With the Insurance Commission of Jordan (IC) now scrapped, the market is attempting to correct itself, albeit with limited success so far.
Last April, the Jordanian government concluded a two-year debate by merging the IC with the Ministry of Industry and Trade as part of a cost-cutting exercise, putting the insurance sector under the Insurance Directorate at the Ministry. It is still too early to comment on the performance of the new regulatory body, but players are understandably concerned, especially with the sector suffering numerous problems.
Mr Imad Abdel Khaleq, Managing Director of Jordan Insurance Co (JIC), said it is unclear whether monitoring procedures will continue. “It will be tested in the middle* and end of the year, when audited statements need to be submitted. Without supervision, the market will return to what it was before the IC was established.”
The market has not changed much in terms of the severe competition and the weakness in some operators’ financial standings, he added. “Rates and terms continue to be offered on unprofessional standards. The uncertain regulatory status is threatening to cause a further deterioration in the situation.”
The regulatory issue has been affecting the market for the past two years, opined Mr Isam Abdelkhaliq, CEO of Arab Orient Insurance Co (AOIC) and COO of Gulf Insurance Group (gig). “The sector’s conditions have been deteriorating, and are expected to worsen with the IC being revoked. There are alarming signs that we are reverting to the pre-2000 era when, for instance, intermediaries operated without being licensed or supervised.”
Having an independent regulator is much better than just a department in the Ministry, said Mr Yacoub Sabella, General Manager of Al Nisr Al Arabi Insurance Co. “The Ministry is a very general institution and cannot specialise in insurance, which is more complicated than banking. Scrapping the IC was a very short-term decision, considering the importance of the insurance sector and the issues facing the operators.” He added the market has witnessed a relaxation in supervision and onsite inspection in the past six months.
Self-correction
The market reported a modest growth of 5% in 2013 to around JOD491 million (US$693 million) in premiums. “This is the lowest growth rate in the past decade,” noted Dr Ali Al Wazani, CEO of First Insurance Co (FIC).
However, the sector has been correcting itself in the past year or so, he said, noting that the 2009-2013 period saw severe fragmentation and unhealthy practices. “The sector has started to correct itself as market dynamics forced some players to exit – in the absence of serious market initiatives and the failure of the regulator in this area.”
Dr Al-Wazani added that players are showing more prudence, under the pressure of their boards, shareholders and reinsurers. “Over the past 18 months, there have been signs showing that we are slowly but surely getting back to basics.”
He expects more players to be forced to exit the market within the next two to three years. “Probably in five years, only the fittest will survive.”
Improved returns ahead
From 2008 to 2013, losses in the market reached unprecedented levels. However, the market has probably already hit the bottom, suggested Dr Al Wazani. “There are several indications that an upward trend will take place. The market has suffered enough losses, whether in underwriting or investment.”
Mr Imad said that companies’ balance sheets showed poor investment results in 2013, but there are “expectations of a better outcome this year, with promising signs so far”.
The sector’s profits in 2013 are not expected to have improved significantly from the preceding year, especially with the IC’s instructions to increase reserves in the first half of last year. “We have increased IBNR reserves as well. Insurance companies’ strengths lie in reserves and hopefully this will continue in the future.”
He added, however, that market dynamics are not expected to change significantly. “Rates are still down and results are not improving much.”
Damages to entire sector
There are inherent problems related to the structure of the market, observed Mr Isam. “The market is extremely fragmented and fundamentally weak. Growth is effectively coming from just a handful of players. The market includes five efficient players, five mediocre, and the rest are inefficient.”
Preliminary results for 2013 show that seven players are operating below the minimum solvency margin. He believes this is largely the outcome of the government’s negligence. “We have been raising red flags for many years, but to no avail. The government, represented by the IC, avoided taking action against troubled companies due to social concerns. The damages to the entire sector are irreparable.
“The responsibility of failing to deal with troubled operators is shared among the players as they did not blow the whistle, the insurance federation for not acting as a united front, and the government as represented by the IC for being indecisive and succumbing to social pressures.”
Mr Isam cited the example of the IC’s decision to shut down companies being reversed several times. “The last time it happened, the Prime Minister requested that one of the companies be given another opportunity. The Board of the IC refused but it was too late by then because the company had completely folded and claimants now have to wait years to receive their payouts!”
