The Allianz SF Insurance Company and Its Activities in Saudi Arabia Report (Assessment)

Introduction

Saudi Arabia is an attractive market for Allianz group to invest, firstly due to the fact that it has huge amount financial resources which can bring up huge profits. In addition to this if attention is given to chalk out such marketing campaigns which focus on increasing the per capita consumption, it could result in even more profits. Allianz group followed joint venture strategy which it pursued in many markets; the firm made alliances with the company to enter into the market. Since Allianz group was not at all short on funds, thus serious thoughts was given to invest directly into the market by setting up offices but this had its own challenges. But, before investing Allianz group considered a number of options of making alliances and distributing just to gauge the response of the target audience; and then if it is encouraging direct investments should be made. It should be observed that most of the firms coming from the other half of the world, commit the blunder of imposing the same marketing ploys and campaigns to the Saudi Arabia market; Allianz group should keep this under consideration and must outsource their marketing activities to some local advertising company.

Brief Company general history

Allianz Fransi was found in 2007 by two companies, Banque Saudi Fransi and Allianz Group as a joint venture. Since then through sound management and nimbleness at seizing opportunities, the Allianz Fransi has grown to a major industry player in Saudi Arabia. Allianz Fransi is involved in offering and has become the leading integrated financial services company in Saudi Arabia.

The Allianz SF and its activities in Saudi Arabia

In Saudi Arabia, the company is involved banking, asset management, and insurance. Its core businesses focus on property and casualty insurance, life and health insurance, and asset management for both corporate and private clients. The company engages insurances for property and casualty insurance for individuals and corporations and this includes motor vehicle, losses to any property, and travel and assistance. Meanwhile, corporate clients are provided with property insurance; motor fleet insurance; directors and officer’s liabilities; corporate credit; and insurance for the marine, transport, aviation industries. In terms health and life insurance, the Allianz Fransi provides private clients with endowments; annuities; term insurance; disability insurance; investment-oriented products; and private health insurance. Consequently, for corporate clients, the company offers group life products and pension product for employees. Through the years, the company had grown by adhering to several management priorities that focus on operating profitability, financial strength, and reduction of complexity and sustainable improvement of its competitive positioning (Allianz SF, 2). These management priorities are discussed as follows (Allianz SF 1):

1. Operating Profitability – continually strengthen operating profitability by pursuing operational excellence and continuous improvement in operational processes and effective implementation of distribution and market management functions;
2. Financial strength – strengthening capital management and group reinsurance program;
3. Reducing complexity – introducing the “target operational model which espouses a uniform organization capable of delivering effective and responsive leadership across global organizational platforms;
4. Sustainable improvement of competitive position – strengthen customer and consumer orientation, as well as maintaining the highest possible level of service quality.

From the table below, the company enjoyed strong sales and net income growth from 2008 to 2009, increasing 5.2 percent. Furthermore, the company posted a positive net income of 4.34 billion, thereby erasing the deficit incurred the previous year. Subsequently, despite the continued global crisis, the company’s retained earnings and soared by 36.3 percent by end of 2009. Previously the company had also suffered from the global financial crisis which weakened its sales and net income during that year. Consequently, the company incurred a negative net income in 2008, while its assets, liabilities, cash resources, retained earnings and total equity also declined.

The Allianz Group Financial Performance,

Source: The Allianz Group Annual Reports 2008 to 2009.

Mode of entry to Saudi Arabia

Expansion in a saturated market is a feat in itself. And an expansion in market that is filled with competitors, this is an even greater feat. Allianz’s expansion into international markets may be described by some as a result of its brilliant marketing strategies, but the fact of the matter is that the brilliant expansion is more of a result of strategic partnerships with local businesses. While others in this regard may have chosen to compete with the experienced and established businesses in new markets, through heavy investment in marketing campaigns and product development; Allianz group sought to make alliance with the Banque Saudi Fransi that is making a joint venture. Allianz SF understood the strategic importance Banque Saudi Fransi had and the manner in which they could allow Allianz’s products and services to infiltrate the market. Allianz SF knew that competing with local companies would be impossible without having the ability to reach the markets with relative speed and cost effectiveness, Allianz made strategic partnerships with Banque Saudi Fransi. The joint venture was designed to provide more profit than the competitors at significantly reduced costs did. Without these agreements with the Banque Saudi Fransi, Allianz Group would not have been able to expand throughout the international market at such a rapid pace.

