There is growing consensus that the UAE insurance market is not at its best, and operators need to take the initiative to put the sector on the right track before seeking any regulatory intervention. Meanwhile, the larger players can help by leading by example to create a healthy and profitable business environment. These were some of the concerns aired at a recent roundtable on the UAE insurance market, which was represented by a good cross section of players.
Speaking from his long experience in the market, Mr Elamin is not optimistic about seeing market improvements in the short run. “The soft market started after rates were slashed in 2001 and since then, rates have not improved. The international reinsurance market has played a major part in this. Hoping to see the market improve is wishful thinking. It did not happen in the past few years and will not happen in the near future.”
With the top three providers – OIC, ADNIC and Orient – controlling 50% of the market while the other 59 companies are fighting for the remaining, “the marketplace is under pressure. Many agreements on certain terms or brokers’ commissions have not succeeded. For instance, in early 2000, players signed a motor-rates agreement but it did not stand for 48 hours”, he said.
Big, small, and international companies share the responsibility, he said. “Everyone is under pressure to increase production. Boards rarely listen to their managements and push for more business without bearing in mind the technical aspects.”
Even the majority of international players are suffering technical losses while some are achieving marginal net profits, not even up to the level of their brand, said Mr Elamin. “This shows that they are actively involved in what is happening in the market and competing fiercely, even in personal lines.”
He noted that some companies’ capital levels have eroded to below 50% of the minimum requirements. “Shareholders need to pump in more capital, but this move is questionable as losses are continuing. Some companies have short-term visions - they know they cannot deliver, but insist on trying.”
Price vs service competition
Price competition in this crowded market continues to be a big worry, and competition in terms of services would make a huge difference to the market but “there is not enough of that in the market”, said Mr Adamantiadis of OIC.
Mr Sethi of Noor Takaful said that while irrational pricing is a concern in the general business, not every customer is sensitive to prices. As seen during policy renewals, “there are customers who value the services embedded in the product”.
Hence, it is important to improve the customer experience, for example by adopting new technologies, he added. “We have seen higher persistency in our general and medical business after improving our online support and simplifying claims procedures. A consistent focus on the services side of the product offering would re-invigorate the industry.”
Need for regulatory intervention?
Participants lamented the self-destructing nature of market competition, with some companies writing business even though knowing that by doing so they will make losses. This, said participants, is where the regulator should intervene to stop insurers from crossing the line.
Mr Light of EIC also called for more regulatory intervention, adding that the regulator has published clear rules. “The role of the regulator is certainly to lay down the rules but then they have to enforce them firmly, constantly and transparently.”
Another area which may require the authorities to step in is ensuring solvency, said Mr El Hout of Al Sagr National Insurance Co, as several players seem to be under-reserved.
Some of the problems in the market could be due to the lack of regulatory action, he noted. “Serious corrective measures have been taken in Saudi Arabia as a result of cooperation between the sector and the regulator. But in the UAE, insurers have not taken the initiative to correct themselves. The solution lies in a more proactive cooperation and activity between the regulator and the Emirates Insurance Association (EIA).”
However, the region’s regulators are still relatively young and learning, said Mr Daya of Hilal Takaful. “We sometimes put a heavy responsibility on the regulators. They still need to learn more about the market’s needs and trends. It is also our job as companies to mature.”
The need for cooperation
Mr Daya said competition is healthy if handled responsibly, but the biggest concern is cooperation amongst players. “As the market becomes more competitive and rates reach the bottom, cooperation will be key and a sign of maturity for the market.”
Agreeing, Mr Safi of SALAMA said: “Insurers need to build trust among themselves to compete on sustainably. Hopefully, the new regulations will push for more cooperation.” One way of building trust is for companies to exchange their views more often to understand the needs of the market, he said.
However, Mr Adamantiadis questioned whether it would be realistic to rely on trust, given the large number of players in the market. “Trust is a nice concept but impossible to apply with every single player,” he said.
Other areas concern more than competition
The root of the market’s problems is not in competition but elsewhere, like the board’s understanding of the unique aspects of insurance business, said Mr El Hout.
He pointed out that some companies’ management are not professionally managing the business because they are under pressure from the market. Their boards grow the top lines, and simultaneously release dividends. In such instances, a short-term rather than a long-term view is taken.
The number of players in the market is still modest compared to over 800 providers in the UK, said Mr Katsipis of A.M Best. “In developed markets, the difference between the large and the small players can reach to around 40 times in terms of gross written premium. In emerging markets, however, the difference between the top five and the smallest players is about five to six times. This means all companies are somehow very similar in the consumer’s perception.”
The lack of specialisation is another problem in emerging markets, he said. “Companies write in all lines, which congests the market. Though motor and medical provide the biggest volume of business, not all companies should go for them. Rather, they should identify certain segments to target. To overcome competition, insurers need to define their strategies. The regulator or other external parties cannot help them achieve this; companies need to take the initiative and focus more on their strategy and bottom line.”
