AAA Financial Services, Ltd
"Have your future today"
Angola, Now and Tomorrow
Mr. São Vicente,
Director SONANGOL EP Risk Manager
February 26, 2001
| Could you give our readers a brief background on this newly established Insurance Company and talk about some of the objectives and goals you have set for the year 2001?|
AAA SEGUROS SARL, our new insurance company, was created within the SONANGOL EP 's Risk Management Strategy. We have been prepare our entry into the financial services market since late 1995-96. As Louis Pasteur said: "chance favours only the prepared mind".
The Risk Management Strategy of SONANGOL EP has two main objectives:
a) provide a financial protectiuon to all assets, persons and revenues involved in the petroleum operation sin Angola;
b) control alll risk management activities in the petroleum industry in Angola by creating an integrated risk management process between SONANGOL EP an its Associates.
The basic steps of this integrated risk management process that SONANGOL EP is now implementing are:
1. Identify risks and evaluate risks and assets. We do this by carrying Risk Surveys in all concessions (also known as blocks...) in Angola. The first Risk Survey & Valuation of Assets has been carried out by MATHEWS & DANIEL in Cabinda Association an d Block 14, operated by CABGOC ( a subsidiary of CHEVRON). Identify risks is basically identify relevant exposures to risks from a variety of sources, including operational, technical, financial and strategic activities. For each source of risk that is identified we must perform and evaluation. We must evaluate the loss frequency but also the size or the loss severity. It is very importante to comsider the most probable size of any losses that may occur and the maximum possible losses that might happen.
2. Select risk management techniques. There are several ways to handle existing risks. The basic tecnhiques for managing the risks can be summarised in three:
a) Risk avoidance
b) Risk retention;
c) Risk transfer.
As you know insurance is the most widely risk mangement techinque for transfer risks but is not the only one. There are several noninsurance methods for risk management tha we use in the petroleum industry.
3. Implement and review decisions. Risk management is a ongoing process in which prior decisions are reviewed regularly. New risks exposures arise, significant changes can occur in expected loss frequency or severity, and the riska management must deal and be prepared for changes. Risks are dinamic and demand a continual scrutiny of past analyses an decisions.
For implementing the Risk Management Strategy SONANGOL EP worked in three directions. One , was the cooperation with Government in order to create apropriate legislation that regulates with risk management activities. Several results were achieved:
a) A new Insurance Law was passed February last year that opened the insurance market and exterminate the ENSA's monopoly;
b) A new Reinsurance and Co-Insurance Decreee was passed July last year that regulate the reinsurance and the co-insurance for the so called special regimes on petroleum, diamond, aviation and agriculture;
c) A new Pension Fund Decree was passed in 1998 that allow companies to create their own private social security system through pension funds management by private companies;
d) A new Labor Law was also passed this year that define the Industrial Accident and Professional Illness Insurance as compulsory in roder o protect workers and start create the insurance culture at work place here in Angola;
e) A new Petroleum Risk Managment Activities Decree is also expected to be approved by the Council of Ministers. This Decree will give power to SONANGOL EP to control all risk management activities in the angolan petroleum industry.
Because risks is define as uncertainty concerning loss and since we depend on oil, we have to manage the petroleum risks as an important way to protect ourselves as persons and as nation also.
Risk creates an economic burden for the angolan society and we need to manage the most important risks in Angola: the petroleum risk..
So, five years ago SONANGOL EP decided to get more and direct involved in the risk mangement business. The second direction, where SONANGOL EP worked very hard was in the creation of the institutional framework to implement its Risk Management Strategy. We have created 6 new companies, last year, to implement our strategy by providing services that previously were not available in Angola:
1. The first company is the holding, named AAA SERVIÇOS FINANCEIROS LDA. This company is the holding that coordinates the whole group of financial services compenies created. The comapny was in
2. AAA SERVIÇOS DE RISCO LDA is the compy provide risk services and do risk identification and evaluation. This company basically study the risk and carry on Risk Surveys & Valuation fo Assets;
3. AAA CORRETORES DE SEGUROS LDA is the insurance and reinsurance retail broker;
4. AAA SEGUROS SARL is our insurance company that provide life and non-life insurance;
5. AAA (ANGOLA) REINSURANCE LTD is our reinsurer incorporated in Bermuda.
SONANGOL EP is the sole concessionary of mineral rights. In terms of assets and revenues, it is the biggest company in the country, which is why SONANGOL obviously needed a good risk management that would be able to control and cover its risks. Especially since over the past four years Angola started a new era in the petroleum industry through a very steady increase in oil production, new and very large oil discoveries, the success ratio in deep water exploration was huge, and a substantial increase in investments.
