The positive financial results of listed insurers for the first half of the year suggest that the UAE market is gradually regaining profitability on the back of regulatory intervention. We look at whether the overdue correction in the market would continue and how the regulator will sustain its momentum.
Top-line has never been an issue for the largest Arab insurance mart but achieving reasonable profitability levels has become increasingly challenging for the past few years.
By the first half of 2016, the 29 listed companies generated GWP of AED10.75 billion (US$2.9 billion), up 9% y-o-y. Net profits saw a notable increase of 118% to AED573 million, against AED263 million.
In comparison, the sector’s net profits witnessed a major setback last year as insurers were required to put in place the necessary IBNR and boost reserves to achieve the required solvency margins. In 2015, the 29 listed insurers’ net profits contracted by 97% for conventional and 242% for takaful players, according to Taha Actuaries.
Despite this improvement in the sector’s aggregate balance sheet in the first half the this year, the market still has some way to go before it regains a firm footing, according to Mr Omer Elamin, Group President of Orient Insurance Co.
“Except for one company, the market has not registered tangible change. The market remains challenging, there are companies which still have low levels of equity and capital below the minimum required.
“The new regulations and requirements set by the Insurance Authority (IA) are going to reflect positively on the market in terms of actuarial pricing, solvency margins, reserving alongside with other financial indicators. 2017 is going to be a turning point but encouraging signs will not materialise before 2018.”
Technical improvements
Mr Christos Adamantiadis, CEO of Oman Insurance Co, said the market has reached an inflection point. “It’s not one thing that has fuelled the market correction but rather a confluence of different forces. To name a few: historical but unsustainable losses in medical and motor; large property losses; dearth of new business; low investment yields; new regulations; pressure from reinsurers, and many more.”
Last year, the IA instructed each insurer to assign an actuary to review pricing and set the necessary technical standards. Correspondingly, the market saw some improvement in the first half of 2016 as as rates saw a 10-20% increase.
Mr Abdul Muttaleb M Al Jaedi, Managing Director & CEO of Union Insurance Co (UIC), said there has been an improvement largely due to the increase motor rates by up to 15%. “This increase has limited the losses but we have not reached the desired technical levels yet,” he said.
“There is a need to fully enforce the new laws. Some companies still have not fully embraced the required laws; some operators continue to target top-line without considering sound technical standards.”
He said that the introduction of new products over the past couple of years, such as the Dubai compulsory healthcare scheme, has given a shot in the arm for some operators to boost their income and profits.
Fire business takes massive hit
There is stiff competition in the P&C insurance business, which accounts for around 73% of total market premiums, said Mr Fareed Lutfi, Secretary General of Emirates Insurance Association (EIA). He said with around 1,500 fire accidents taking place annually, albeit majority are small, profitability is suffering.
“The big accidents, especially erupted at skyscrapers with cladding, prompted the concerned authorities to adopt new laws addressing this peril in particular. This in return has raised the cost and reinsures are pushing to raise the prices. The frequency of severe accidents is high and worrisome.”
For the fire line in particular, the situation has further deteriorated with the frequency and density of accidents taking a toll, with one incident last year reported to have consumed a big chunk of the fire premiums for 2015.
Fire premiums stood at AED2.3 billion last year, up by 3% from the previous year, while loss ratio increased to 90.2% from around 86%, despite the jump in the number of fire policies from 91,155 to 167,614.
In light of the bleak outlook, some of the market’s active providers decided to put an end to this turbulence and agreed with some major reinsurers to set improved technical standards when offering P&C covers, especially fire.
Corrective measures
Mr Adamantiadis said that the increased incidence of some high profile and other less publicised fire events has indeed sparked a rethink of the entire property insurance space with all stakeholders (insurers, reinsurers, brokers, owners associations, authorities, etc).
“The effort to improve property insurance terms is on-going. Pricing, important as it is, is just one of the elements in the mix of corrective actions. Another very encouraging though less noticed development has been the desire of insureds to look at and update their insured values, for property damage as well as business interruption.”
Stressing on the importance of achieving technical profits, Mr Elamin said that the stock markets are not showing real improvement and the real estate businesses are not picking up, with reduction in rental income and valuation of properties, which would impact companies’ balance sheets. “Therefore, companies unable to achieve decent technical income will witness weakened net profits.”
Mr Al Jaedi called for insurers to set up special investment committees qualified to manage their investments where real estate and stocks are causing serious threats to companies’ financial positions.
Consolidation still out of sight
The crowdedness of the marketplace has dragged the market towards unhealthy price competition and pushed away several reinsurers, according to many observers. Yet, they believe it would be difficult to see mergers due to the abundance of capital.
Troubled companies could seek mergers, “but it is not a good recipe to merge troubled companies”, said Mr Lutfi. Meanwhile, there is a need to lay-down a clear run-off law for insurance companies which might leave the market, he added.
Mr Elamin believes that the anticipated improvement in the coming period could dissuade any attempts for mergers. “There will definitely be improvement across the market which would discourage mergers, rather it might create some acquisition movement. There is a need to reduce the number of companies by at least 50%.”
However, this would not happen without the enforcement of the regulator, he said. “Companies which do not meet the solvency margins will have to inject capital or leave the market. The companies which are unable to generate premiums out of quality services, and live only through cutting rates, should either merge or be taken over by other players.”
A valid tool to swiftly consolidate the arena is to increase the capital requirement, he proposed. “Increasing the minimum capital requirement to AED300 million, from AED100 million would take care of many of the small companies which are currently struggling.”
New heights ahead
Clients are gradually becoming more service-oriented and survival is for the fittest at the end of the day, said Mr Al Jaedi.
“The market needs pro-activeness and insurers should have the initiative instead of waiting for the regulator to instruct them. Improving services and diversifying products are some of the means we follow to grow business profitably. There is much to be done to increase the penetration level and bridge the huge protection gap in the market,” he said.
Mr Adamantiadis said that while all markets go through cycles, he hopes the UAE market is heading in an upwards trajectory.
“This upturn in the UAE market has some way to go, so I am convinced we will see continued positive dynamics on the market. That is not to say that the trajectory is totally linear and some bumps and setbacks will inevitably exist along the way.
“Price competition will remain strong, but hopefully the baseline will have shifted upwards so that despite the welcome competitive pressures, the market will not tip back into losses or unsavoury practices any time soon.”