Mr Londe of Moody’s said the new regulations issued by the Insurance Authority (IA) would strengthen several key characteristics of insurers, including capital adequacy, asset quality and reserve adequacy along with providing a push for more transparency within the marketplace.
He added that the actuarial- and risk-based approach of the regulations should ease the pressure on pricing and stiff competition. “Even in terms of choosing a niche market, when a company does its assessment based on the regulatory requirements, it will be able to identify which lines of business and market to focus on.”
Mr Londe said as invested assets will be more heavily scrutinised, companies would be focusing more on underwriting profitability. “Still, reforms should start from within companies. Time has been given to apply the new regulations, but several companies are being proactive and have started taking steps to ensure they are in alignment.”
Over-emphasis on motor and medical
Mr Light said companies can burn themselves very quickly, especially from motor and medical, as they are both classes written largely without reinsurance.
He noted that there are other matters insurers can work on together rather than focusing on pricing, which companies decide on individually. “As professionals, we can discuss issues such as the quality of information, wordings, payment terms and the conduct of the market independently, without regulatory intervention. Competition is a fact of life but there could be some useful cooperation across the industry through the EIA.”
The market’s current business structure forces insurers to write medical and motor; nonetheless, confining business to these lines narrows the companies’ horizons, said Mr Daya. “Each provider should have a sustainable and applicable vision. There will be obstacles in the first years but providers should continue to follow that vision and revisit it if needed.”
Unhealthy practices
In motor, Mr El Hout said the problem is mainly in the premium differences between the net premium received by the insurer, and the gross premium paid by the client. A proposed solution is to print the amount of premium on the motor policy directly from the insurer’s system, so that clients will know how much the policy actually costs. At the same time, balanced commission percentages should be agreed with the brokers. This would lead to transparency for the client with fair competition.
In other lines however, brokers put pressure on insurance companies to get the lowest rates and the broadest coverage. This is fully understandable as their duty is to maximise the benefits to their clients. However, sometimes the brokers’ margins exceed those of insurers, he said.
Another observation is in respect of special manuscript wordings, resembling a blank cheque which some insurers approve without discussion because these are “prestigious accounts”. Some of these covers cannot be properly reinsured and this is dangerous and needs to be carefully considered, Mr El Hout added.
“Why wait for the regulator to tell us what to do when we know what best practices are? Don’t the insurers which are now dumping prices to generate cash to pay for old claims and other commitments know that such actions will get them into bigger problems?” he asked.
The role of bigger players
With their large capacities and business volumes, big companies have played a major role in the market’s current standing, and should continue to play a role to bring the sector to its senses, said Mr Idris of ADNIC. “ADNIC has already started setting an example by making bold decisions to walk away from certain businesses. This means that for the first time, we have budgeted a negative growth, but the board is supportive.”
Mr Elamin said management should focus on achieving what is best for their companies, “and the market will inevitably improve. It is not enough to rely on general agreements or on big players to make an impact. On the contrary, the big players are more capable of causing a downturn than an improvement because of the congested marketplace”.
Boards should play constructive roles
Mr Daya said shareholders are sharp businessmen but unaware of the long-term nature of insurance business, so management should manage the expectations of their boards and encourage them to have a long-term strategy and vision. As some companies have burned their operations while seeking quick returns, part of the maturity starts at the board level.
He added that shareholders have to hear the word “no” from their management sometimes and learn to give time for positive long-term results. “This is not easy and requires persistence with the boards.”
There are, however, some in the UAE market which expect a better understanding from the boards at this stage, especially after seeing the market’s losses over the past three years.
Board education is one possible effect of the new insurance regulations, said Mr Katsipis. “A major advantage is the board becoming aware of what is happening, defining the risk appetite of the company, and becoming involved in deciding the adequacy of the company’s risk controls and ERM.”
The question now is how soon this will take place. “Many companies will find it difficult adapting to the new regulations. Most shareholders have significant clout in the market and can lobby effectively against their early adoption.”
Specialising in niches
The first step towards achieving a profitable marketplace is for companies to find their niches even within broad lines, said Mr Katsipis. “As motor and medical account for about 80% of the retained market, some companies can target niches within these lines, such as certain age groups or segments such as blue-collar workers, which a few are already doing.”
Though agreeing that specialisation is important, companies, both local and international, are only now learning to use data effectively, said Mr Adamantiadis. “Most companies do not have the analytical tools to segment and slice and dice the data.”
Agreeing, Mr Light said: “We often forget that, big as it is, the UAE market is still relatively small by global standards. It is hard here to make business out of a collection of niches. It can certainly be very misleading to draw very big conclusions from very small data sets.”
