The outlook for motor insurance in the Middle East remains negative given the high levels of competition that leads to cut-throat pricing, said A.M. Best in a recent report titled, “Accelerating Competitive Conditions Pressurises Motor Insurance in the Middle East”.
The rating agency said that while some regulators have attempted to impose discipline in the market by requiring actuarial pricing for motor insurance contracts, pricing in the rest of the region remains largely driven by undercutting rivals. The trend towards commoditisation and reducing customer loyalty indicate a period of further pressure on motor profitability. Insurers with poor distribution networks and unsophisticated pricing are likely to suffer further in the medium to long term.
A.M. Best also noted that while all Middle East countries have legal requirements for drivers to purchase motor insurance, regulation differs from country to country. In some jurisdictions, such as Egypt and Jordan, regulated tariffs on motor third-party liability (MTPL) mean that insurers cannot set the price or sometimes even refuse to insure the individual. As a consequence of the rigidity in pricing and the unprofitable nature of this product, some insurers are unable to compensate for MTPL losses through other profitable lines of business and have abandoned the motor market completely.
Mr Mahesh Mistry, A.M. Best’s Director of Analytics and co-author of the report, said: “Companies that continue to write unprofitable tariffed MTPL hope that profits from comprehensive motor are sufficient to absorb MTPL losses. However, the ability to offset MTPL losses is dependent on the individual insurer’s ability to generate sufficient margin on other product classes as well as achieving sufficient economies of scale to absorb expenses.”
In countries where MTPL is tariffed, there have been calls from market participants and insurance associations for the government to either increase tariffs to a profitable level or for a move toward premium rate liberalisation. However, governments historically have been reluctant to increase tariffs given the public’s perception of motor insurance as a form of indirect taxation.
The effect of MTPL products on underwriting performance is not only restricted to jurisdictions with motor tariffs. Mr Salman Siddiqui, Senior Financial Analyst and co-author of the report, noted: “Similar loss ratios are exhibited across markets where companies enjoy rate flexibility on MTPL. Interestingly, the loss ratios for MTPL are higher in the UAE than Jordan. A key driver of the UAE’s high loss ratios is the intense level of competition with limited specialisation, which is a trend across the Middle East. As a result, all insurance companies compete for all lines of business, putting pressure on pricing.”
Group accounts vs SME accounts
A.M. Best noted too that motor insurers in the region have tended to concentrate on large group accounts to obtain market share and grow top-line revenue. The resulting competition has led to significant pricing pressure. In extreme cases, underwriters and sales staff keen to retain large clients have resorted to breaching underwriting authorities and minimum pricing controls. This has translated into large losses for insurers, particularly in Saudi Arabia and the UAE.
Conversely, companies that have identified the relatively less competitive market segment of SMEs have tended to perform better, benefitting from a greater level of pricing power. Additionally, companies that have strong shareholder connections (such as to car dealerships) or captive distribution channels, have also enjoyed enhanced pricing power and reported better underwriting profits as a result.