insurance to determine if a driver qualifies for a discount after a 30 day period, depending on the driving data sent by the device. Like numerous progressive products linked with Progressive.com, customers with the device can log into the website to track their driving habits and make changes where necessary. They can also opt out of the program with no conditions.

“Snapshot”, according to the company is another “first” from Progressive Auto Insurance that is in line with the company’s culture of innovation and better customer service especially in usage-based insurance.

“Snapshot” combines advanced technology, security and ability to optimize discounts for the customer resulting in long-term savings. Over a quarter a million customers so far are using the program with many making savings of up to $ 200.

Progressive have changed their systems numerous times throughout their history The current business environment is very dynamic and defined by demand for better customer service and delivery of services. Business technology keeps changing every day to cater for the changing business environment.

According to King (2009, p. 501), old technology, no matter how effective it is, comes with outdated and sometimes ineffectual processes. Rivard et al. (2004, p. 90) supports the above position by asserting that business firms have no choice but to resort to technology change for the sole purpose of acquiring flexibility which is crucial in meeting the dynamic challenges of an IT-driven world.

Old technology is less likely to guard against fraud, is less efficient and also slow. It is the reason why progressive Auto Insurance keeps modifying their claims system even after generations of effective service by the system.

In a nutshell, Progressive Auto Insurance keeps modifying its claims system in response to needs in the customer service. The company also modifies systems because of the need to increase efficiency and need for increased operational flexibility.

Managers play an important role in successful implementation of technologies in any firm. A routine change in technology does not give sufficient grounds for managers to play a less involving role. In fact managers’ personal attributes have proven to play a big role in choosing and adopting new technology in firms (King, 2009, p. 158).

Any firm that is adopting technology must recognize that the role of managers is crucial. They help in identifying appropriate opportunities, smoothing the way for flawless implementation and helping in mitigating risks that technology brings (Reynolds, 2010, p. 11).

Managers are decision makers and they inject the human element at the highest level when implementing technology changes. There is every need for increased manager involvement in the introduction and adoption of new IT systems in firms.

Technology implementation is a gradual process that takes time. This change management continuum model aims at helping Progressive build its commitment to implementing a customer and policy management system.

Conclusion

The role of managers in a firm covers areas broader than technology implementation. Considering importance of technology in a firm’s survival, managers’ role is even more critical

References

King, W.R. (2009). Planning for Information Systems. New York: Routledge

Reynolds, W. (2010). Information Technology for Managers. New York: Cengage Learning.

Rivard, S. et al. (2004). Information technology and organizational transformation: solving the management puzzle. New York: Butterworth-Heinemann.

Introduction

It has become evident from the recent scenarios that the insurance and finance market is transforming peculiarly as more insurance companies are stepping into it. The competition among insurance companies is increasing with an increase in the number of companies which is also the case in the UAE’s insurance market. In order to establish and operate an insurance company efficiently and successfully a strong strategic planning is essential.

Strategic planning is required not only to maintain and operate some business, but also is required before launching a new company. This paper is aimed at discussing the strategic plan of an insurance company in the UAE, which is about to launch and has potential competitors in the market.

Since, the insurance sector is not as huge as the industrial sector therefore, no significant strategic elements have been highlighted for this sector. However, according to various authors the key elements which are very vital for the strategic planning of insurance companies must include various instruments.

Firstly, the plan should highlight the vision and mission of the company i.e. what it is aimed for and what are its objectives and also highlight ways by which the company plans to generate handsome and profitable revenue. Moreover, the plan should also include internal and external factors which may affect the business directly or indirectly, in a positive or negative manner.

Followed by these factors is the mid-term and long term planning including how the company plans to exploit resources, allocate budgets and its assets. Furthermore, an efficient plan is needed through which the company can overcome potential barriers and any financial breakdown (Van House and Hammond).

The basic reason for designing and following a strategy is to help the company that it can gain advantage over its competitors. Since, insurance is an intangible service, therefore, the significance of a strategy in this sector becomes vital. In order to get an edge over competitors an insurance company has to follow the plan very efficiently. Getting advantage over rivals / competitors means that the company can sustain in the market on a long run generating profits.

In order to attain this purpose, the company must take steps to achieve its set performance goals within the given time. In any organizational setup, strategic planning is of key importance. United Arab Emirates has been a centre of investors’ interest for many decades. This has ultimately attracted the insurance sector towards the country.

Although, there are many insurance companies working in the UAE namely Daman Insurance, Oman Insurance, and Adnec Insurance etc. and more insurance companies are seeking their way into the UAE’s market. Keeping in view, high demand of insurance providers in the UAE planning for the launch of a new insurance company in the UAE is being made and highlights are presented in this report.

This company namely Crescent Insurance Company (CIC) is a new born insurance company, which is planning to penetrate into the UAE’s market, with its main focus is to be a healthy insurance company with a successful and efficient strategy. Unlike other insurance companies our company has some different plans which will help CIC to attain its desired goals effectively in the long run.

The company also aims to spread its wings internationally once it gets hold of the UAE insurance sector. The business / strategic plan of CIC is so designed that it may provide an edge over competitors and help the management to acquire the company’s vision and mission. The company will offer different insurance services to its customers including life insurance, health insurance, safety, sickness, and damage or loss insurance.

Financial assistance is also one of the services that the company plans to offer to the needy customers. The company plans to hire a management team which is dedicated, friendly and skilled, and having experience in the insurance sector. This will help the company to undertake complex decisions regarding businesses and its customers. Moreover, it will also assure better customer services.

The following are some key elements of the strategic plan of CIC including the Vision, Mission, goals and objectives.

Vision

The Vision of Crescent Insurance Company (CIC) is written as:

“The insurance services are provided to customers according to their will with premium quality protection and that too at affordable prices.”

This states that the company offers different insurance products / plans to its customers who are in need of insurance and wants to design the plan as per their will. The option of tailored insurance services will provide an edge to CIC to outrun its competitors and become distinctive.

Mission

The core mission of the company is to establish a healthy partnership with the customers, workforce, members and the government. The victory of the company will be analyzed by customers when they will choose CIC amongst many other insurance companies present in the UAE. To become the leading insurance provider, fulfilling all customers’ needs with value services is what the company is planning for.

The company plans to provide insurance services to every individual who contacts the company regardless of their background and financial status. The company aims to plan such insurance designs that will benefit every segment of the society; poor or rich without neglecting any individual.

Core Activities

The core activities majorly include insurance services provided by CIC to its customers. However, the financial assistance and support to the needy customers is another core activity of the company. The company plans to generate revenues and profit through these services.

However, other activities of CIC include quality customer services and insurance guidance to new customers. The revenue generated through services will help the company to cover its costs and manage its resources which will help in sustaining operations of the CIC.

Internal and External Factors

While setting up any new business, it is very essential to consider both internal and external factors which can influence and affect the business. Internal and external factors are numerous which can vary based on the type of business. However, in the case of CIC which is an insurance company, the internal and external factors are limited.

These factors can be easily analyzed through different models. These models include PEST, SWOT, and Porter Forces etc. this paper will consider 5 Porter Forces and SWOT analysis for the examination of internal and external (environmental and organizational) factors faced by CIC.

5 Porter Forces

Since its establishment, the 5 porter factors have become very famous and significant for the purpose of business analysis. It was introduced by Michael Porter in 1979. These 5 factors are generally used to examine the market competitiveness and thus draw results for risks and benefits to the company from within its market.

The Porter’s 5 forces includes: threat of new companies, threat of alternate product or services, bargaining power of consumers, bargaining power of supplier, and competitive challenge among the present firms. Let us discuss these 5 forces in relevance with the Crescent Insurance Company and its service.

Threat of New Companies

Since, the insurance market is huge and open for new companies, the attractiveness of UAE makes it more complex for the existing companies. Therefore, no barriers are seen for new organizations which are willing to enter the market and thus, making it difficult for existing firms to hold their customers as there are no customer switching costs.

However, in the present case of CIC which is a new company this factor hardly affects the company at present. In the longer run, this factor may influence the company’s business and output. However, at present it has threats from the existing competitors.

Threat of Alternative Product and Services

The presence of other insurance firms in the market of Arab Emirates makes it a little difficult for CIC to ground its roots into the market quickly. As almost all the services provided by all insurance companies are the same except for their USP, therefore the threat is greater in this regard.

Bargaining Power of Consumer

UAE is seen as a potential market for insurance sector, however CIC is a new company and does not have brand loyalty, therefore it will take some time to develop the bargaining power of their customers. This factor depends on the efficiency of services offered by CIC.

Bargaining Power of Supplier

CIC has to abide all the rules and regulations set for the insurance sector by the government of UAE. However CIC is a new name in the insurance business, this factor is also not powerful which will exert high pressure on the company.

Competitive Challenge Among the Present Firms

This factor again exerts high pressure on CIC as it has three competitors in the market. CIC has to be very effective and influential in its operations and services to outrun these competitors.

SWOT Analysis

Analyzing any organization’s Strengths, weaknesses, opportunities and threats can be termed as SWOT analysis. Let us analyze CIC following the SWOT model (Pahl and Richter).

Strengths

CIC is a new name in the insurance market. However it has a list of strengths which will ensure better services and will allow the company to yield smart profits and revenues. First of all the company’s management and employees are a major strength for the company.

They will help to develop the business and to extend its wings in the market. Moreover the variety and distinctiveness of the services offered by the company is also strength of the company seems promising in regard of operations and expansion of business.

Weaknesses

At present, the company does not see any weakness which may harm the business except for that its plan / USP might be copied by any other insurance company which will reduce its customer loyalty and will harm the business.

Opportunities

Since UAE is the hub of industrialization and tourist attraction, more investors and people from the world are moving to the country for different purposes. This ensures positive future for CIC in UAE in a variety of ways. Once the company will become stable and will develop a brand identity in UAE, it will then expand its business on international level.

Threats

CIC predicts no threats or barriers in its operations however the competitors which are Daman, Oman and Adnec Insurance can effect and harm the company’s business. This threat can be encountered by a strong strategy and effective team work. However, CIC plans to do both so that its competitors may not in any way effect their business.

The reason for using these two models for the assessment of the internal and external factor is uncomplicated. SWOT analysis and the 5 factors of Porter makes it easy to understand the business from every perspective and thus to revise and improve the plan (if needed).