In creating AAA's Risk Management Companies that I mentioned before, there were three factors that were brought to our attention:
First, the people, that are involved. SONANGOL EP by itself just accounts for 7 500 plus probably 5000 in the entire oil industry. So the industry itself employs in the range of 12 to 13 000 people, directly and indirectly. All the people that are involved in the petroleum activities and operations are exposed to the normal risks of premature death, illness, industrial accidents, age, etc. So there are several risks that we must manage.
Firstly, if a worker dies we need to address the income needs of survivors. A major concern is the impact of premature death will have on the financial position of the families members. And also on ehave to remember that families in Angola are extensive not nuclear. The survivros not only include the souse and the childrens but also elderly parents and other surviving dependents due to the angolan family culture or pattern.
Secondly, persons are exposed to loss of health. Losses resulting from helath problems are usually as important as the risk of premature death. If you are sick, expenses must be paid for medial care and you need income that cannot be earned due to time away from work . Loss of health is temporary and not irreversible and permanent as premature death. One of the biggest challenge here in Angola is to manage health exposures. We do not have modern health insurance services and products. We need a revolution in this field.
Thirdly, is the loss of income. If an individual have a disability loss we need to take care of him. We need to manage the effects of disability to work.Loss of income is the principal. Then we have the living expensesthat may increase indeed and the periodic medical expenses. Expenses may increase at the same time that income decreases. The impact on financial resources are great and worse than a premature death. Unemployment also can cause loss of income.
Finally, we need to manage the age risk. Persons will cease work someday. And then they will need to have money to continue living. We need retirement plan. And we think that the best solutions, right now, are the pension funds. About 70 to 80 percent of pre-retirement income is needed for a retired person to maintain the same standard of living. But life will not stop after retirement and persons need income. If suitable arrangements were not done with pension funds that the retirement can be very miserable in Angola. The life is too complicated here without money. And the sons cannot always be the replacement of a good pension fund. Nobody know how long he will live. So one needs to plan very carefull and save enough money.
The second factor was that of assets. As you know the capital base here in Angola comes from more than two thirds of the oil industry. It's more or less about 80 percent of the country's GNP. The way we have been managing these risks were very poor.
What we discovered is that we are managing an industry whereby no Risk Survey had been conducted even in concessions that have up to 5 billion USD in assets. You can imagine what a disaster it would have been if we still carried a monopoly in insurance that prevented us to deal with the risk management side. The first ever Risk Survey was carried out, last year, for the Cabinda Association and Block 14, which is operated by CHEVRON. Right now we are negotiating with TOTALFINAELF to carry out a second Risk Survey on 5 or 6 concessions that TOTALFINAELF are operating.
So as you can see insurance for us is not risk management, its just part of risk management. Its just a tool for transfering risk. But because of the structure here in Angola, people are convinced that insurance is everything, that insurance is equal to risk management, which is of course not true.,
Risk management is a part of management itself. Risk management is not something that should be done by third parties. It is not something that is separate from the normal management either.
There are many things to do in terms of investment and responsibility, but there are also lots of benefits and rewards that we will collect as well. We look at risk management we look at it with a broader view.
The Decree 8/89 became a mechanism that just prevented SONANGOL EP from doing anything in fine-tuning risk management to the oil industry and hence adapting to the evolution that the oil industry was going through. Even the limits of capital that were stated in this Decree were out of date. You cannot regulate an industry with terms and views and perspectives of the 1960's or 70's in an industry that right now is using the most advanced technology in Angola. Some of this technology has been tested for the first time ever.