Saudi Arabia Financial Services Industry

The Saudi Arabia financial sector is considered to be well developed according and is composed commercial banks, finance companies, investment fund companies, insurance companies, and companies trading in the equities markets. The banking sector was dominated by a few commercial banks, one of which is state-owned and one is foreign-owned. The banking sector in Saudi Arabia has been largely concentrated, with two of the largest bank controlling half of the sectors assets, loans and the deposits. Subsequently, a growing niche segment in the Saudi Arabia financial sector is the leasing business. Non-bank financial investment companies typically invested most of their resources in foreign markets, although domestic investments have been increasing in recent years.

The Saudi Arabia Insurance industry is dominated by several large, local insurance firms. These companies are linked with some of the others through complex ownership structures and arrangements. As far as the insurance sector was concerned, the value of insurance premiums generated by insurance companies in the country has been growing. However, the insurance industry in Saudi Arabia has been ascribed as the least active of all the financial sectors existing in the emirate. Essentially, the Saudi Arabia insurance industry has not kept pace with the growth of the insurance industries of other Middle East countries for several reasons and these are:

• The religious views against insurance; and
• The lack of enforcement to require the public to purchase health and life insurance

In the long term, financial experts predict that the Saudi Arabia insurance industry, as well as the other sectors in the financial services industry, will rebound and grow in 2011 due to the following reasons:

• Oil prices are expected to increase, thus expanding the country’s economy and stimulating the insurance, banking, and investment sectors;
• The Saudi Arabia government has a budget surplus. This was a welcome outcome considering that the Saudi Arabia government feared a budget deficit during this period;
• The government is gearing to implement more laws to reform the insurance sector and improve the regulatory structure;

Furthermore, the Saudi Arabia government is committed to promote the tenets of investment which allows investors to invest in:

• Industries except for those related to oil and gas exploration or production;
• Construction, operation, and management of infrastructure enterprises in the field of water, power, drainage, and communications;
• Banks, investment corporations, and foreign exchange companies which the Central Bank of Saudi Arabia agrees to consider incorporating;
• Insurance companies which the Ministry of Commerce and industry agree to incorporate;
• Information technology and software development;
• Hospitals and the pharmaceutical industry;
• Land, sea and transport;
• Tourism, hotels, and entertainment;
• Culture, information, and marketing except for issuance of newspapers and magazines and opening of publishing houses;
• Integrated housing projects and zone developments except for real estate speculation;
• Real estate investment through foreign investor subscription to the Saudi Arabia shareholding companies.

Indeed, since 2008, the Saudi Arabia government had implemented laws that aimed to make the county a more business receptive place to do business.

Problems Faced

Labor

One of the main concerns for a company entering the Saudi market can be seen through the issue of labor. The Saudization policy can be seen as one of the most important that can be mentioned in the light of such policy. In that regard, such policy was actually implemented to decrease the high unemployment rate in the Kingdom of Saudi Arabia.

Job creation was a major problem in the Saudi Arabia, in which the heavy dependency on foreign workers was one of the main characteristic of labor in the country. Accordingly, such characteristic led to that the unemployment rate among Saudis might have reached as high as 32 percent among young workers (Looney). The basis of the Saudization policy was in governing reforms according to which the employment for Saudi nationals would increase, while reducing the reliance on foreign workers. The initiatives governed by such policy included such aspects as banning the employment of foreigners, increasing the employment of Saudi nationals in companies by five percent each year, and increasing the fees on recruiting expatriates (Looney).

The challenges that can be seen from the perspective of Allianz Saudi Fransi Cooperative Insurance Company are mainly related to staffing issues, and the negative impact that such policy might have on FDI. On the one hand, the policy has goals favorable to the Saudi economy, decreasing unemployment rate of Saudi nationals. On the other hand, the side effects of such policy might have a negative impact on the decision of firms to enter the Saudi market. One impact can be seen through the disadvantage such policy puts the foreign company entering the market against foreign competitors, as well as the local ones (Ramady 370). The disadvantages might include the differences in the costs of hiring expatriates and Saudi nationals by foreign firms. Accordingly, tracing the initiatives governed by such policies and their changes, it can be stated that those policies are largely unpredictable with “rules and quotas changing without warning” (Ramady 370).