Strategic Plan

Mid-Term (2.5 years)

As it has been already discussed that strategic planning plays a vital role in any business therefore a sound strategic plan is essential for every business. It allows the business to assess its key features, the resources, profits and how to address the damages. Moreover it ensures that quality and customer care is maintained throughout without neglecting or compromising any of the standards set initially.

The company aims to hire experienced and skilled workforce and management. Moreover CIC has initial plans to construct state of the art building followed by effective marketing strategies and expanding the percentage of their market share.

Long Term (5 years)

As it has been already discussed that strategic planning plays a vital role in any business therefore a sound strategic plan is essential for every business. It allows the business to assess its key features, the resources, profits and how to address the damages. Moreover it ensures that quality and customer care is maintained throughout without neglecting or compromising any of the standards set initially.

The strategic plan of CIC is so designed that it may cater and respond to every possible situation with the ability to double the revenue every year. The long term goals of CIC further includes that it will become the pioneer of insurance sector in the coming 5 years with almost 60 offices in UAE and 10 international offices. CIC will monitor and maintain its operations and resources adequately and effectively.

The company also plans to address any financial turn over or other threats which may in future harm or slows the business. The company has also allocated resources and assets which can be utilized in time of any financial breakdown.

The company has decided to invest a total of $3Million initially including the cost of the building and the 5 initial offices in f cities of UAE. The company has also kept $1Million to address and overcome any financial breakdown. CIC plans to increase its sales by 10% at the end of 1^st year and by 50% at the end of 5^th year. The company’s profit is predicted to shoot form $3Million to $7Million at the end of 5^th year.

Tangible and Intangible Assets

The company plans to utilize its tangible and intangible assets in an efficient manner. The tangible assets such as the office building, the furniture, and other office related accessories will be used most advantageously. This will ensure better customer care and high customer service in an excellent manner. The office premises will also be used for client and management interaction centre where the trained personnel will guide and assist the clients with their queries and other services.

Whereas the intangible assets are basically the liquid cash which the company plans to keep aside initially and use it for damages or loss or financial breakdown. CIC also plans to utilize its intangible assets for the construction of different offices in different parts of UAE and world once it has formed a brand name.

Conclusion

However, Crescent Insurance Company is a new insurance company in UAE insurance sector, but with its effective and sound strategic plan it will be able to capture the market and beat its competitors. Following the proper business plan and the keeping the threats in mind, the company will be able to generate the desired profits successfully.

The company plans to maintain its business integrity by maintaining the quality of its services and customer care on short and long run both. The uniqueness of CIC’s vision which allows customer to design insurance plans as per their will, will attract many customers and will help the company to create a brand loyalty.

Works Cited

Pahl, Nadine and Anne Richter. SWOT Analysis – Idea, Methodology And A Practical Approach. Santa Cruz: GRIN Verlag, 2009. Print.

Van House, Charles L. and William Rogers Hammond. Accounting for life insurance companies. New York: R. D. Irwin, 1969. Print.

Recently, Progressive Insurance Company has introduced new products for regular drives – snapshots. These devices are necessary for developing rewarding systems that would encourage drivers to ride carefully. Hence, the more accurately you drive, the more money drivers save. The initiated complain focuses on new options for consumers to gain discounts.

The product creates several benefits for consumers whose driving habits are much more accurate and less aggressive (Schultz, 2011a). Hence, the proposed item is both progressive and innovative, which correspond to the strategic vision and mission of the insurance company. Flo, the mercantile character, representing the Progressive’s objectives, highlights the main benefits for drivers who are interested in discounts and money-saving.

With regard to the four characteristics of the service, including service intangibility, inseparability, variability, and perishability, the least attention is given to the service perishability (Kotler & Armstrong, 2011). The reference, however, is made to the analysis of the functionality of iPod device, which can also be used as a mile counter while driving (Kotler & Armstrong, 2011).

In fact, the service providers failed to introduce the terms under which snapshots can be maintained and regulated. As per the service tangibility, Flo has managed to demonstrate the device and explain how this product works. There is also an evident connection between the provider and its service and, therefore, strong evidence for service variability and inseparability from the Progressive Insurance is revealed. Because the company’s product has been advertised, it can be stated that the snapshot is at the stage of commercialization.

Introducing online transactions as a direct channel for communication with customers supports the Progressive’s customer-centered policy. Specifically, using virtual space contributes to greater availability and simplicity of utilizing insurance services. Hence, it also justifies the company’s strategy to keep in constant contact with people who are interested in its services.

Hence, independent agents can communicate with consumers both by phone and by online channels (Toops, 2009). Using the Web as an additional channel of communication makes the independent agents’ work much easier because it provides them with greater coordination and visibility of virtual space. Introducing direct insurance also provides customers with greater awareness and control of policy accomplishment.

Despite the suggested advantages, independent agents still face a number of challenges while gaining experience in online communication. This is of particular concern to the skills and experiences of independent agents’ dual approach to promoting the Progressive’s brand. Two-fold orientation creates difficulties in terms of defining priorities to which the insurance agent should adhere (Toops, 2009).

The problem can also influence the profitability and performance of the employees who should cooperate with customers traditionally and via online devices. Increased workload creates some challenges in terms of the quality of work. Nevertheless, the Progressive Insurance invests resources into Web development, as well as insurance of their employees’ exceptional performance.

The pricing strategy of Progressive Insurance is confined to the unlimited paying capabilities of consumers. It implies that buyers are entitled to choose the price they want to pay. Such a strategy is typical of the Snapshot case because customers also pay money for freedom. The pricing considerations are significant for the Progressive’s competitors, such as State Farm and All-State. The greatest insurance companies are aware of the fact that customers are more interested in money issues rather than in insurance (Schultz, 2011b).

The pricing strategies that Progressive Insurance has developed correspond to the techniques of introducing prices based on customer value. In particular, the pricing policy should reflect basic buyers’ attitudes to and perception of values, but not the costs introduced by the seller (Kotler & Armstrong, 2009). The process of setting prices should primarily concern the marketing mix concepts, although the cost-based scheme is not of the least importance. Therefore, consumers must perceive the value of service to understand whether they need to buy it or not.

Introducing fictional characters in the leading insurance company’s commercials is another approach to meeting customer needs and objectives. The point is that consumers have always been interested in saving their money and receiving discounts rather than in getting car insurance only. Therefore, the task of the Progressive’s Flo, All State’s Mayhem and Farm States’ Jessica is to enhance the customer-based approach. More importantly, a humorous approach to advertising is another technique to advance face-to-face communication and add to the value of the service.

According to Schultz (2011b), “the good-hands people needed their own over-the-top personality to push their message that there is more to insurance than price” (p. 2). Therefore, such personality as Mayhem has received recognition in popular culture because he embodies all possible threats that could happen with consumers’ property.

Similar attention is given to Flo whose eccentric personality has also lured many customers (Schultz, 2011b). Therefore, introducing these fictional characters makes customers understand how services can become more tangible, which is among the priorities in the insurance industry. Moreover, the introduction of progressive and innovative approaches to insurance has provided a shift from traditional approaches and has created more opportunities for customers.

References

Kotler, P., & Armstrong, G. (2011). Principles of Marketing. New York: Prentice Hall.

Schultz, E. J. (2011a). Flo Thumbs A Ride With Drivers. Advertising Age 82(11), 1.

Schultz, E.J. (2011b). How the Insurance Industry Got Into A $4 Billion Ad Brawl. Advertising Age, 82(8), 2.

Toops, L. M. (2009). Progressive Looks to Promote Agents While Protecting Share on Direct Sales. National Underwriter, 113(34), 10-25.

Our proposed project topic involves the discussion of the Oil Drilling and Oil Services industry in relation to the question of insurance. The main accents are made on analyzing the characteristic features of the Oil Drilling and Oil Services industry in the United Arab Emirates (UAE) and on the examination of the laws and regulations which can be used regarding the oil industry insurance.

Purposes

The main purpose of the research project is to explore the insurance issues which are associated with the Oil Drilling and Oil Services industry with references to the United Arab Emirates’ settings and local companies.

It is necessary to investigate the function of Risk Management and Risk Transfer mechanisms in relation to the laws and regulations which are used regarding insurance issues within the Oil Drilling and Oil Services industry.

It is important to analyze the role of insurance in the development of the Oil Drilling and Oil Services industry in the United Arab Emirates and examine its basic principles in the local and international context with references to comparing the situation in the UAE with the insurance policy used in the oil industry globally.

Background

The economy of the UAE is predominantly based on the Oil Drilling and Oil Services industry which influences the annual changes in the United Arab Emirates’ gross domestic product. That is why, all the questions which are associated with this industry are strictly regulated by the definite standards, norms, and laws to provide a secure market within the industry. The activities within the Oil Drilling and Oil Services industry are connected with a lot of challenges, and the most significant among them are the challenges associated with the insurance issues.

The main task of those managers who are responsible for the questions of security is to provide the possibilities for predicting and overcoming the insurance issues with references to the specifics of the regulations and laws related to the insurance systems in the United Arab Emirates (Davidson).

The development of the insurance system in relation to the Oil Drilling and Oil Services industry in the UAE started in the 1970s as a result of the industry’s progress which was associated with a lot of risks. In spite of the fact the most dangerous accidents within the industry were characterized by other countries, the insurance industry in the UAE became to develop quickly to prevent the possible risks. The insurance companies oriented to the Oil Drilling and Oil Services industry focused on property insurance, extra insurance, and loss to physical assets. The issues of safety and risks of blowouts were determined among the most influential challenges. Moreover, modern insurance companies propose umbrella coverage and intensive liability protection to overcome the possible risks.

The Oil Drilling and Oil Services industry is based on different technological processes which are connected with a variety of industrial risks which should be discussed from the perspective of the insurance questions. The process of functioning of definite units used in the industry such as pipelines, pumping stations, plants, and tank farms should be regulated with references to the definite norms the main task of which is to prevent the realization of risky situations which can lead to making harm to employees or to destroying properties. In spite of the fact, the company develops the safety programs, such risks as an explosion, the equipment damage, the changes in the high temperatures or pressures, the environmental issues exist, and they should be controlled and operated, basing on the certain insurance system (Suleiman).