We are operating under a very old risk management scheme. We almost started a silent revolution with the creation of AAA's Risk Management Companies, specially the AAA SEGUROS SARL.. We have been able to turn around an outdated system.
|The third and final issue that was brought to our attention was that of revenues.|
This country depends on oil. Oil is the blood of this economy. It represents more than 97% - diamonds take from 3 to 5% - of the exports. More than two thirds of fiscal revenues and to contributes to 45% of GNP. More than half of the economic activity in Angola is fueled in one way or another by the oil industry. This means that if something goes wrong and the production stops, or oil prices drop dramatically, not receiving the expected revenue would produce huge shock on Angola, and we have to know how to manage these kind of unexpected occurrences and the loss of oil production income.
All AAA's companies are operating right now. Obviously the first year will be to risk manage the petroleum risks mainly, but we will also spread our actions into other areas, because people are saying that we were just created for the oil industry. Partially we will always be fed mainly by the oil industry but that is not where we are going to stop. We are going to expand into other areas like aviation, telecommunications, life insurance, property and liability, health, auto, marine, etc.
For the time being we have quite a lot on our hands. Right now we have insured Block 0 in Cabinda, Block 14, and Block 4.26, and are in continued negotiations with other blocks. The reason we were able to cover those three blocks is not because we are part of SONANGOL EP, but because we handed in the most competitive bid. We are very competitive and have the right strategy.
Who are your competitors on these bids?
Right now there are only two direct insurance companies. AAA SEGUROS SARL , which is us and ENSA. But don't forget that we are new in the business, with a starting capital of 15 million USD. To give you an idea how important is our paid up capital: with 12 million I can incorporate 3 commercial banks with a minimum capital of only 4 million in Angola! Since it is a business of capitalization, one needs to build on that. One has to have huge capital, reserves and provisions. That is the financial advantage that empowers you to manage and retain risk. Without capitalization one cannot build capacity tor etain risk. Without capital an insurane company do only fronting because does not have capacity.
ENSA can't even be considered a competitor when it comes to the large risks, because the market that decides the premium we have to pay for the petroleum industry, is the international reinsurance market. So it means our connections with the reinsurance market, our brokerage services in the reinsurance market, and our knowledge of the risk market is the key. ENSA is only a local player. It is not important when we talk about large risks.
Who do you work with in the international reinsurance market?
Right now our reinsurance broker is HSBC INSURANCE BROKERS LTD and our main re-insurance leader is ZURICH ENERGY. These are the two main partners we are working with. But we are also negotiang a partnership with AFRICA RE and many others reinsurers, in Africa and elsewhere.
Can you tell us if the AAA's Risk Management Companies, such as AAA SEGUROS SARL is going to be opening its capital?
We will open the capital of all the companies. Right now, there are three shareholders: SONANGOL EP, SONANGOL P&P SARL and BAI - BANCO AFRICANO DE INVESTIMENTO. Already we are in the process of negotiating the entry of more private capital. The idea is to invite other shareholders, although SONANGOL EP will always remain a very influencial partner within the group, but not the sole shareholder.
Are you going to "spread" to foreign partners or are you looking at local shareholders only?
Anybody and everybody who is interested is invited. We would like to invite local shareholders, who can also provide us with financial solidity, and we would like to invite foreign partners who can also provide us with know how in order to expand into neighboring countries and eventually even on other continents. The reinsurance industry is an international business on itself. You can't establish a reinsurance company just by reinsuring your domestic risks. You have to spread your risks geographically and look for opportunities that do not exist locally.
It will take time to reach our goals, but we are not in a hurry. Creating a solid base is the most important right now.
Are you looking to increase the capital of AAA SEGUROS SARL through these possible foreign and local partnerships or shareholders?
No, we are not looking to increase our capital right now. I think 15 million USD is enough for the moment. We will reach capitalization by other means not by increasing the paid out capital. We will increase it through the contributed surplus or reserves.
Can you give us some key figures regarding the insurance business and the risk management business?
Well since we just started this year, in 2001, I can't really give you detailed numbers. To give you an idea, however, our largest client is the Cabinda Association and Block 14. The gross premiums we have received up to know from 3 blocks have been of over 12 million USD. The total gross premiums earned in one year in the Angolaninsurance industry is 90-100 million. But this number will probably double in the next 3-4 years. The growth is huge and will happen very soon. The risk management services industry is probably a business of more than 250 million in Angola, including insurance of course. But also these number will increase very soon as we will expand the risk manegement activities in the oil industry and in other sectors of the angolan economy also.