Another barrier, said Mr Daya, is the lack of talent.
Basic problems need to be addressed before talking about specialisation, said Mr Elamin. “To begin with, companies need to know their expenses and overheads before looking at segmentation and other sophisticated tools.”
Need for a more active association
Previously the Chairman of the EIA’s Higher Technical Committee before resigning after a year, Mr Elamin said that having an active Association would solve many issues. “Generally, companies tend to follow directives, but the Association is not even providing those directives now. We need to see how to create a positive environment to put the Association on the right track.” He added that there is a need for prominent leaders to take part in this.
Mr Light said the Association gets a lot of criticism, but it is also up to members to make a difference. “The association is only as good as its members make it. The guys working at the EIA are doing the best they can, but updating it will cost something both in time and energy, as well as money.”
Agreeing, Mr Idris said change can only take place if the secretariat is strengthened with adequate resources and the structure of the association needs is revisited to give a stronger say for the Higher Technical Committee.
Citing two examples of associations that played a role in developing the sector, Mr El Hout said the Insurance Executive Committee (IEC) in Saudi Arabia was founded under the supervision of SAMA, which also sends a representative to attend its meetings. Lebanon’s insurance association (ACAL), despite the country going through ups and downs, has managed to serve the sector in areas such as applying the orange card, establishing several pools, and supporting the banking sector during the difficult days of civil war. “A lot of positive actions were taken but always through a well-defined, respected body.”
Calling for an association with more participation, Mr Londe said: “With the new regulations pushing for more transparency, more insurance companies will be willing to discuss market concerns, and the best way to do this is through active participation in the insurance association.”
Takaful – an undeveloped opportunity
Mr Elamin said the takaful segment has not created much change in the market. In fact, the concept still needs further explanation, especially with the UAE being a very cosmopolitan place, therefore requiring more education to reach the wide range of nationalities.
Mr Sethi said that while takaful and conventional operations are supposed to be very different, at the moment they are perceived to be similar. “With time and increasing customer awareness, differentiation will attract more customers to takaful.” He added that having more Shariah-compliant investment avenues will improve product pricing.
Takaful is a “wasted opportunity” because the vast majority of operators have not performed according to their original business plans and are not meeting their original goals of increasing penetration, gaining acceptance and making profits, said Mr Katsipis. “The insured population has also not grown. Many companies have failed to build up critical mass fast enough and therefore have ended up competing with conventional companies for the same types of business.”
He called on takaful companies to focus more on the life segment, where their strength is. “Operators should slowly start redirecting their activities, otherwise there is no added value to the market.”
Forging ahead with cautious optimism
Despite the harsh realities, players still hope to see an improved sector.
Mr Elamin said there is light at the end of the tunnel due to the new regulations which will force players to take corrective measures regarding their solvency margins, reserving and investment policies.
Mr Idris expressed optimism for the medium to long term. “Corrections should take place as the current market situation cannot hold for too long. It is a matter of time for self-correction to take place. As for ADNIC, we lead by example.”
The most critical matter is the IA’s capacity to implement the regulations, said Mr Light. “If properly implemented, there will be some pain, but the market ought to look very different in five years from today. There are grounds for cautious optimism if power in the market consolidates into more sensible and professional hands. Whatever else happens though, EIC will continue to focus on technical underwriting rather than just chasing cash flow or short-term investment profits.”
Sustainability is also very important for OIC, said Mr Adamantiadis. “I would like us to shift our focus to the service side of the business as we do not think enough of our service. I am optimistic about pricing because there is some kind of self-correction in that, which should also extend to the service side. As a market leader, we lead by example to focus more on services and customer centricity.”
The market situation is difficult but not desperate, noted Mr El Hout. “We are working hard to keep our house clean until something is done in the overall environment – mainly implementing the regulations. Meanwhile, we will still be affected by those not running their houses in a proper way. They hurt themselves and others as well.”
It is important to build cultural awareness within insurance companies, from top down, said Mr Safi. “Improving the culture of understanding with policyholders and the association will lead to improvement but for the time being, let us begin with our own companies.”
Though not coming as quickly as hoped, the new regulations should create grounds for consolidation as the capital requirement will increase and put further pressure from boards to find profitable niches, said Mr Sethi. “Having fewer, larger companies in the future would create more opportunities for growth through acquisition and scale efficiencies.”
Good days are ahead, but not this year because time is needed to implement the new regulations, said Mr Katsipis. “Given the depressed oil prices, less spending is expected and there will be fewer big projects and lower reinsurance commissions – which make up companies’ most profitable line.”
The challenges are numerous but the UAE’s stability amid the overall chaos in the region gives hope for the whole country, said Mr Daya. “We have a good chance to get this industry up and running to where it should be. As a company, we have a defined strategy and a parent driving it with us. Together, we will get to our vision.”