Moreover, the usage of new technologies in order to strengthen the company’s capabilities often increases the risks for damaging properties and for workers’ life. That is why it is necessary to develop the insurance programs also with references to these issues. Thus, the work with insurance issues is closely connected with developing the safety standards of any company which functions within the Oil Drilling and Oil Services industry (Davidson).

It is possible to determine several leaders within the Oil Drilling and Oil Services industry in the United Arab Emirates which policies and principles should be discussed with references to the insurance issues. Abu Dhabi National Oil Company and the related ADNOC Group of Companies are the most influential drilling companies in the Middle East (“Abu Dhabi National Oil Company”). The approach to overcoming the insurance issues is correlated with the company’s status, and it should be paid much attention to providing the workers’ safety and healthy working conditions in the company. Moreover, the questions of the environment protection and safeguarding assets are also discussed as influential for determining the company’s path.

The next company which can be examined with references to insurance issues is the Emirates National Oil Company (ENOC) which is controlled by the Government, and it operates in Dubai and the Northern Emirates of the United Arab Emirates (“The Emirates National Oil Company”). It is important to compare the ways according to which the insurance issues are resolved in the ADNOC Group of Companies which operates in Abu Dhabi and in the Emirates National Oil Company. The policies and insurance issues of most influential companies such as the ENOC and ADNOC can be compared and contrasted with the privately-owned company Crescent Petroleum which has the long history of its development from 1971 (“Crescent Petroleum”).

Scope and Research Methods Used

To provide the necessary research in the field of the Oil Drilling and Oil Services industry in relation to the insurance questions, it is important to examine the research question from several perspectives, concentrating on the particular features of the insurance industry and its role in the UAE with references to the general regulations and requirements and from the point of the specifics of the insurance issues discussed regarding the Oil Drilling and Oil Services industry in the United Arab Emirates.

The questions of insurance within the Oil Drilling and Oil Services industry should be examined with paying much attention to the particular features of the UAE insurance industry itself and to the requirements and regulations according to which it is possible to resolve the insurance issues which are challengeable for the companies within the oil industry. These questions should be also discussed with references to the laws spread at the territories of the UAE and in the free zones (Peng).

Moreover, it is significant to pay attention to the fact that Dubai and Ras Al Khaimah depend on their own court systems. One of the major points of the Insurance Law is the aspect that United Arab Emirates companies must not be insured with those insurance companies which are not located in the United Arab Emirates and can be discussed as foreign ones. The contemporary Insurance Law covers such aspects as the company’s capital and property, employees’ life, and liability, meeting the requirements of all the companies in relation to the possible risks, including the companies within the Oil Drilling and Oil Services industry (Radetzki).

To have the opportunity to examine the risks and insurance issues with references to the definite company, it is important to conduct the interviews with the executives of the companies related to the Oil Drilling and Oil Services industry and with the persons who are responsible for resolving the questions associated with the Risk Management and Risk Transfer mechanisms. The research’s conclusions should be based on the qualitative analysis of the information provided by the interviewee in order to determine the most typical insurance issues associated with the industry and the most effective ways to predict and prevent these issues in relation to the safety and insurance system and regulations.

The availability and affordability of the insurance products can be examined with references to the reinsurance issues which are characteristic for such companies as, for instance, Abu Dhabi National Oil Company, the Emirates National Oil Company, and Crescent Petroleum. Furthermore, it is necessary to discuss the controversial questions with references to the experience of the international companies which operate in the oil industry worldwide. Transocean Ltd. is one of such companies, and it is based in Switzerland, but its offices are located not only in Switzerland but also in the USA, Brazil, and other countries. In 2010, the company’s offshore oil drilling rig Deepwater Horizon was destroyed because of the geyser’s eruption and the following explosions. Eleven workers were killed and many employees were injured.

The main insurance issues are connected with the problem that the staff was international, the safety requirements were not followed directly, and the accident resulted in the large oil spill. Thus, the Deepwater Horizon incident cost from $2 billion to $3 billion (“The Ongoing Administration-Wide Response”). This incident which led to the largest environmental disaster in the USA during the 2010s should be analyzed carefully in order to develop the programs to prevent similar incidents in the future. It is also possible to refer to the earlier accidents such as the blowout of Ekofisk Bravo Platform operated by Phillips Petroleum Company in 1977. The insurance issues were connected with the problem that human errors caused the accident (“Ekofisk Bravo”).

It is also important to focus on the problem of reinsurance with references to the Deepwater Horizon accident. The practice of reinsurance can be defined as the provision of the necessary insurance for the insurance company which has significant losses connected with its definite contract by the third party. Companies became to use reinsurance actively in the late 1990s as a result of definite global accidents.

This practice was also important for the Oil Drilling and Oil Service industries because of the high level of potential risks for companies. Thus, the insurance losses caused by the Deepwater Horizon accident were extremely large that is why the main accents were made on the additional reinsurance to decrease the risks and losses. The situation influenced the development of the reinsurance market within the Oil Drilling Industry, affecting the increase of liability insurance and discussion of more risks associated with Oil Drilling and Oil Service industries (“The Ongoing Administration-Wide Response”).

It is important to refer to the statistics of the accidents connected with the insurance issues which happened within the oil industries worldwide. The concentration on this aspect is important for determining the most problematic points the solution of which can contribute to the increase of the general level of safety and productivity according to the insurance issues. Thus, it is possible to refer to the insurance events which happened locally and internationally (Yee). It is significant to analyze critically the causes of accidents and use their outcomes to develop the programs and insurance systems to predict further accidents and overcome their consequences successfully.

Works Cited

Abu Dhabi National Oil Company (n.d.). Web.

Crescent Petroleum (n.d.). Web.

Davidson, Christopher. Abu Dhabi: Oil and Beyond. USA: Columbia University Press, 2009. Print.

Ekofisk Bravo (n.d.). Web.

Peng, David. Insurance and Legal Issues in the Oil Industry. USA: Springer, 1993. Print.

Radetzki, Marian. A Handbook of Primary Commodities in the Global Economy. USA: Cambridge University Press, 2010. Print.

Suleiman, Alef. The Petroleum Experience of Abu Dhabi. UAE: Emirates Center for Strategic Studies and Research, 2008. Print.

The Emirates National Oil Company (n.d.). Web.

The Ongoing Administration-Wide Response to the Deepwater BP Oil Spill. 2010. Web.

Yee, April. Hard Lessons from Oil Industry Accidents. 2012. Web.

Introduction

According to Jaffer, the Takaful is a young insurance company which was formed in 1979. Its growth over the years has, however, been quite robust (63). These days, Takaful has extended to other Muslim populated areas across the world. Along with Takaful, there has been growing another “co-operative system of reimbursement”, Re-Takaful which started in 1985. Takaful operators now attract considerable interest and in turn, there is an awareness of the need for Re-Takaful to comply with the requirements of Sharia (Jaffer 64). These are the key elements of the strong adherence to the community’s first principles and its need for Takaful.

As noted by Borscheid and Haueter, the Sharia regulates Islamic insurance market, and Takaful does not have a long history in the UAE. It has grown very quickly due to the rapid expansion of a number of companies, which were built on the assumption that the public wanted Islamic institutions. In the year 2010, the market share was 6 per cent of the total premiums written. However, between 2005 and 2008 the UAE’s Takaful market grew by 135 per cent, before shrinking in a declining local economy (Borscheid and Haueter 406). The first Takaful insurance company in the UAE, the Abu Dhabi National Takaful Company, only began its operation in 2004. By the end of then year 2010, the number of Takaful companies had grown to ten.

Brief History of Takaful

Takaful began in 1979 in Sudan and Saudi Arabia (Jaffer 64). The need for Islamic principles in Islamic banking transactions pioneered this phase. This was led by Bank Faycal and the Al Baraka, two groups that were interested in developing an insurance offer based on the Sharia.

In 1985, Al Baraka launched the first re-Takaful operator BEST Re. In the years that followed, two other re-Takaful operators were launched. These were the Islamic Takaful & Re-Takaful Company, owned by Dar Al Mal and the Islamic Insurance & Reinsurance Company (IIRC).

A dynamic impetus to growth, however, came from South East Asia. From the 1980s onwards, the Muslim world saw Takaful evolving considerably in Malaysia. The Malaysian Takaful operator, Syrikat Takaful Malaysia, illustrated the swift growth of the first Takaful portfolio in the country, all based on a model which served as a platform for expansion to the other countries in Asia (Aziz 3).

In recent years, Islamic finance has witnessed new growth following the rising strength of petrol exports. New Takaful companies started their operations in other Islamic countries such as Kuwait, the United Arab Emirates, Pakistan, Sri Lanka and Malaysia. The recent development in the Re-Takaful world is the launch of Re-Takaful in Dubai, a fully fledged re-Takaful operator spearheading growing interest from the international insurers in this niche market (Jaffer 64).

Takaful Insurance and How it Different from Conventional Insurance Sold in Dubai

Takaful is a Shariah compliant mutual risk transfer agreement, which involves participants and operators. Sharia is based on Quran, the words of God as revealed by the Prophet Muhammad, and As-Sunnah, the practice or life of Prophet Muhammad. To some degree, the concept of mutual risk sharing covered under takaful is similar to mutual risk sharing in conventional insurance. It is mutual; sharing of risk based on Taawun or Mutual Protection” (Iqbal 2).

The Takaful and Conventional Insurance have two major differences. First of all, it is the way in which they are managed, and second, is the way in which they are evaluated and handled. In addition, the legal relations between the operator (insurer) and participant (insured) have a different nature.

As it is widely known, the religion of Islam governs all areas of human activities, including finance. Thus, risk assessment also follows the principles of Sharia. Those principles dictate the rules of business conduct. Thus, there are three major prohibitions which must be completely avoided by Takaful operation. Those are the prohibitions of interest (riba), uncertainty (gharar) and gambling (maisir) (Archer, Rifaat, and Volker 34).

The Takaful contracts should be open and clear, any hidden information would be the violation of gharar. Maisir which goes for gambling is absolutely unacceptable. Thus, both parties of the Takaful contract should be stayed assured of its reliability and security; any speculative elements would automatically discriminate the subject matter in which both, the insurer and insured are interested in. Furthermore, Riba is absolutely unacceptable in the Sharia Law and thus, under a Takaful arrangement as well. According to Venardos (4), Takaful treats participants’ contribution to the risk sharing scheme not as a premium in the way conventional insurance does. This is done so as to avoid the riba. Besides, Takaful operators are required to properly manage participants’ contributions according to the Sharia teachings (Iqbal 3).

