Balances due from other insurers in the UAE market is a material component of insurance debtors for the UAE market, according to A.M. Best.
This issue is particularly problematic in the UAE, and contrasts with the Saudi insurance market. The significance of this issue can be further illustrated by the fact that excluding these receivables from the debtor days’ calculation would reduce the number for the UAE insurance market by 30 days. Additionally, these debtors make up the majority of debtors outstanding over 180 days.
The root cause of poor cash collection from other insurers in the UAE stems from the lack of a market-wide, regulatory-enforced mechanism to reconcile subrogation accounts between parties. This results in disputes between companies regarding the correct amounts owed to each other, and can result in delays of up to three years in receiving funds.
Furthermore, given the insufficient level of communication between companies, there is significant uncertainty around the recoverability of these balances. Companies generally tend to overestimate their subrogation receivables and underestimate payables, said the rating agency.
Therefore, should the industry formalise its approach to reconciling intra-market subrogation, A.M. Best would anticipate considerable write-offs of receivables and an increase in payables, leading to a decline in overall capital and liquidity.
Given the materiality of subrogation amounts across the UAE insurance market, the agency considers it critical that the regulator, the Insurance Authority, and/or the industry trade body, Emirates Insurance Association, find appropriate mechanisms to resolve inter-market balances.
Debtors
The challenges faced by insurers in the UAE in relation to insurance debtors can apply additional pressure on already distressed technical margins.
The agency noted that while average insurance debtor days for listed UAE-national insurers showed an improving trend from 2013 to 2017, they were well above the average for the MENA region, and significantly higher than those of insurers in Western Europe. Insurers often point to a different payment culture in the MENA region, with outstanding amounts always being delayed but ultimately fully recoverable.
However, this issue appears to be exacerbated in the UAE compared to other MENA countries. Saudi Arabian insurers, operating in a market with very similar characteristics to the UAE, report materially lower debtor days (66 days in 2017), which are more in line with European averages, and almost half of the UAE’s average.
Additionally, the ageing of insurance debtors in the UAE continues to present a concern. Amounts outstanding for more than 180 days (the point after which insurance debtors start becoming inadmissible for regulatory solvency purposes) remains high (above 20% of total insurance debtors.
Lax credit controls
In terms of premium collection, credit controls are either too lax or non-existent, particularly when it comes to strategic relationships, A.M. Best noted. Insurers in the UAE often rely on strategic relationships with agents, related parties or on large group accounts that contribute sizeable premium volumes. In order to maintain these relationships, insurers are content to provide extended leniency in collecting premiums. However, this is to the detriment of the insurer, who is losing out on the ‘float’ that is generated on key lines of business such as motor insurance, and the associated investment income that could have been generated. Cash collection is important to enhancing investment returns as the ‘float’ increases.
Insurers need to prioritise the tightening of their own credit control procedures, particularly with regard to strategic partnerships, said the agency.
Despite issues in cash collection, overall liquidity in the UAE remains reasonable, with companies maintaining sufficient cash balances to cover net liabilities, said the agency. However, failure to clear debtor balances has caused a number of companies to take significant bad debt provisions. In 2017, such provisions resulted in a 10% reduction in combined technical profits. M