Mr Isam also criticised the discrepancy in companies’ capital. “Five insurers have over JOD30 million in capital and shareholders’ equity, while the rest are below JOD10 million. There was an unsuccessful attempt by the IC seven years ago to limit small players to the motor business, and to top up their capital if they wanted to write other lines. A firmer approach is needed, otherwise the whole market will completely collapse.”
The emergence of market leadership
In some other markets, around 20% of players dominate 80% of GWP and the remaining operators hold small market shares, said Dr Al Wazani. “This enables the market leaders to direct the sector.”
Historically, this has not been the case in Jordan and the sector continued to suffer from severe fragmentation. “This is starting to change, however. Previously, the largest players used to have a share of 6% to 9% each. In 2013, the top five in terms of GWP controlled around 50% of the market. This should enable them to raise prices, enforce better terms and hopefully, lead the market in the right direction.”
The market pressures should unite leaders to take this course. “Top players have stronger weight, especially in the non-motor lines, because the rest of the players’ portfolios come mostly from the motor business, particularly third-party liability,” he commented.
Despite this change, it remains a challenge to enforce professional terms and prices, said Mr Isam. “Some companies’ boards are pushing for the volume at the expense of underwriting quality. This is happening even at some of the large players.”
Shutting down troubled players
The liquidation of Arab German and Al Baraka Takaful earlier this year resulted in raising customers’ awareness, noted Dr Al Wazani. “They have started to look into companies’ financial performances and ratings when buying insurance.”
These companies had unhealthy business strategies and hence their liquidation was seen as positive, said Mr Sabella. “However, the reputation of the sector has suffered as a result.”
Market analysts say there are six other operators which are about to face the same outcome, especially in the absence of a strong regulator.
The gap is widening between successful companies and the rest of the operators, said Mr Isam. “What sets them apart is the ability to respond to customers’ demands. As for AOIC, we benefit from having large accounts and not from fronting, thanks to our capacity as part of gig.”
Developing niches
The difficulties and severe competition are limited not just to the insurance sector, but also extends to other financial and commodities sectors, noted Mr Sabella. “Without a robust economy to increase disposable income, a promising insurance sector is not easy to attain.”
However, providers can still do something about the situation, he added. “The problem is if they continue to do business in the same way and over-rely on traditional lines such as motor.” Al Nisr benefitted from leaving the motor business two years ago, and is now “focussing on other rewarding lines. We are investing in all channels, including direct, intermediaries and bancassurance”.
AOIC is developing its niches as well. With the increased awareness of political violence (PV) covers, the company has been promoting them to SMEs. “Demand for PV has increased and there is a reasonable capacity, especially with relative stability in Jordan in the last 10 years,” said Mr Isam.
Mr Sabella noted that some retail outlets have started asking for this cover since last year. “However, demand for PV covers is probably a short-term trend that may not necessary last.”
Medical drives growth, but not without problems
At around 26% of the market GWP, medical is growing steadily and improving in terms of results, said Dr Al Wazani. “Despite its volatility due to the large volume of claims, medical can boost the sector’s performance if it is controlled well and adequately priced.”
However, claims and prices of medical services are on the rise, while many insurers are not observing sensible underwriting standards, observed Mr Imad. “Medical seems to be becoming another worrying line of business, like motor TPL. It is a ticking time bomb, with falling rates, inflation and abuse threatening the business. Monitoring TPAs is important, but this is increasing the burden and cost.”
Starting on the right foot
With the market GWP growing by over 9% in the first quarter of 2014, the year seems to have started on the right foot, noted Mr Imad. “Technical profits have improved and investments are expected to pick up.”
JIC is investing in its overseas operations, given the saturated domestic market. “We recently obtained a medical licence in Dubai, and strengthened our presence in our UAE branches. Our operations in Iraq and Kuwait are doing well, and we are looking to set up a new operation outside Jordan. It is going to be something different and big.”
The growth rate at the start of the year is raising hopes for a return to the double-digit era before 2010, said Dr Al Wazani. He added that at seven years of age currently, FIC will soon enter maturity. “Growth in the Levant is already on the cards.”
AOIC has succeeded in a tough market where disposable income is limited, said Mr Isam. “Presently, AOIC directs gig’s Levant operations, and we aim to copy this successful experience in neighbouring markets. We are also hoping that gig’s Jordan life operation will be launched this year.”
Even though the market may not see double-digit growth this year, Mr Sabella believes that long-term planning will be the key to success. “We are following the same plans which we have laid for years – product and software development, and investing in training and development. Our focus is more on the local market because it has been proven that this market will be rewarding for those who play it right.”