Based on the information provided above, it is clear that both, Gharar and Maisir are basic prohibitions that present a great challenge for Takaful operators. It is very important to make sure that all Takaful arrangements and actions are free of any uncertainties and vagueness. Moreover, riba is also the area which requires great attention. Consequently, riba free investment and fund management today are the areas that need close consideration and need to be separate disciplines. Considering the abovementioned information, one thing should be explained in order to avoid confusion in understanding of the Islamic finance and business operations. Thus, the major emphasis is done on the fact that Islam does not prohibit risk or uncertainty, what is strictly regulated is selling and exchange of risk and its transfer to other parties using the sales contracts (Iqbal 3).

On the other hand, Islamic teaching encourages such virtues as helping other people in any situation. According to Sharia, sharing is essential if men and women have to assist one another (Iqbal 3). Figure 1 and figure 2 show the different concepts between conventional insurance where risk is generally transferred, and Takaful where risk is shared (Iqbal 3).

Under conventional insurance, insurance is a risk transfer mechanism by which an organization can exchange its uncertainty for certainty. The uncertainty experiences would include whether loss will occur, when it will take place, how severe it will be, and how may there might be in a year. Insurance in this case offers one the opportunity to exchange this uncertain loss with certain loss through the insurance premium. The organization agrees to pay fixed premium and in return, the insurance company agrees to meet any loss which will fall within the terms of the policy. Exchange of uncertain loss with certain loss as it is done in conventional insurance exactly falls into the meaning of Gharar and it is thus not allowable in Islam. In Takaful concept, therefore, there is no transfer of risk from participants to the Takaful operator. Risks are shared among participants under a mutual guarantee scheme or Takaful scheme. It is part of the operator role to ensure that each participant pay equitable contribution, as well as to ensure that the unfortunate one who suffers a loss will get proper compensation.

Implementation of Takaful In Actual Practice

According to Iqbal and Mirakhor (85), there is no standard operating model for Takaful companies, as each country may decide on a particular model. In particular, Takaful models can be mudarabah based, wikala based, or a hybrid of the two. In discussing the practical implementation of Takaful, Bank Negara Malaysia (BNM) will be used as an example.

Typically, the implementation of Takaful is carried out in the form of solidarity mudarabah, where the participants agree to share their losses by contributing periodic premiums in the form of investments (Mitchell 94). They are then entitled to redeem the residual value of profits after fulfilling the claims and premiums. One of the critical differences between contemporary insurance and Takaful is the participant’s right to receive surplus profits. While the participants in a given Takaful mudarabah have the right to share the surplus profits generated, they are at the same time liable for additional amounts if the initial premiums paid during a period are not sufficient to meet all the loses and risks incurred during that period (Venardos 84). Apparently, Takaful companies can constitute reserves which allow the need for the insured to make supplemental contributions if claims exceed premiums.

Bank Negara Malaysia Guidelines

BNM was established in 1959 under the Central Bank of Malaysia Act of 1958. It is owned by the Government of Malaysia. One of the main responsibilities of the bank is the conduction of the monetary policy.

Thus, the main responsibilities of the bank include:

• Bringing about financial system stability and fostering a sound and progressive financial sector;
• Playing an active role in advising on macroeconomic policies, and managing the public debt;
• The sole authority in issuing currency as well as managing the country’s international reserves (Gönülal 15).

Guidelines on Investment Management of Takaful Operators

BNM provides the relevant policies that should be observed in managing investment portfolios and the associated risks. The guidelines have been developed to achieve the following objectives:

• To safeguard the interests of Takaful participants
• To institute strong and effective governance of investment activities of the Takaful fund
• To ensure an appropriate risk management framework is in place in identifying, monitoring, controlling, and mitigating the various risks arising from investment activities, and
• To ensure sound management of assets appropriate with the nature and profile of the Takaful fund’s liabilities (Guidelines on Investment Management for Takaful Operators 2).

Guidelines on Internet Takaful

Internet activities by Takaful operators are also meant to be performed by following strict rules or guidelines. The guidelines shed light on the risks associated with the Internet usage while distributing the Takaful products and services. In addition, these guidelines provide minimum risk management measures that Takaful should implement when using the Internet. According to Iqbal and Mirakhor (134), Internet insurance sites can basically be categorized into two types. The first type is the information based website and this provides predefined, publicly available marketing information about the Takaful operators, including the products and services offered (El-Gamal 59). The second type is the interactive based website that provides for transactions to be executed, including soliciting Takaful proposal and the participation and renewal of certificates that may or may not involve online payments (Rosly 76).

Example of Takfaful

The following example refers to how a personal accident cover is treated under tafakul. First of all, a personal accident cover is designed to provide compensation when a person dies or in the case of injuries or disabilities in the event of an accident. Typically, the plan clearly stipulates the jurisdiction and details of the cover (Rajhi et al. 24). Participants are expected to donate premiums based on tabarru requirements.

In case any participant suffers dies or suffers an injury as a result of an accident, all participants have a responsibility to indemnify each other. Where no claim is made during the period the cover is meant to last and maturity is reached, participants get an opportunity to share whatever surplus is available. Ordinarily, the sharing will be done based on the appropriate Takaful model (Sabri 52).

In a case where the Mudaraba model is to be used, the parties involved share the available surplus based on an agreed ratio. Imagine that the operator is to receive 50% of the surplus while the participant is to receive 50%. Suppose further that the available surplus amount is AED 200 Million and the contribution or donation is AED 500 Million. The premium or participation for the year is AED 10,000. The surplus sharing ratio will be equal to:

Agreed ratio x Surplus / total participation = 50% x AED 200 Million / 500 Million = 20%. The Participant’s share will be equal to: surplus sharing ratio x contribution. Therefore, each participant will receive 20% x 10000 = AED 2000.

Amount of Takaful Insurance Sold in the UAE Vs Conventional Insurance

According to Nazim and Balcome (7), global Takaful contributions grew by 19% in 2010 to US$ 8.3b. Total contributions are expected to reach US$ 12b by the end of the year 2012. This is illustrated by figure 3.

Popularity of Takaful in the rest of the Middle East

Given the low insurance penetration rates in the Middle East and North Africa region of just under 2%, and with region accounting for less than 1 % of global premiums in spite of its energy wealth and the recent regional infrastructure boom, there remains plenty of room for rapid growth in insurance. Apparently, Takaful insurance is set to drive much of this growth in the coming years, supported not only by its religious and ethical appeal but also the potential for the return of some insurance premiums and often attractive pricing (OBG 15). According Jaffer (5):

Takaful has become one of the leading segments of the financial sector across the Asian, Arab, and African regions with a growth rate of 10 to 30 percent annually. Major markets currently include Malaysia, Iran, Pakistan, and Saudi Arabia.

Ethical Issues Related to Takaful

Due to the ethical issues underpinning Islamic banking, investment and finance, the increasing transparency of customers and conditions, the pricing structure, regular monitoring for compliance by Sharia’s boards, major Takaful providers need to ensure that all participants adhere to the Sharia Laws (Hassan, Lewis, and Lewis 15).

As it has already been discussed, it is unethical for any participant to go against the requirements of Islamic teachings. Under Takaful insurance, the requirements of Gharar, Maisir, and Riba must be strictly followed by all the participants. However, this poses serious challenges to regulators in their quest to match the requirements of Islamic teachings (Mitchell 132).

Challenges Facing the Takaful and Re-Takaful Industry in UAE and Worlwide

Despite other challenges, market and demand knowledge, as well as the need to meet the market demand, are two major challenges faced by the Takaful and re-Takaful industry. These elaborated as follows:

Market and Demand Knowledge

Although there has been considerable growth experienced in the Islamic banking sector, the size and knowledge of the Takaful segment is still limited. It is imperative for the Takaful industry to have a better knowledge of its existing and potential market. Demand is not gauged either by the Takaful or Re-Takaful companies. There is a need for market segmentation and an understanding of the demand constituents. Takaful and Re-Takaful, and all the operators interested in the development of the industry must make sure that they are aware of their markets (Jaffer 68).

Meeting the Demand

More market knowledge will enable the industry to meet the demand. It is clear that the Takaful industry can only witness considerable growth if it can first supply the demand originating from the retail business (Ayub 56). Individual consumers are more sensitive to the issue of Sharia compliance than corporate organizations. If the Takaful companies begin by competing with the conventional insurers on industrial risks, consumers will be unable to differentiate the Takaful from the conventional. In this respect, the industry can learn from retail banking.

Other Challenges for Takaful and Re-Takaful Operators

The potential for Takaful to grow is beyond question. However, there are still many challenges that the Takaful should overcome to properly operate in the market. One of the main obstacles for the successful growth of the company is human resources. This obstacle arises due to the fact that these days the insurance market faces a shortage of qualified staff that seem to be aware of the main insurance principles, as well as have an in-depth knowledge of the rules of the Sharia finance (Borscheid and Haueter 23)

Taking into consideration these obstacles, it is evident that of the biggest challenges is to create effective strategies to promote customer awareness. Even in the modern fast developing world where information is communicated rapidly, many Muslims still consider that insurance principles are contrary to the principles and concepts dictated by the Sharia, especially with regard to life insurance. Thus, there is an urgent need to make people aware of the fact that Takaful strictly follows the religious concepts and its operations are regulated by the main principles of Sharia. “Similarly, non-Muslims need to be made aware of why Takaful is ethical” (Hassan & Mahlknecht 46).

In the UK, Europe and the US, there is still little awareness on how the Takaful can be accounted for. Moreover, there are no strategies on how Takaful businesses can operate based on the Islam principles and, at the same time, not to contradict local national regulatory insurance rules (PWC Takaful 6). Thus, “Takaful businesses in other countries account for Takaful under International Financial Reporting Standards (IFRS). Applying IFRS to Takaful is a complex area and will be the subject of a separate PricewaterhouseCoopers’ paper”. (Kettell 30)

Furthermore, another challenge for Takaful company is the “limited availability of short-term non-equity financial instruments such as sukuk and Shariah-compliant money market instruments equivalent to treasury” (Archer 25).

