Move may be precursor to privatization
CAIRO: President Hosni Mubarak issued a decree yesterday to form a holding company for insurance, bringing the four main public insurance firms as well as the country s only reinsurance company under the Ministry of Investment s asset management program.
The newly-formed entity complements the nine other holding companies that are central to the government s privatization strategy and to the Ministry of Investment s attempts to rationalize and improve the profitability of state assets.
The holding companies act as owners of a number of public businesses, with the notable exception of military production and oil and gas. The creation of a holding company for insurance centralizes the ownership of the public insurance sector and may be the first step towards restructuring and privatizing the industry.
Minister of Investment Mahmoud Mohieddin says in a statement that the ministry s general objectives will be to increase the rate of growth of the insurance sector and to generate new employment opportunities.
Mohieddin adds that the creation of the holding company will facilitate the restructuring of public insurance companies while encouraging related sectors such as real estate and investment.
We ve been waiting for so long for something like this, especially because the market share of public insurance companies has declined since the entry of international players, says Mahmoud Soheim, head of research at Naeem Holdings, a financial services and brokerage firm.
International firms have been engaged in the Egyptian insurance market for the past two decades, but the four public insurance companies have failed to keep up with foreign players. This resulted in a deteriorating financial condition of the public insurance companies.
They need to restructure before they go bankrupt, says Soheim. These companies, as with most of the public enterprises, never learned marketing … Their employees do not care about profitability because their salaries are not tied to commissions.
Insurance and pension funds are two common sources of a substantial quantity of funds that are typically channeled towards secure investments with stable returns.
To date, however, the public insurance companies have failed to become active participants in new instruments that are more innovative and rewarding than treasury bills, such as securities that are backed by mortgages or other assets.
Meanwhile, because of the pay-as-you-go approach, public pension and social security funds have increasingly relied on support from the government in order to pay their beneficiaries. As a result, Ministry of Finance Youssef Boutros-Ghali says that 73 percent of benefits paid under the social security system come from the national treasury rather than from current contributors.
In order to improve the management of the social security system and of pension funds, these two areas were added to Boutros-Ghali s portfolio in the last cabinet reshuffle in December.
Investment and finance professionals anticipate these developments to change the way pension and insurance assets are managed, contributing to the development of a secondary mortgage market and other forms of securitization issues.
The decree also signals an expansion of the government s privatization program, which was initially focused on industrial activities. State-owned service companies are increasingly within Mohieddin s reach, beginning with the restructuring of financial services since the introduction of the unified banking law in 2003 and now expanding to the insurance sector.
Other policies are expected to be implemented in an attempt to encourage the growth of the insurance sector. These include the reduction of the stamp tax on insurance premiums from 26 percent to 13 percent and opening up the brokerage market to foreign companies.
The restructuring of the insurance market will help a sector, described by Soheim as a forgotten industry , fulfill its true potential as an important source of funds and a critical participant in the investment cycle.