Fairfirst’s Chief Executive sees signs in the skyline: A general insurance boom is coming

Construction and rising incomes are transforming the general insurance industry that is struggling with shrinking margins

“I see Sri Lanka’s national bird wherever I look,” Sanjeev Jha says with a chuckle, turning away from his office window overlooking Colombo. “Cranes, everywhere! That’s why we’re here,” he says, smiling. Of course, the crane is not Sri Lanka’s national bird! It’s the junglefowl.

Jha is chief executive of Fairfirst, a general insurance company incorporated in 2016, and he’s excited seeing cranes dotting the Colombo skyline. To him, they are manifestations of development. Construction is booming and incomes are rising. There’s opportunity for Fairfirst to expand its property and health insurance businesses here. The firm estimates its topline revenue will double by 2020.

The company is a unit of Fairfax Financial Holdings, a $9 billion revenue Canadian venture capital firm. Forbes calls its founder Chairman Prem Watsa ‘Canada’s Warren Buffett’. The group’s several businesses around the world specialise in property and casualty insurance. It also has interests in other areas like technology and resorts. Five of the largest insurance companies in the group, operating across Asia, Europe and North America, generate revenue of $7 billion. A dozen other insurance firms in Africa, Asia, the Caribbean and East Europe combined rake in $970 million.

In 2015, Fairfax acquired 78% of listed Union Assurance’s general insurance business for Rs3.7 billion at 1.5 times book value. A year later, it acquired 100% of Asian Alliance General from listed Softlogic Holdings for Rs1.2 billion at 1.7 times book value. The companies merged to form Fairfirst Insurance.
Sixteen firms locked in intense price competition overcrowd the general insurance market. Motor insurance dominates the industry, accounting for over 60% of the business. Firms struggle to make topline gross profits, according to LOLC Securities, a stockbroking firm. Bottom-line profits come from income earned investing in premiums, but margins are narrowing. The industry is forecast to grow 9% each year, twice as slow compared to 21% for life insurance. But, Jha believes Fairfirst will grow faster, at around 26%.

Excerpts from the interview are as follows:

Why did Fairfax enter Sri Lanka’s challenging general insurance market?
● Fairfax believes there are long-term opportunities to grow value in the general insurance business here.

Many people have this attitude that insurance companies are big and imposing, but that should never be the case

Thirty years ago, people joked that Dubai’s national bird was the crane. It’s the same for Sri Lanka today. If you look at Colombo’s changing skyline, you see cranes everywhere. There’s a construction boom, and it’s not limited to Colombo. Sri Lanka is developing. Investments are flowing in. There will always be debate whether economic growth and investment inflows are adequate. But, there is progress, and there’s nothing stopping Sri Lanka. General insurance growth depends on the economy doing well, and people appreciating and desiring the need to mitigate risks as their incomes grow. So, we’re optimistic and positive about Sri Lanka.

What are Fairfirst’s goals?
● We are not hung up about business growth for the sake of growing. We would walk away from growth if underwriting profits got compromised. My belief is that the topline is vanity, but the bottom-line is sanity. And, as a leading global insurance group, we measure bottom-line as underwriting profits.

Underwriting profits refers to an insurer’s operating profits before investment income. As insurance companies, we collect premiums and use it to honour claims, and pay commissions, salaries and other expenses. If there is a positive balance left, we have made an underwriting profit.

Underwriting profits for non-life companies in Sri Lanka have not been there. When we entered the market in 2015, the business was making underwriting losses. We turned it around in 2016 and ended with a combined ratio of below 100%. Thus, we made underwriting profits, and grew.

A key goal for us is to grow our book value 15% each year over the long term. Since 2015, we almost doubled our premium income, and we expect it to double again over the next three years. But, not at the expense of underwriting profits.

How will the company achieve these?
● As a company, we are aiming to grow underwriting profits by focusing on the right segments and managing risks.

We’re in a beautiful position. Commercial insurance, or what we call wholesale insurance for factories, hotels, buildings and large infrastructure projects, has huge potential to grow. The Colombo Port City project will unlock huge opportunities. The number of buildings and hotels coming up is amazing.

We are very strong on the commercial side, with the highest market share for non-motor insurance. We cover some of the largest local and multinational companies operating in Sri Lanka. We are a preferred insurer for the broker community in Sri Lanka for commercial and complex insurance. At the same time, we have affinity deals in the market with telcos, banks and motor dealerships. We are market leaders in the growing health insurance segment too. Motor insurance has the potential to deliver value despite its overcrowded market. We can’t compete and gain market share in segments where there’s under-pricing, but our underwriters are looking for segments where we can tap with sensible risk-pricing and a service delivery that makes sense to customers.

Motor dominates the personal lines general insurance market in Sri Lanka, but this will evolve. As the economy grows, people become savvier and their incomes rise, they will start to buy insurance to cover their homes, personal health, accidents and travel. Health insurance, in particular, has strong potential.

What are the advantages of being part of the Fairfax group?
● We’re able to underwrite larger and more complex risks because of access to capacity and expertise from across the world. This helps make the domestic market secure and attractive to international investors.

A key goal for us is to grow our book value 15% each year over the long term

Fairfirst rolled out an advertising campaign in early 2017 introducing the new brand identity after the Union Assurance-Asian Alliance merger. The ads told clients that the journey would not be easy. This is an unusual statement for an insurance company.
● We looked hard at Sri Lanka’s insurance market and realized that there is a huge trust deficit between what an insurer promises to cover and what’s actually delivered. Many people don’t have a great experience buying insurance and are disappointed when expectations are not met when making claims. We don’t want to be that, so Fairfirst will never make unrealistic claims. The only thing I can promise our clients is that we will do a damn good job as an underwriter. We know there are areas where we’re not the best, and we’re not trying to hide it. But, these are areas we’re trying to improve on, and it’s not going to be easy. The problem happens when, as individuals or organisations, we shy away from our frailties rather than embracing and changing them.

We’re taking steps to bridge the trust deficit. Fairfirst will use plain English in policy contracts, so people can understand what they’re getting into. Insurance contracts are so complicated, even I get confused. We use legal language no one understands and this leads to customer grievances later on. Why should we confuse anyone? There is a huge mistrust people have about insurance companies. Using simple language is an attempt to build trust and comfort.

What were some of the challenges Fairfax faced when entering the Sri Lankan market?
● The first challenge was breaking the obsession over growth. I asked everybody to forget about growth and focus on underwriting profits instead. We had to take the glamour out of the topline and shine a light on the bottom-line.

Another challenge was the hierarchical culture. Frontline and young members of the staff are shy to approach senior management. This stifles creativity and innovation. It’s difficult to change this culture. Most staff can’t bring themselves to call me Sanjeev. If we can change this culture, it will have a powerful impact in the way we treat our clients. Many people have this attitude that insurance companies are big and imposing, but that should never be the case. We’re like any other service provider, and people must be comfortable dealing with us.

How was the merger between Asian Alliance and Union Assurance?
● We made it clear there would be no job or pay cuts. Of course, we had to remove certain positions to avoid duplication, but it didn’t mean retrenchment. Usually, if an acquisition and merger are successful, key personnel get bonuses. We paid every single employee a bonus. My team and I visited our branch network for town halls and allayed all concerns. The integration is not over yet, there is more work to do in creating a common Fairfirst culture.

Will there be other acquisitions?
● Fairfax looks for long-term value creation. At the moment, our focus is on consolidating the existing business and building a great insurance company in Sri Lanka.