Takaful is a rapidly grown company and one of the main challenges that it is facing nowadays is to ensure that its insurance system will come up with effective strategies to cope with such a rapid growth. Along with these challenges, “Takaful providers must improve their product innovation and continue offering a high level of customer service” (Htay et al. 5). Thus, they have to be able to understand evolving customer and market-specific needs, as well as be ready tore-design product base and provide new customer benefit packages, as well as make sure appropriate communication channels to reach their customers and spread relevant information on its insurance practices and operations (Kettell 35).

Conclusion

From the discussion presented in this paper, it is obvious that Takaful insurance will continue growing as time goes by. It is, however, important to ensure that as this happens, critical structures are put in place to guarantee successful growth. This is important especially considering that the success of Takaful insurance is largely dependent on Islamic teachings which can be very tricky to deal with.

Works Cited

Archer, Simon, Rifaat Ahmed and Volker Nienhaus. Takaful Islamic Insurance: Concepts and Regulatory Issues, Hoboken, NY: John Wiley & Sons, 2011. Print.

Ayub, Muhammad. Understanding Islamic Finance, Hoboken, NY: John Wiley & Sons, 2009. Print.

Aziz, Zeti A. Islamic Banking and Finance Progress and Prospects Collected Speeches: 2000-2006, Malaysia: Bank Negara Malaysia, 2006. Print.

Borscheid, Peter, and Niels Haueter. World Insurance: The Evolution of a Global Risk Network, Oxford, UK: Oxford University Press, 2012. Print.

El-Gamal, Mahmoud. Islamic Finance: Law, Economics, and Practice, Cambridge, UK: Cambridge University Press, 2006. Print.

Guidelines on Investment Management for Takaful Operators. 2012. Web.

Gönülal, Serap O. Takaful and Mutual Insurance: Alternative Approaches to Managing Risks, Geneva: World Bank Publications, 2012. Print.

Hassan, Kabir, Mervyn Lewis and Mervyn K Lewis. The Handbook of Islamic Banking, Cheltenham, UK: Edward Elgar Publishing, 2007. Print.

Hassan, Kabir, and Michael Mahlknecht. Islamic Capital Markets: Products and Strategies, Hoboken, NY: John Wiley & Sons, 2011. Print.

Htay, Sheila, Mohamed Arif , Younes Soualhi, Hanna Zaharin and Ibrahim Shaugee. Accounting, Auditing and Governance for Takaful Operations, Hoboken, NY: John Wiley & Sons, 2012. Print.

Iqbal, Muhaimin. General Takaful Practice: Technical Approach to Eliminate Gharar (Uncertainty), Maisir (Gambling), and Riba’ (Usury), Jakarta: Gema Insani, 2010. Print.

Iqbal, Zamir, and Abbas Mirakhor. An Introduction to Islamic Finance: Theory and Practice, Hoboken, NY: John Wiley and Sons, 2011. Print.

Jaffer, Sohail. Islamic Insurance: Trends, Opportunities and the Future of Takaful, London, UK: Euromoney Institutional Investor Plc, 2011. Print.

Kettell, Brian. Introduction to Islamic Banking and Finance, Hoboken, NY: John Wiley & Sons, 2011. Print.

Oxford Business Group (OBG). The Report: Algeria 2011, Oxford Business Group, 2011. Print.

Mitchell, Charles. A Short Course in International Business Ethics: Combining Ethics and Profits in Global Business, California: World Trade Press, 2010. Print.

Nazim, Ashar, and Justin Balcome. 2010, The World Takaful Report 2010. Web.

PWC Takaful. Takaful: Growth Opportunities in a Dynamic Market. 2012. Web.

Rajhi, Ahmed, Abdullah Salamah, Monica Malik, and Rodney Wilson. Economic Development in Saudi Arabia, New York, NY: Routledge, 2012. Print.

Rosly, Saiful. Critical Issues on Islamic Banking And Financial Markets: Islamic Economics, Banking And Finance, Investments, Takaful And Financial Planning, Indiana: AuthorHouse, 2005. Print.

Sabri, Nidal. Financial Markets and Institutions in the Arab Economy, New York, NY: Nova Publishers, 2011. Print.

Venardos, Angelo. Current Issues in Islamic Banking and Finance: Resilience and Stability in the Present System, Hackensack, NJ: World Scientific, 2010. Print.

Role of Consumer Behavior in Insurance Positioning

Consumer behavior is a broad concept that critically analyzes consumer purchases with the aim of predicting future purchases. It explains why a consumer settles on a certain product or service as opposed to another. Positioning refers to the view and opinion a customer places on a product in relation to competition.

A positioning strategy should take into consideration a number of factors. One such factor is the effect of consumer behavior. The role of a positioning strategy is to prepare the mind of a consumer. The basis should be differentiating a company’s product from competitors. In a market where the insurance service is the same, this is tricky. However, the service provider should strive to meet the basic requirements of a service before engaging in secondary requirements.

In United States, it is a legal requirement for any individual who owns or drives a vehicle to buy Auto Insurance. This provides a vast target market encompassing virtually all segments. Since this is not an essential product, a number of factors influence a customer’s decision to buy insurance from a particular provider.

Most customers might look for comfort, value addition and innovativeness since prices are almost the same. Hence, it is imperative for Nationwide Auto Insurance to employ a strategy that puts it in that position (Usunier 2000). Creating long-term bonds requires creating new ways that meet the sophistication and unpredictability of customers. Nationwide Insurance does not compete on prices. Rather, it employs a value addition policy that ensures brand loyalty.

Consumers perceive non-basic items as unnecessary costs. They do not enjoy purchasing auto insurance. This means that Nationwide should use creative ways to make this a good experience. From the above, it is important to note that Nationwide can combine a service whose requirements are bound to possession of yet another product. For example, Nationwide can package Car Insurance and Life Insurance together.

Unlike luxury products, which customers may quit using once they fulfill their urges, this service (insurance) is a requirement. Hence, the principle of diminishing returns does not apply. Income and budget constraints on consumers inform their every day purchases. However, in the case of Auto Insurance, this may not affect their decision, as it is mandatory. Hence, customers base purchase decisions on reliability, reputation, similar services and innovativeness. Nationwide should strive to compete from these angles (Usunier 2000).

Impact of Purchasing Trends on Consumer Behavior

Technology

Technology is closely associated to globalization. Nationwide insurance uses technology at various levels of its operations. For example, it allows online payments of premiums and uses customized customer service solutions such as face book and Twitter to handle enquiries (Suri et al 2003).

Technological improvements have introduced advances in software and hardware, which have created a shift in information power from marketers to consumers. The insurance industry has registered tremendous gains from the recent information technology waves in terms of automation. Consumers in this environment have continued to expect more from insurance providers. For example, a mobile application that reminds them to pay premiums when they fall due may be pleasant (Castells 2011).

Globalization

Consumer behavior is not a static concept. Apart from the fact that majority of customers tend to act in different ways and react differently to the various strategies, global purchasing trends equally affect their behavior. First, globalization has exposed customers to volumes of easily available information from which they can make decisions. In the context of insurance industry, customers can easily compare different providers, gauge other consumers’ reactions and make a reliable decision.

It is, therefore, incumbent upon Nationwide to maintain an impeccable reputation (Nationwide 2012). This is especially true in a world where consumers discuss brands at readily available forums such as blogs and social networking sites. An adverse move may easily sway a prospective customer’s opinion and may even dislodge a customer from a company (Suri et al 2003).

Hence, companies need to be globally alert on the hot issues that consumers are discussing concerning their operations and make instantaneous corrections and clarifications to avoid negative opinions, which have the capability of spiraling to dangerous levels (Castells 2011).

Cultural Changes

Nationwide communicates it corporate culture well to suppliers, customers and prospective clients. The company engages in social responsibility activities to enhance its culture. It touts diversity and inclusion, respect, integrity and honesty as its main pillars. It is paramount to project a clear organizational structure in an industry whose business threatens a company’s morality and integrity.

Additionally, consumers are quite alert and dynamic making articulate profiling a challenge. Customers critically look into organizational ethics before making purchases. Hence, Nationwide should strive to align strategies with values and competencies to attract this unpredictable market.

Product, Pricing, Promotional and Place Distribution Strategies Recommendations

Product Strategy

Nationwide offers a variety of products spread across its five main areas of operation (property and casualty, life insurance and retirement savings, health, mortgage and banking and asset management). It should use the already existing multi-policy offers to drive sales of Auto Insurance. Nationwide can also personalize its ‘vanishing deductible and I am on your side programs’ through use of podcasts to enhance lower premiums on Auto Insurance.

Nationwide can also reposition by offering specialized car maintenance solutions through use of past accident data simulations. Nationwide can redefine policies to cut premium payments for selected groups, such as students, who willingly and proportionately adhere to programs such as ‘smart ride’. Lastly, nationwide can reposition the claims process by having mobile units that only respond to an accident scene if the customer does not have a mobile application that processes the claims instantaneously.

Place Distribution Strategies

Nationwide employs the services of exclusive agents, individual brokers and banks as part of an intricate distribution strategy. Lately, Nationwide has widely used the internet to bolster this strategy. Through its ‘I am on Your Side’ customer experience slogan, the company seeks to leverage social media exhaustively. Though Insurance is mostly a face-to-face service, Nationwide should revolutionize this by selling Auto insurance online as part of a repositioning strategy. The company will spend less on agent commissions and save customer’s insurance ‘shopping’ costs.

Promotional Strategy

Auto insurance industry’s promotional spending has recorded an upward trend since 2006. Major competitors, however, constantly outspend Nationwide. In 2009, Nationwide changed its slogan from ‘Life Comes at You Fast’ to ‘I am on your Side’. Since then its promotional strategy centers on this slogan.

The company uses broadcast television, print, web and radio to reach out to its market. It also uses public relations and sponsorship programs. However, Nationwide should use personalized strategies more often as part of ‘I am on Your Side’ slogan. This will initiate direct buzz marketing, which is an effective tool in the internet. Additionally, Nationwide should leverage social media avenues (e.g. You Tube, Face book and Twitter) as part of a repositioning strategy.