The Local –Regional Characteristic of the Insurance Market

The nature of the insurance market in Saudi Arabia can be seen among the main challenges before Allianz. First of all, the market itself is characterized by low penetrations rates, where for many Saudis are still not aware of the benefits of insurance and its real nature (Oxford Business Group). The religious views on the insurance is another major aspect that should be considered in terms of the insurance market, for which the compliance with sharia – Islamic laws governing the Saudi society is among the main factors that foreign companies should consider. Accordingly, one of the main notions that should be defined in the context of foreign insurance companies is takaful – sharia compliant insurance. The characteristic of such type of insurance is cooperation and risk sharing. Such cooperative concept is important and emphasized in Saudi insurance, for which the compliance with Islamic precepts is crucial (Oxford Business Group 100). It should be noted that according to such precepts, conventional insurance is considered haram, i.e. against Islamic laws and running contrary to sharia.

The main problem faced by market entrants can be seen in the absence of single sharia oversight board (Oxford Business Group), and the rapid transformations in the regulatory framework related to such market can be pose a challenge for foreign companies entering the market, requiring a cautious approach toward the changing regulations (Kuwait Times). The accompanying challenges derived from such peculiarities of the insurance market can be seen in such aspect as the lack of qualified staff who understands all the difficulties and the technical principles of takaful. However, the main problem for entry can be seen in the lack of awareness with many consumers being not aware of the fact that takaful is religiously acceptable and not haram (Ahmad, Masood and Khan), especially when such service is provided from a foreign company. Such fact can be seen significant to the Muslim world in general, rather than Saudi Arabia. Accordingly, such facts put a foreign entrant to the Saudi insurance market at a disadvantage to local competitors, who already had the first mover advantage. While foreign entrants analyze the results of the changes in the regulatory framework regarding the sharia –compliant insurance, local and regional competitors built dominant positions.

Competition

The environment in insurance market can be characterized with rapid growth. Accordingly, entering the market Allianz already faced competition with dominant position and knowledge of all aspects of sharia compliant insurance. The insurance sector was opened for foreign direct investment in 2003. Considering the fact that conventional insurance was available for over 50 years in the kingdom, with the first national insurance company being approved in 1986, it can be seen that competition was one of the main challenges before Allianz (Jaffer 97). The competition includes major companies with entirely local shareholding participation such as Tawuniya, Malath Insurance, and Wiqayah (Oxford Business Group 100). Additionally, there are other international major players in the market HSBC, as SABB Takaful – Medgulf, AIG, Ace and Bupa (Oxford Business Group).

In 2008, licenses were issued to nearly 2008 insurance companies, with 20 companies being listed on Saudi Arabia’s Stock exchange. Thus, it can be stated that the insurance market was and still competitive at the time of entrance. One of the main competitors in the market can be seen through Tawuniya, previously known as the National Company for Cooperative Insurance (NCCI), which was the only officially licenses insurance company prior to opening the gate for foreign direct investments. Having the first mover advantage, Tawuniya had the time to set up in the kingdom and adjust to the requirements of compliance with the sharia, and having the necessary expertise to operate within such environment. Considering the lack of expertise and the human resources’ crunch in such field, along with the Saudization policy, it can be stated that the competition posed a challenge to Allianz.

Management Style and Workplace Environment

Aside from the specifics of the insurance market, it can be stated that there are challenges of managerial and workplace environment nature. One aspect can be seen through the cultural characteristic of managers in Saudi Arabia. Considering the fact that the Saudization policy obliges foreign companies to employ Saudi nationals, Allianz should expect dealing with the cultural aspects, characteristic of Saudi management. Such aspects might include power distance, which implies the fact that Saudi managers typically would make “decisions auto critically and paternalistically, instead of making them after consulting with subordinates” (Baumann 52).

Other differences can be seen through the distinctions between individualism and the collectivism, characteristic to western and Eastern cultures respectively. Additionally, Islam and the Beduin tradition are stated to be influencing the business culture in Saudi Arabia. One of the aspects can be seen the challenge in both employing women and dealing with them as customers. The segregation in genders that lie within the cultural and religious tradition in Saudi Arabia poses a dilemma for foreign firms. The latter is especially significant considering the fact that Saudi women have an estimated wealth of $11 billion in bank, which makes them potential customers (Power). At the same time, the strict laws in the Kingdom put restrictions on being in women either as customers, women-only are good examples in that matter, and through the employment relations between men and women in the workplace.