What is the relationship between ENSA and AAA SEGUROS SARL, considering you are the only two insurance companies in Angola?
We are competitors. At first they tried to prevent us from entering their market. They even accused SONANGOL EP of trying to take control of the market. They must realize that we are living in a market economy, and will have to expect anyone to come in, and will not be able to prevent anyone from entering the insurance market.
The Government's strategy was to create a transition period. There is now a Decree for re-insurance and co-insurance, whereby the petroleum, the diamond, aviation and agriculture risks, have to be co-insured between companies who have public or state capital, meaning ENSA and AAA SEGUROS SARL. In my view, as an economist, this is a quasi oligopoly or a captive or reserved market. This is naturally acceptable as a transition, but the time must also come when all of these arrangements must be stopped. Otherwise this will also be restraining and limiting on the development and modernization of the insurance market. We will not create capacity with these special regimes.
AAA SEGUROS SARL has signed a co-insurance agreement, with ENSA, whereby we co-insure with them the big risks. This means that in block 0, 14, and 4, ENSA are our co-insurers. AAA SEGUROS SARL is the lead co-insurer and the sole responsible for placing the risks in the international resinsurance market.
The reason the Government set this decree is because they are trying to achieve a balance or compromise between us. It is clear that it must be a temporary situation. It shows how far we are from real liberalization, from a market economy.
The biggest difference between AAA SEGUROS SARL and ENSA is strategy and vision. We, AAA SEGUROS SARL see things on our own way and we know what we are doing here because we have objectives clearly defined.
What is the policy on allowing foreign insurance companies enter the market?
Foreign companies can already come under the new Insurance Law. The reason for us wanting foreign companies to take interest in becoming a shareholder in our companies is because our perspectives and strategy will not stop in Angola. If you really want to be a player in risk management and reinsurance you have to look world wide. With the limitation of co-insurance one is forced to look for more open and free markets.
The good news is that the insurance market has been opened and now there is a new integrated risk management services supplier - the AAA Risk Manangement Companies. Risk management and reinsurance will play a role in stabilizing the financial market and improving the conditions for investment, as it is a common fact that you cannot expect a boom in investment without having a very sound risk management and reinsurance market. It is essential. There are many activities that only develop if there is an insurance market. The creation of AAA SEGUROS SARL will prove to be very beneficial to the Angolan economy.
We are not fooled however. We know that this is only the beginning. We must expand the insurance and risk management culture in Angola. The attitude people have towards risk is either avoidance or they simply retain the risk, the latter being a huge incurring financial cost. There is no future on risk retention, which is why people must look for more sophisticated and modern solutions of risk transfer. An economy that do not have tools for risk transfer will not expand because investment will not happen regularly.
What is your competitive advantage in the insurance market?
We have a more profound knowledge in risk management. We study and research certain risks, and by knowing what they are exactly we can propose more modern and sophisticated solutions. We also transfer risk to the market in a very unique way. We have very good partners and alliances that allow us to compete in the national insurance market. The fact that we are a small company means we have very low overhead administration costs and are agile to our clients needs. We also invest quite a lot in training people by sending them abroad.
There is no reason why Angola being an underdeveloped country must be also underdeveloped in the insurance and in the risk management business. We will do a lot in the risk management field and in the insurance industry here in Angola
We have clients that are multi-nationals, that operate globally and will not accept sub standard service. They are expecting first class service. If we want to serve this type of client we have to perform in that fashion.
Our most important resource in AAAs are ideas and ability to do the job, to deliver, to perform. We are innovative and capable of breaking new ground. That's our strength. Do not forget that AAA are the first truly integrated financial services group in Angola. And this is a very good new for Angola.
NOTE: World Investment News Ltd cannot be made responsible for the content of unedited transcriptions.
© World INvestment NEws, 2002.
This is the electronic edition of the special country report on Angola published in Forbes Global Magazine. February 18th, 2002 Issue.
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