These are increasingly becoming powerful brand discussion forums and Nationwide can use this valuable information to improve its Auto Insurance service. This would be a smart move to counter the disadvantage where competition outspends it in mainstream advertising. Additionally, Nationwide can reposition through continued roll out of its ‘smart ride program’ in every state. Currently, Nationwide runs tests in only one state and its success may drastically reduce premium payments on Auto Insurance and save customer costs.

Pricing Strategy

Nationwide does not compete on price. Instead, it places emphasis on value and creating innovative and fresh ideas. For example, in 2009 Nationwide created an iPhone application that allows customers to initiate a claims process when an accident occurs. This application is open source and it was new in the insurance industry. The customer can take photos of the accident scene, inform the authorities and fill claims forms online, which saves time.

To reposition, Nationwide can insist further on value addition. Nationwide can refrain from spending too much on advertising compared to competitors (e.g. Progressive, Allstate and GEICO) to attract customers, which has been the trend since 2006. Additionally, since customers can easily obtain price comparisons, it would be prudent to continue offering excellent customer services (e.g. claims handling).

Nationwide should also continue using the ‘I am on Your Side’ slogan to influence customer purchases through hands-on community engagements. Lastly, it should continue with its policy where it differentiates its Auto Insurance service on value addition as opposed to price.

References

Castells, M. (2011). The Rise of the Network Society: The Information Age: Economy, Society and Culture. New York, NY: John Wiley & Sons.

Nationwide (2012). Nationwide Car Insurance.

Suri, R. et al (2003). The Impact of the Internet and Consumer Motivation on Evaluation of Price. Journal of Business Research, 56.1: 379-390.

Usunier, J. (2000). Marketing across Cultures. New York, NY: Prentice Hall.

Consumer behavior has strong implications when determining and formulating a marketing strategy to capture and create value for the Nationwide Auto insurance product in the market in the automotive industry.

A successful marketing strategy driven and influenced by internal elements such as attitude, lifestyle, and motivation provide the marketer with the best components to formulate the right marketing strategy to address the marketing needs of the consumer and to achieve measureable marketing objectives (Petty & Cacioppo, 1981).

These components influence the potential points of entry into the market, the mode of entry, the marketing models, and the product positioning matrix to adopt when formulating a strategy to enter the motor vehicle insurance industry. The marketing strategy formulated must reflect how the underlying elements of attitude, lifestyle, and motivation affect consumer behavior.

Attitude

According to Petty and Cacioppo (1981), attitude is strongly influenced by a person’s experience with a product or service and is strongly related to the buyer or consumer behavior and the beliefs customers about the product. Belief is a crucial component that influences “learned attitude” which could be important when formulating a marketing strategy. On the other hand, experience can create a negative or positive attitude toward a product and influence consumer behavior (Petty & Cacioppo, 1981).

The negative or positive attitude customers experience with the Nationwide Auto Insurance product underlies its influence on acceptability in the market, an attitude which can be deep seated and influential to the psychology of the customer. In that case, the positive attitude contributes positively to creating product loyalty, strong brand engagement, positive buyer behavior, and influence on others to buy the Nationwide Auto Insurance product.

Attitude influences the levels of involvement in the Nationwide Auto Insurance and the experiential perceptions on the marketing strategies which influence positive customer behavior. That enables the marketer to create a marketing model that ultimately leads to positive buyer behavior, strong brand engagement, positive customer experience, and positive perceptions about the Nationwide Auto Insurance product. That ultimately influences positively or negatively influences exposure stimuli and interpretations (Petty & Cacioppo, 1981).

Lifestyle

Lifestyle has strong influence on the marketing strategy developed for the Nationwide Auto Insurance product based on product considerations. That is because consumer lives have strong influence based on their background incuding where they live, income levels, and education (Petty & Cacioppo, 1981).

The impact of lifestyle factors on the marketing strategy include identifying the best approach to segment people according to their values and beliefs, their level and rate of expenditure, and any lifestyle attribute related to the frequency with which people interact with and use the motor vehicle (Marketing Teacher, 20102). Other factors that impact on the marketing strategy include income levels, education levels, culture, buyer power, and social groups.

Motivation

When formulating a marketing strategy with the aim of achieving marketing goals, motivation influences need, desire, need based segmentation, provides better understanding of motivation, and customer identify with a product.

Analytically, the strategy should therefore include approaches that include identifying and integrating components that affect individual consumer behavior based on psychological motivational elements which include self-expression need for assertion, consistency and other theoretical components that affect consumer behavior. The marketing strategy should include psychological factors to create consumer involvement in the marketing of insurance products to achieve marketing goals (Marketing Teacher, 20102).

References

Marketing Teacher: Consumer Behavior Internal Influences – Motivation. (2012).

Petty, R. E., & Cacioppo, J. T. (1981). Attitudes and persuasion: Classic and contemporary approaches. Dubuque, IA: William C. Brown.

Introduction

BP has always been in the news sometimes for the wrong reasons and sometimes for good reasons. Its size is the most fascinating feature. BP was the largest company in the UK in the 1980s and 1990s (Doherty & Smith 2003, 410). It was also the second largest in Europe and since then the situation has not changed. It still occupies its respective positions. It operates throughout the world and has stations in many countries. Most of its production licenses as well as facilities are in Alaska and the North Sea. Its equity capital was approximated at $35 billion. On the other hand, its debt was estimated to be about $15 billion. Its after-tax profit had averaged at around $1.9 billion between 1988 and 1992 (Doherty & Smith 2003, 410).

It consists of four operating companies. The first one is BP Exploration which is in charge of exploration as well as the development of gas plus new oil resources. The second one is the BP Oil which is responsible for refining, distribution as well as selling of petroleum products. The third is the BP Chemicals which deals with petrochemicals, nitrates as well as acetyl.

Finally, there is the BP Nutrition which operates the animal-feed business. Its assets include exploration as well as extraction licenses. It also includes technical as well as scientific capital particularly in the oil industry which is in the form of filling stations, refineries, rigs, road tankers, pipelines as well as ships. The concentration of value of its business and its limited range of activities means that it faces significantly undiversified business risk (Doherty & Smith 2003, 410).

BP’s risk exposure

According to Doherty and Smith (2003, 403), insurable events which include product liability suits as well as physical damage on the assets of the company; and toxic torts raises the cost of production for these industrial corporations. Most large companies usually buy insurance against their large potential losses as they practice self-insuring against smaller potential losses.

BP is exposed to a range of small routine losses to multi-billion-dollar potential losses. Its small scale potential losses include industrial injuries and even minor shipping or vehicle accidents. It also includes equipment failures as well as small fires. On a larger scale, there are refinery explosions and fires as well as oil spills that cause minor environmental damage.

There is also the possible loss of oil tankers. BP’S very large losses are likely to be caused by huge clean-up costs that result from major oil spills; defective fuel may also result into liability due to major disasters such as airline disaster, and may also result from tort claims arising from widespread injuries which result from the release of noxious gases. Loss of lives due to an offshore rig could also result in a major loss to the company. The worst of all to happen could be the cancellation of the operating license as a result of political backlash on claims of environmental damage. To the extent of such potential losses, BP has to buy insurance in exchange for loss settlements should the risks occur (Doherty & Smith 2003, 411).

To have the real statistics of its potential loss distribution for decision making, BP retained independent actuarial consultants. The actuarial consultants were presented with every industry as well as BP loss data. They estimated BP’S whole distribution of expected annual loss to be about $157 million. In the past, BP had insured its property as well as liability exposures. However, it was not very keen on ensuring its business-interruption exposures although insurance coverage for the same had been available. It had only insured it to a very limited extent.

Its liability insurance, as well as business-interruption insurance, was acquired through external insurers; however, some insurance was purchased through O.I.L. which was an oil-industrial mutual and where BP was a joint partner. It, therefore, purchased its upper tail insurance coverage from O.I.L. Some of its property had been insured directly through independent insurers while others had been insured by a captive insurer. All of this external coverage had covered the first two losses which were; those below $10 million; and $10-$500 million. Most of the insurance coverage had been in the range of $10-$500 million. However, there was no insurance coverage available for above $500 million potential risks and therefore it had self-insured this range. The cost-benefit framework that was presented by the actuarial consultants made BP undertake a comprehensive re-examination of its insurance coverage plan (Doherty &Smith 2003, 411).

Coverage for losses under $10 million

In its new approach, the managers of the local operating units were now in charge of losses under $10 million. In cases where there was a provable need for insurance, the local managers could purchase it from BP’s captive insurer. They were also allowed to look for competitive quotations in the local markets. The main reason was that uninsured losses in this category are minimal and therefore could only cause small changes in the firm value. According to Doherty and Smith (2003, 412), the standard deviation for BP’s after-tax earnings was above $1 billion. Thus, self-insuring of BP’s losses below $10 million could only raise the standard deviation of its after-tax earnings by about $12 million. This meant that the expected insurance benefits gained through controlling of financial-distress were insignificant at this level.

The resolution that now gave local managers the authority to ensure small losses were made after making other considerations. BP had seen that since markets for losses had become very competitive at this level, it meant that market forces would effectively eliminate the anticipated insurer rents. Market forces usually force insurance companies to hold only highly liquid as well as safe assets to eliminate the problem. Since such assets may have lower predictable returns, insurers may be forced to increase capital to reduce competition. According to Danielsson and Keating (2011) insurers have often been forced by the market forces to increase their illiquid asset holdings.

They also felt that insurers usually have a competitive advantage especially in terms of service-provision activities in areas like claims administration. Since losses that occur in this range are many and also routine, insurers usually provide informational advantage particularly in loss assessment as well as control. Besides, their contract enforcement is also reliable.

BP also felt that insurance coverage would satisfy their local financial-responsibility requirements. For example, the insurers set a minimum amount which they provide for injury liability in case of an employee gets in an accident within the company, they pay for property damage during accidents and they also pay for costs incurred during lawsuits. They would, therefore, be better placed to recover from costs of environmental clean-ups that occur as a result of spills, overfills as well as failures in the piping system; and third-party compensations.

According to the amendments that were made in the Federal Financial Responsibility Regulations in 1991, owners or operators of the underground storage tank, majorly oil industrial companies have to demonstrate financial responsibility that they can cater for the costs of carrying out corrective actions as well as third–party compensations that arise from discharge of petroleum from their underground storage tanks (United States Environmental Protection Agency 2000, 3).