Solutions

Pre-entrance Initiatives

One of the main solutions to the aforementioned identified problems can be seen in the formation of a joint venture between Allianz and Banque Saudi Fransi. In order to adapt to the market, it can be stated that the formation of a joint venture can be seen as a suitable solution. First of all, the creation of joint ventures can be seen from the perspective of complying with specific local requirements. Joint ventures in general are viewed as a methods of entry that creating greater synergies which are said to reduce the barriers to entry, bringing about faster access to areas such as “consumer awareness, marker penetration, product design and customer service” (Jaffer 94).

The choice of the partner in the joint venture can be seen of strategic importance, where choosing Banque Saudi Fransi (BSF) is one of the ways the company targeted the challenges identified in entry. Banque Saudi Fransi in itself is a joint stock company affiliated with Credit Agricole Corporate and Investment Bank. The use of the distribution channels of the bank, providing opportunities for the group to penetrate the market. Accordingly, Allianz was following successful examples implemented previously by the same company in other regions as well as successful examples in Saudi Arabia as well. The example in Saudi Arabia can be seen through the formation of the joint ventures between Saudi British Bank and the International Banking Group HSBC. The support of the choice of joint ventures, as a solution applicable specifically to the insurance market, can be seen through the statement of Amine Bentaleb, associate director and portfolio manager at Arqaam Capital. Citing the differences between conventional insurance and takaful, Bentaleb stated that “(Given) the fundamental differences between the two models, there is need for joint ventures and collaboration in a nascent segment where even the regulation is not up to date,” (Kuwait Times).

Another solution can be seen through the way Allianz planned the entrance to the Middle East market, as well as the Muslim market in general. Allianz started targeting the takaful market in Indonesia and Malaysia, obtaining an expertise in countries with large Muslim population, namely Malaysia which began working through takaful operators in other parts of the world. The justification for Indonesia as a choice can be seen through the large Muslim population and the size of the market. Accordingly, among Arab countries, Allianz started from Bahrain. The choice of Bahrain can be justified through the fact that it has similar market conditions, while at the same time functioning as a regional financial centre since 1976, being open to open banks. Saudi Arabia, on the other hand, was opened to foreign direct investments only recently, licensing only majority locally owned institutions. The latter can be added to the fact that “Bahrain has more Islamic financial institutions than any other centre, with twenty-four Islamic banks and eleven Islamic takaful insurance companies, most of which serve the regional rather than the local market” (Wilson 26). Thus, prior to entering the market which was estimated to grow to $ billion, Allianz gained an expertise in takaful and Islamic financial services. In that regard, it should be mentioned that despite voicing the intentions of having a presence in the Middle East the company was already present in the region since 1978, through representative offices (Allianz Allianz in Middle East: Dubai).

Post-entrance Initiatives

In order to maintain compliance with sharia standards prior to establishing a unified board in the country, Allianz established a sharia board, headed by Abdullah Bin Suleiman Al Manea, a member of the Supreme Judiciary Committee of Saudi Arabia. Sheikh Abdullah is a chair member of many financial institutions in Saudi Arabia, where his interpretive opinions serve the company in establishing the legal framework for the insurance operations.

The HR problem can be seen solved through the compliance with the Saudization policy, while at the same time providing training initiatives that invest into the company’s human resources. In that regard, among the company’s goals in the first years of entry, heavy investment in human resources was prioritized, in addition to distribution networks and IT systems (Saudi Fransi Cooperative Insurance Company). The investments into human resources can be seen in supporting training efforts through a wide spectrum of “customer service and technical training courses, backed by Banque Saudi Fransi and Assurances Generales de France -, plus Allianz Group experts” (Allianz “Exciting Entry Opportunities – Big Challenges”). It should be noted that through not only following the Saudization policy, but also through making the majority of the company owned and or operated by Saudi employees, the company improved its position through allying itself with Saudi interests (Rice). The latter can be seen through the way the company increased the proportion of Saudis in the company as well as including more Saudis in the company’s organizational chart.