According to BP’s management, insurance coverage was seen to minimize the noise in the performance benchmarks that are put in place for the local managers. This, in turn, would provide stronger incentives for local managers to perform. According to Schnedler (2006, 1-4) when crafting incentives for a manager, identification of trade-off in insurance as well as the excellent allocation of effort in a variety of tasks need to be done concerning trade-off involving the responsiveness such as signal-noise ratio, precision and many more; of the performance benchmarks as well as similarity in terms of congruence to the benefit of the organization.

Insurance coverage takes into account the difficulty of the task thereby making responsiveness and similarity informative on trade-offs involving insurance and allocations. This, in turn, provides information on best performance measures that the employer could use and how well each measure reflects the employer’s benefit from the particular activity. Insurance coverage is therefore used to provide cover for downside risks of employees’ subjective pay. According to Gibbs, Merchant, Van der Stede and Vargus (2003, 2), subjective bonuses are paid to employees to complement perceived weaknesses realized during quantitative performance measurements.

Subjective bonuses are highly related to the extent to which achieving the bonus target could be difficult and besides, could lead to considerable consequences should the organization fail to meet the target. They are also positively related to an operating loss. Subjective bonuses also contribute positively towards productivity, profitability as well as pay satisfaction. Its benefits are greater than the manager’s tenure since it improves incentive contracting. This implies that insurance coverage would help improve the performance of managers within the company.

The localized nature of certain BP’s tax liabilities has some potential tax-related benefits that come from insurance. According to Andrews (2006) insurance coverage may cause royalty relief meant to motivate the production of more oil and gas. Tax-related benefits are usually determined by laws and regulations. Captive insurance firms also offer tax planning via captive tax-planning tools.

By using these instruments they shift the profits from high-tax areas to low-tax. This profit Shift to a high-tax jurisdiction could as well be as a consequence of tax advantages. In the high-tax jurisdiction, deductibility is not allowed since payments are not considered as expenses for tax. The expense is considered extremely high while transfer pricing becomes paramount. Tax authorities usually reason that insurance premiums normally paid to insurance companies are per nondeductible since inter-company transfers are not included in expenses in a fiscal sense.

Coverage for $10-$500 million losses

The new approach required that losses which are over $10 million be insured through external markets only in specific circumstances such as in situations where the needed insurance is under joint-venture provisions or in cases where the insurance coverage is under current bond indentures. According to the new insurance policy, this range would no longer be insured through external insurance markets. This had reflected a major policy change as most of BP’s losses ranging from $10 million to $500 million had been previously insured. In making these changes, BP had made several considerations.

First, they acknowledged that in this range, there is limited effective competition within insurance markets. Doherty & Smith (2003, 409) agreed that there were few markets for pollution as well as other non-familiar lines of insurance, especially for high-risk lines. It meant that it was even more difficult to find insurance coverage for potential losses of more than $500 million. According to Mayers (1981, 391), effective competition in the insurance industry helps limit the divergence involving premium as well as the capital market’s valuation of company assets. Insurance contracts, therefore, create a separation between asset control and risk-bearing.

In this case, payoffs dependent on designated events are paid. Limits in effective competition in the insurance markets affect the pricing and variety insurance policy available. The markets for large losses of this level particularly in certain specialized risks had less competition, therefore providing services such as environmental audits as well as risk assessment for BP’s case; alone, would require large investments since there were only few insurance companies that offered coverage for extremely large exposures. BP would therefore only purchase insurance coverage in this level in certain situations where insurance contracts can contain complex provisions while stipulating exclusions as well as insurability requirements. It also stipulates settlement procedures for handling the problems.

Secondly, the costs of implementing insurance contracts at this level were seen to be high. There are usually taxes levied on insurance companies by the government which makes insurance companies increase their pricing. It meant that BP would have been forced to pay premiums which exceed the expected specified amount to cover for the tax levied on the insurance companies. The threshold of insurance premiums would now range between certain amounts. It also meant that BP would also have to pay for increases that arise due to inflation. According to Doherty and Smith (2003, 407), the charges of enforcing contracts at this level usually include legal costs of actions often with huge insurance policies which were normally much higher than the same costs. Since contracts have to be self-enforcing as the enforcement costs are too high, the employers have to pay for the costs to avoid a repeat of the same (Thomas 1988, 541-542).

Thirdly, the company also felt that in this level of losses, insurance companies do not have relative advantages for delivering safety as well as other services which have been left with financial indemnification. According to Doherty and Smith (2003, 412), BP paid a premium of up to $1.15 billion and only managed to recover $250 million through claims. Insurers do not provide distribution systems which have a comparative advantage especially in predicting risks. They also do not provide adequate customer information on coverage since they do not evaluate potential risks to make the customer more informed of the potential risks and the estimated costs of potential risks.

Finally, BP’s management concluded that the impacts of losses within this range have limited effect on the corporate value. According to the results the actuarial consultants that BP had retained, self-insuring losses which are in this range increases the standard deviation of the company’s annual earnings by just $98 million (Doherty & Smith 2003, 412).

Conclusion

BP which is one of the largest industrial companies in Europe and the world had applied various strategies for its insurance coverage. However, due to the increasing potential exposure to business risks as well as the impacts of insurance coverage costs on operating costs, it reviewed its insurance strategy. The policies that were adopted by the company are logical and have greater cost-benefits. The insurance strategies that were adopted by BP depended significantly on supply considerations within a range of sizes of possible claims.

After undertaking a supply-sided study of the insurance industry and other distinct features of business demand for insurance, BP concluded that it had a significant comparative advantage over insurers in terms of bearing the risks of the company’s largest exposures. Thus, it now purchased insurance for coverage below $10 million while undertaking most self-insuring to losses which are in the range of $10-$500 million as well as self-insuring coverage to losses above $500 million. This was a wise decision considering that the company used to pay more premiums and recovered less from claims.

Reference List

Andrews, E., L., February 14, 2006, US royalty plan to give a windfall to oil companies. New York: New York Times. Web.

Danielsson, J., & Keating C., 2011, valuing insurers’ liabilities during crises: What EU policy markers should not do. Web.

Doherty, N., A., & Smith, C., W., 2003, Corporate insurance strategy: The case of British Petroleum. In Chew, D., H., & Stern, J., M., 2003, The revolution of corporate finance, 4^th ed. New Jersey: Wiley-Blackwell Publishers. pp. 403 – 413.

Gibbs, M., Merchant, K., A., Van der Stede, W., & Vargus, M., E.,2003, Determinants and effects of subjectivity in incentives. Los Angeles: University of Southern California.

Mayers, D., & Smith, C. W., 1981, Contractual provisions, organizational structure, and conflict control in insurance markets. The Journal of Business, 54(3). Chicago: University of Chicago Press. p. 1.

Schnedler, W., 2006. Task difficulty, performance measure characteristics, and the trade-off between insurance and well-allocated effort. Heidelberg: University of Heidelberg.

Thomas, J., 1988. Self-enforcing contracts. The Review of Economic Studies, 55 (4). New York: The Review of Economic Studies Ltd. p. 541-542.

United States Environmental Protection Agency, 2000, Financial responsibility for underground storage tanks: A reference manual. Washington DC: EPA. p. 3. Web.

Introduction

Risk and insurance are notions that are closely connected, and risks should be discussed in the context of the expected insurance that differs depending on the type of risk. These aspects need to be discussed in detail with the focus on insurance companies in the United Arab Emirates (UAE) and the Gulf Cooperation Council (GCC) countries. The purpose of this paper is to discuss the term ‘risk’ and associated insurances, focus on the concepts of the ‘third party administrator’ and ‘reinsurance,’ and report on the financial results of the major insurance companies operating in the UAE and GCC countries.

Risk and Mitigation with the Help of Insurance

A risk can be defined as a threat of negative circumstances for a person or business. In the context of personal life, risks are associated with the probability of injuries or traumas. In the context of business, risks are associated with the probability of financial or material loss for the company. Insurance is the provided financial protection that is aimed at mitigating risks and actual results of negative events with the focus on the financial compensation (Cummins & Santomero, 2012; Zietsch & Von Harpke, 2014). Thus, health risks are usually mitigated being covered by health insurance, and business risks can be addressed by a range of corporate insurance types.

Third-Party Administrators

The Third Party Administrator (TPA) is an organization that addresses the insurance claims and cooperates with insurance companies in order to administer the insurance cases effectively (Wollan & Brook, 2015). Thus, the TPA has a range of administrative responsibilities in order to guarantee that risk management is conducted appropriately, and insurance companies cover their obligations in a proper manner (Clarke, 2013). In the UAE, the functions of TPAs are performed by Next Care, NAS network companies (NAS Administration Services Ltd.), MSH International LLC, FMC Network UAE Management Consultancy, Inayah TPA LLC, and WapMed TPA Services LLC among others.

Risks Associated with Providing Passenger Boats Renting Services

There are many risks that are associated with providing boat services. The risks to the life of passengers are most typical, and the main way to mitigate them is to refer to the boat or airboat insurance provided by insurance companies in the context of additional programs. This type of insurance covers such risks as accidents, threats to life, and damages related to the property (Gorge, 2015). The health risks and accidents are also covered by third party liability insurance for passengers that guarantee the provision of financial assistance in cases of accidents that are not caused by the malfunctioning of the boat.

There are also risks associated with fishing and violation of safety rules (Borch, Sandmo, & Aase, 2014). These risks are not covered by insurance provided by the organization, but they are under consideration by the programs providing life and health insurance. If the fishing risks are not associated with the passengers’ violation of norms, such cases are covered by the specific fishing insurance provided by the organization.

Reinsurance and Selection of the Insurance Company

Reinsurance is a specific type of insurance acquired by an insurance company from any other company in order to resolve all possible problems associated with addressing the clients’ claims. Thus, using the reinsurance procedure, insurance companies share their obligations with other companies while reducing the risk of the finical loss (Cummins & Derrig, 2012). It is appropriate to choose those insurance companies that use reinsurance practice with the focus on the assistance of reputable and reliable companies with high financial and insurance rating.

Insurance Companies in the UAE and GCC Countries: Financial Information

Table 1. Financial Information for Insurance Companies and TPAs.

Table 2. Financial Information for Insurance Companies.