Alternatives

One of the alternatives available before the company is conducting coaching as a way of developing managerial skills and attributes compatible between the Western and the Saudi staff. Building the expertise in the Islamic insurance filed is as important as building managerial and leadership skills. The latter includes the collaborative decision making as an important point of cultural contention. One of the ways the company can overcome the labor crunch, in addition to the training courses is the cooperation with educational institutions in order to develop the skills necessary in the field of Islamic financial services. It can be assumed that the Saudization policy will follow with more quotas along with increasing the number of Saudi nationals in the working force. Thus, the company might consider preparing specialists in the insurance field through educational institutions, as a part of the HR investment considered by the company. Additionally, training seminars in and insurance workshops and summits, can be beneficial for the exchange of expertise and the development of a unified legal and framework for Islamic insurance.

In what concerns competition, it can be stated that one of the alternative can be seen through increasing the market share of the company through forming alliances with other insurance market participants. In that regard, despite the favorability of the government to the majority owned Saudi companies, there are no restrictions in terms of the foreign investments share in a company. At the same time, the alliance can be formed with fully owned Saudi companies. The list of potential market participants for mergers and acquisitions might include Weqaya Takaful, Malath Insurance, and others. The outlook for the insurance market states that small companies will find it difficult to compete with the major players. Accordingly, considering the fact that the majority of products and services in the insurance market were already established, one of the solutions can be seen through increasing the market share and consolidation.

The focus on the provision of services in the health and the motor insurance, which are considered as fields having growth potential, is a perspective direction. With the company receiving the license for motor coverage, the need for good local knowledge and a good geographical spread can be seen as one of the suggestions that support the consolidation alternative (Oxford Business Group). Although mergers and acquisitions are still uncommon the Saudi Arabia (Ramady), they can be viewed as an option with the legal and operating framework, concerning labor, company, and bankruptcy laws develops.

One of the alternatives that will enable larger market penetration and increasing the awareness of the customer can be seen through adapting some of the aspects of the business model of the company according to the cultural concerns of the Saudi citizens. Developing the trust of the consumer the company might consider rebranding the company in accordance to the established cultural and religious traditions. In that, regard the company can utilize the increase in the female workforce in the kingdom, and segregates workforce to provide services and products to other females in the country. A segregated workforce can be seen among the advantages of local insurance companies, and considering the challenges involved in the gender mix in the work force, such alternative might be seen as a good option for the building trust with consumers.

Analyzing the alternatives, it can be stated that the solutions that company used to tackle the challenges and the problems faced might be seen through the perspective of the time of their implementation. Accordingly, many of the solutions was taken prior to entering the market, considering the fact the company already had an experience in a similar environments, i.e., gulf countries such as Bahrain and United Arab Emirates. Similarly, the same can be said about the expertise in takaful insurance, with the company having already entering Malaysian and Indonesian markets. Nevertheless, some of the problems can be attributed to the dynamic nature of business and changes in policies, trends, etc. Thus, the proposed alternatives shall not be perceived as mutually exclusive to the solutions already implemented by the company.

Main players of the industry

The operational scale of Allianz SF can be compared to a regional player such as A’ayan Leasing and Investment Co. is clearly evident in the huge disparity in revenues, income, and overall financial resources. The Allianz SF may surpass the A’ayan Leasing and Investment Company in terms of financial resources and product diversity; the latter still have several distinct advantages. The company has become well-versed in the political and economic dynamics of the country, as well as the other Arab states. This has proved advantageous particularly in dealing with the Saudi Arabia bureaucracy. Another aspect lies in its strong real insurance capability, which allows the company to seize opportunities in this sector. The Allianz SF is primarily insurance company, and as well do have knowledge in real estate development and construction through asset management activities. Thus the main strengths of the Allianz SF lies in their global, diversified product portfolios, which allow them to spread operating financial risk. Of course, their massive financial resources allow them to invest in lucrative, growing financial markets in anywhere in the world.

Future plans of the company in Saudi Arabia

The above case clearly shows why organizations which seek to merge, acquire, or enter into joint ventures or partnerships, in Saudi Arabia. Saudi Arabia is thus, a country which attracts foreign direct investment because of their receptiveness and their cultural, social, and attitudinal behavior, which is very different from western countries. This just goes to show that culture plays an important role when organizations switch over their operations or merge with local companies abroad. This example also clearly illustrates which country would ideally suit organizations seeking partnership, merger, acquisition, or joint ventures. This study also helps the management understand how important decisions are to be taken (Leontiades, 231).