Conclusion: The Best Insurance Companies

While referring to the results of the analysis of financial statements for several insurance companies popular in the GCC countries, it is possible to provide the list of the most successful and reputable organizations. According to the data of 2014, the most successful insurance companies are Emirates Insurance and Oman Insurance Co. It is important to note that ADNIC lost its positions in comparison with the year of 2013.

References

Abu Dhabi National Insurance Company. (2016). Annual reports. Web.

Abu Dhabi National Takaful. (2014). 2014 Annual Report. Web.

Al Ain Ahlia. (2014). 2014 Annual Report. Web.

Al Dhafra Insurance. (2014). 2014 Financial Statement. Web.

Al Khazna Insurance. (2014). 2014 Financial Statement. Web.

Arab Orient Insurance. (2016). Financial results. Web.

Borch, K. H., Sandmo, A., & Aase, K. K. (2014). Economics of insurance. New York, NY: Elsevier.

Business Wire. (2015a). A.M. Best affirms ratings of Arab Orient Insurance Company. Web.

Business Wire. (2015b). A.M. Best Affirms Ratings of Emirates Insurance Company P.S.C. Web.

Business Wire. (2015c). A.M. Best revises outlook to positive for Abu Dhabi National Takaful Company P.S.C. Web.

Business Wire. (2016). A.M. Best comments on ratings of Abu Dhabi National Insurance Company P.S.C. Web.

Clarke, M. A. (2013). The law of liability insurance. New York, NY: Taylor & Francis.

Cummins, D., & Derrig, R. A. (2012). Classical insurance solvency theory. New York, NY: Springer Science & Business Media.

Cummins, D., & Santomero, A. (2012). Changes in the life insurance industry: Efficiency, technology and risk management. New York, NY: Springer Science & Business Media.

Emirates Insurance. 2014 Annual Report. Web.

Gorge, G. (2015). Insurance risk management and reinsurance. New York, NY: Taylor & Francis.

Moody’s Investors Service. (2015). Moody’s affirms the A3 IFSR for Al-Ain Ahlia Insurance Co. Stable outlook. Web.

NAS. (2016). Claim processing. Web.

Next Care. (2016). Company profile. Web.

Oman Insurance Co. (2014). 2014 Annual Report. Web.

Oxford Business Group. (2014). The report: Abu Dhabi 2014. Oxford, UK: Author.

Reuters. (2015a). A.M. Best Affirms Ratings of Al-Sagr National Insurance Company P.S.C. Web.

Reuters. (2015b). A.M. Best Affirms Ratings of Oman Insurance Company P.S.C. Web.

Wollan, E., & Brook, A. N. (2015). Business Insurance Law and Practice Guide. New York, NY: Taylor & Francis.

Zietsch, D., & Von Harpke, M. (2014). A reader in insurance and reinsurance metrics. New York, NY: Verlag Versicherungswirtsch.

Summary

Stephen Manning and Andrew Gurney created an article based on Manning’s presentation of the same subject during the Basel II & Banking Regulation Conference in April of 2005. The article entitled, Operational Risk within an Insurance Market reflected the ideas of Manning and Gurney when it comes to the development and implementation of risk management within Lloyd’s insurance market. The article’s objective is to encourage leaders and regulators to focus on operational risk in the context of risk management.

It makes more sense to focus on the operational risk because the failure in this area creates a chain reaction of events that often lead to greater market risk and credit risk. In other words, the successful management of operational risk reduces the probability of incurring losses as a direct result of problems or weaknesses in the following areas:

1. internal and external fraud;
2. employment practices and workplace safety;
3. clients, products and business practices;
4. systems failures;
5. process management.

In addition, there is greater demand for this type of due diligence as a consequence of greater stakeholder scrutiny, and also as a consequence of increasing recognition that companies investing in the identification and management of operational risk are more likely to achieve its business goals (Manning & Gurney, 2005).

It is difficult to identify and manage operational risk. Insurance companies and business leaders respond to this need by creating management frameworks like Enterprise Risk Management. In the case of Lloyd’s of London, the response includes the creation of tools and techniques, such as

1. On-site operational risk reviews of businesses;
2. Quarterly franchise risk and control self-assessment;
3. Stress and scenario testing; and
4. Operational risk toolkit (Manning & Gurney, 2005).

Learning Points

It Makes More Sense to Manage Operation Risk

Failure at the operational level creates ripple effects that affect different aspects of the business organization. Therefore, it makes sense for corporate leaders to invest in this particular component of the business model. One can also argue that there are various aspects of the risk management process that are difficult to quantify. However, different components of the company’s business operations are relatively easier to manage compared to others.

Business failures are rooted in the failure to manage operational risk

A company’s internal controls form part of the business operations of the said organization. There are numerous examples of failures rooted in weak internal controls. Companies went bankrupt due to the absence of investor confidence; however, a deeper investigation of the problem leads to weak internal controls. The application of operational risk management techniques uncovers this type of problem before it causes serious damage to the company’s reputation and earning potential.

The Value of Enterprise Risk Management

It is difficult to measure operational risk. However, business leaders and insurance companies can help mitigate risk by developing an appropriate management framework and assessment tools. A good example of a management framework is the Enterprise Risk Management framework adopted by companies all over the world.

It is Important to Adopt a More Proactive Approach

Business organizations are catching up on the importance of Enterprise Risk Management strategies. However, a paradigm shift is needed when it comes to the reason for adopting the said framework. In the present time, business leaders are adopting it for the sake of satisfying certain government regulations. It is better to acquire a more proactive approach to using the Enterprise Risk Management framework.

Critique of the Article

Corporate scandals in the first decade of the 21^st century heightened the demand for greater scrutiny on business factors related to operational risk (Bauer, 2009). The root cause of high profile business failures in this particular point in corporate history was rooted in weak internal controls (Markham, 2006). For example, the underlying cause of the 2008 financial crisis was traced to the absence of safeguards that allowed bankers to loan money to people that had no capability of repaying the said loans.

One can argue that the said financial crisis was exacerbated by the accounting fraud scandals that negatively affected global markets. For example, Enron, a multi-billion dollar company, went bankrupt after the discovery that Arthur Andersen, the accounting firm hired to audit the company’s books, acted as an accomplice to cover-up the company’s deliberate act to deceive investors (Niskanen, 2007).

It is important to point out these examples of corporate failure in light of Manning and Gurney’s assertion that business leaders have the ability to avoid similar problems if they utilize the principles of operational risk management. One can detect a weakness in Manning and Gurney’s argument, especially in the area of anticipating or detecting weak internal controls. For example, in Enron, the SEC failed to detect the conflict of interest arising from the dual role of Arthur Andersen as the company’s auditor and financial consultant.

In the aftermath of the corporate scandals that gripped news headlines twelve years ago, the US Congress ratified the Serbanes-Oxley Act of 2002. This piece of legislature aims to strengthen internal controls and establish independent external auditors in order to prevent the repeat of the Enron fiasco (Walden & Thoms, 2007). Based on Manning and Gurney’s argument, operational risk management uses the same framework to mitigate the impact of risk.

However, it is important to point out that the Serbanes-Oxley Act of 2002 was created in response to the problem. In other words, no one was able to develop counter-measures to prevent accounting fraud. Is it possible to develop strategies to anticipate this kind of problem? It is impossible to eliminate weak internal controls because it is impossible to eliminate corporate greed.

Practical Implications

In the context of the United Arab Emirates, business leaders must adopt a more proactive stance when it comes to the issue of Enterprise Risk Management. The UAE’s Insurance Authority must encourage insurance companies not only to study and implement strategies based on the ERM framework for the sole purpose of satisfying UAE’s legal requirements. Greater emphasis must be given on the financial rewards and other incentives that insurance companies will inevitably acquire if corporate leaders are willing to invest in the study of operational risk management.

It is good to know that the UAE’s Insurance Authority is implementing guidelines and regulations that will help prevent the financial fiasco that ruined multi-billion dollar companies in the United States and Europe. This commitment to the application of ERM tools and techniques was manifested in the creation of Article 9 and Article 10 of the UAEs Financial Regulations for Insurance Companies (Insurance Authority, 2016).

In Article 9, it is forbidden to use borrowed funds to prop up the company’s financial standing (Insurance Authority, 2016). This is an important piece of regulation because it enables government regulators to detect early warning signs of financial trouble. In Article 10, insurance companies within the UAE are subjected to more stringent standards when it comes to submitting reports concerning the company’s risk analysis.

Although the UAE’s Insurance Authority had taken deliberate steps to prevent the repeat of financial scandals that negatively affected American and European markets, it is high time to compel insurance companies to adopt a more proactive approach in applying operational risk management principles. In other words, insurance companies within the UAE must develop tools and techniques that will enable them to detect weaknesses in internal controls and other issues related to the company’s ability to accomplish its business goals.

Comments

Manning and Gurney’s article helps to persuade business leaders on the importance of Enterprise Risk Management and why they need to embrace a more proactive approach in implementing related strategies. However, it is important to point out that the ERM model is not a perfect solution in the attempt to eradicate the risk. One can argue that it is impossible to anticipate every type of problem. Nevertheless, the knowledge gained from previous failures forms part of the strategy to mitigate the impact of risk.

Conclusion

Without a doubt, it is prudent to adopt the idea of using Enterprise Risk Management to increase the company’s potential earnings and perceived value. Although, it is impossible to measure every aspect of the company’s operational risk, the use of Enterprise Risk Management tools is a good starting point. It makes more sense to focus on operational risk, because business failures are oftentimes rooted in the failure to analyze the consequences of weaknesses that emanated from poorly developed business processes.

References

Bauer, A. (2009). The Enron scandal and the Sarbanes-Oxley Act. New York: Springer.

Insurance Authority. (2016). Financial regulations for insurance companies. Web.

Manning, S., & Gurney, A. (2005). Operational risk within an insurance market. Journal of Financial Regulation and Compliance, 13(4), 293-300.

Markham, J. (2006). A financial history of modern U.S. corporate scandals. New York: M.E. Sharpe.

Niskanen, W. (2007). After Enron: Lessons for public policy. Lanham, MD: Rowman & Littlefield Publishers.

Walden, M., & Thoms, P. (2007). Battleground. Westport, CT: Greenwood Publishing.