In addition to this, there are also the sentiments of the organizations involved in the merger, acquisition, joint venture, or partnership to be considered. When an organization makes adjustments to its existing cultural, workers tend to interpret this as being provocative. No organization would like to be looked at as the inferior one to the other, and this could cause friction among the working group in domestic mergers. Efforts may be on to acquire new ideas and machinery to enhance production and quality. The import of such technology or idea may not find favor with the working class of one of the mergers, and this cause considerable damage to production and alliance. Such cultural invasion may be seen as a provocation into their privacy or existing practices which they may seem more productive and operational. In such situations, workers take a rigid stance to block entry of technology or idea that make them insecure and go on the defensive. Therefore, when such decisions have to be made, decision maker(s) must take into consideration these two vital aspects (Dickinson and Ramaseshan, 29).

Implications for future use in Saudi Arabia

There is no doubt that the backbone to any successful business is the attitude and efforts of its workforce. Essentially, all decision-makers will pay a lot of attention to this, and the better the perks are the better will be the performance.

Many organizations, faced with the prospect of global competition have had to downsize their workforce and decentralize their operations to cut production and operational costs. Will this suffice or would the decision-maker think out of his/her hat and propose an alternative to this? As a critical thinker, one should evaluate his/her environment in which the decision-making is mandated and so, if the decision-maker s planning on establishing an effective and supportive workforce, they would obviously focus their attention on answering the following question; what kind of arrangement would help the organization compete in the highly competitive global market? A lot has been read into the advantages of team work and today, just about every organization practices this theory. However, not all teams are equal. There are teams that irritates, the team that one would be reluctant to approach, or that special team that one is excited to associate with. Obviously decision-makers would opt for the third option as this team would be able to support any initiative the management throws at them as a challenge. Shared responsibilities and accomplishments among them bond them together and this is the kind of team that excites the management.

Because of the changing global business environment and challenges associated with this, many organizations have changed the face of their earlier HR practices to accommodate a highly flexible system of work ethics, where employees enjoy a healthy and enjoyable work environment. New employees, more often females than males, are offered the option to work part-time and at home as subcontractors, or consultants, temps and interims.

Pay and rewards are good practices to improve employee performance and increase productivity. The welfare of the employees is also another aspect of healthy factor in motivating personnel to perform.

With so much at stake at their workplace and with so much pressure on the home front, a large number of employees find their frenetic lifestyle far too demanding and seek greater flexibility in their roles and responsibilities. Offering flexible working hours for both men and women is a great idea in this direction. It is estimated that seventy per cent of companies, of which ninety per cent in the public sector, have begun schemes to support their staff balance their work at home and office. This reduces unnecessary burden on their shoulder leading to lack of interest and below par performance at work.

HR policies should promote and inspire confidence, and so any policy that motivates employees would be favorable. Motivation comes from cordial employer-employee relationship, a supportive and encouraging manager-worker relationship, and recognition. Recognition in the form of rewards and promotions will go a long way to instigate hard and dedicated work. This way, employees will strive to support the management’s initiative to achieve their goal. This is another area where decision-makers would have to use their critical thinking. Thus, in order to manage uncertainties, the future of management and organizations would be by taking correct decision-making by engaging in critical thinking and challenging key management assumptions.

Conclusion and recommendation

The company should utilize it strengths to take advantage of economic opportunities in the Saudi Arabia. However, they should also be mindful of their weaknesses and the threats in the environment. The opportunities can be found in tapping promising markets in the recovering real estate and construction sector, and increasing popularity of leasing activities not only in Saudi Arabia, but also in other Gulf states as well. The company’s Arab heritage and strategic partnerships in Islamic financial institutions allow it to better maneuver in bureaucratic circles and customize financial products and services to clients in the entire region. In the medium to long-term, the company can intensify its activities in the equities market since they have already established a credible track record in fund management. However, it is suggested that the company should diversify quickly into other business segments in the Saudi Arabia financial sector such as banking since its financial resources are ample compared to most its competitors. As an influential regional player, the Company’s main strategy should be to strengthen its hold in its core business areas and secure vital market share growth.

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