Profitability of the Oman insurance sector has improved notably in 2017, but challenges remain amidst a competitive business environment and tough economic pressure. Inadequate pricing of risk and the fragmentation of the sector will continue to dampen the industry’s progress, but the launch of mandatory healthcare insurance is expected to boost business.
The year 2017 was a milestone for Oman’s insurance industry as players increased their capital to meet the new minimum requirement of OMR10m ($26m) from the previous minimum of OMR5m. Local operators, accounting for half of the market’s 20 providers, have also become publicly listed as required by the Capital Market Authority (CMA) which undertook these reforms to boost the industry’s performance, enhance transparency and improve the confidence in the sector. The new regulations are also expected to push players to consolidate.
The market’s GWP in 2017 grew by only 0.3% to OMR451.2m compared to the 2% growth rate achieved in 2016. The market continues to face a tough business environment as a result of tight government spending on new projects, said Arabia Falcon Insurance Co (AFIC) CEO AR Srinivasan. “Business volumes are down and existing companies are fighting over the same pie. For a country with a population of 4.7m, it is extremely competitive to have 20 insurers vying for a market worth $1bn.”
The situation becomes more severe due to the fact that premiums coming from mega projects such as petrochemicals and refineries are absorbed by the reinsurance market directly, he said.
Profitability improved
Profitability of the sector jumped by 171% to OMR23.7m from OMR8.7m in 2016 and OMR15.57m in 2015. Though a healthy indicator, this increase is not considered a ground-breaking development because in 2017 the companies’ paid-up capital increased by 16% to OMR248.5m, while total assets hiked by 22% to OMR1048.73m (due mainly to the increase in capital requirement). Therefore, the return on assets (ROA) in 2017 increased to 2.25% from 1% in the preceding year, but it is actually close to the ROA of 2% achieved in 2015 and below the 3.4% rate of 2014.
Over the past three years, profitably of the sector was inconsistent as it dropped by around 44% in 2016 mainly because of the losses incurred by Dhofar Insurance Co, a major player which used to write around one-fifth of the market GWP. The company has been undergoing a major restructuring which has started to yield positive returns – by the end of 2017, its net loss reached OMR1.1m against OMR6.3m in the preceding year. For the first half of this year, Dhofar has reported a net profit of OMR661,000 against net loss of OMR308,000 for the corresponding period of 2017. Overall, GWP for the national insurers has improved by 9% in the first half of 2018 against the same period of the past year, while profitability saw a 13% improvement.
Consolidating the marketplace
AFIC is the fruit of the merger between Arabia and Falcon last year. The merger has led to an increased capital and a stronger entity, said Mr Srinivasan. “The merger was very smooth as it served both companies’ interests and the synergies were absorbed.”
It was the only merger the market has witnessed in 17 years and the latest capital increase is unlikely to see more consolidation. To incentivise M&A, capital requirements should have been increased substantially, said Mr Srinivasan. “A similar situation was experienced around seven years ago when the capital was increased from OMR3m to OMR5m. Nothing happened because shareholders managed to cover the increase from their own resources. Though the main goal is to push companies to consolidate, there are cultural barriers that derail mergers. The desire to be a chairman of a weak company instead of being a shareholder of a strong one has to change,” Mr Srinivasan said.
The regulator needs to give a stronger incentive and enforce stricter requirements such as increasing the minimum capital requirement to OMR25m, he said. “The Arabia and Falcon merger led to an increase in capital. Only two other companies pumped in capital because in the stock exchange the market is weak and insurance is not appealing to investors.”
Medical is the next wave of growth
Preparations are underway to launch the mandatory healthcare insurance for expats in Oman. There have been several discussions among stakeholders including insurers and various healthcare service providers. It was initially scheduled to be launched at the beginning of this year, but it has now been tentatively postponed to 2019.
The CMA is currently conducting a legal review and has not specified a time frame for enforcing the scheme. “The regulator made a good decision to defer implementation to avoid a lot of confusion. The CMA wanted to have a system readily in place, including a uniform reporting network, some sort of unified pricing of the services and minimum common policy wording. The regulator is working with the stakeholders to set the unified wording and coding structure. Once this is done, optimistically speaking, it should be available by mid-2019,” said Mr Srinivasan.
Medical insurance is the second-largest line of business after motor. Premiums reached OMR134.43m in 2017, or 30% of the market, an increase of 16% y-o-y making it the fastest growing non-life line. Claims for this line grew by 10% to OMR106m in 2017.
Mr Srinivasan said premiums will definitely grow with the introduction of the compulsory healthcare scheme. “And of course claims will follow but, if controlled efficiently, insurers will see some profit margins – though most likely thin because the top line is higher than bottom line due to the nature of medical business. Therefore, more control is necessary over the healthcare insurance and medical services pricing.”
Life insurance: A setback in 2017
Life insurance accounts for 13.6% of total market premiums. In 2017, life premiums dropped by 9.3% to OMR61.37m. Foreign insurers wrote around 46% of the life business, down from 62% in 2016 as their life premiums fell by 33%. National providers, on the other hand, increased their life business by 29%.
The overall drop in life operations is largely attributed to the slow growth in selling individual life covers as it shrank 29% for the whole market. Slow credit life insurance activity, tied with individual banking loans, is believed to be the main reason since it is the main driver for individual life policies. Statistics show that credit growth reached 3% in April of 2017, the lowest since 2005.
Distribution: More innovation required
According to CMA’s latest report, brokers control 27% of the GWP. Oman is not as advanced as other GCC markets when it comes to selling insurance online and leveraging modern technology. “The reason could be the population mix. In the UAE, for example, almost 90% of the population are expats, whereas in Oman expats account for 40%. In addition, in Oman, people still prefer the direct or face-to-face way,” said Mr Srinivasan.
There is only one online payment gateway in the country, which could account for the slow development in the online selling channel. “However, insurance companies are working on their own systems to offer online paying mechanisms. AFIC has a B2B online setting, but for individuals we plan to have such facilities in a year,” he said.
Cyclone: Minimum losses to the industry
Cyclone Mekunu, which struck the coastal region in May, claimed 31 lives in Oman and Yemen. It also caused major economic losses to the Dhofar region, mainly on the infrastructure and at Salalah port. The economic loss stands at $400m, according to the Aon Global Catastrophic Report published in June 2018. The insured loss is not yet finalised, but has reached OMR108m (losses for reported and expected losses for unreported claims) until the beginning of July, as per the CMA’s latest data which show that insurers have received 762 claims, mainly from property, vehicle, engineering, marine equipment and other damages.
Mr Khaled Nouiri, COO of the country’s sole national reinsurer, Oman Reinsurance Company (Oman Re), commended the exceptional awareness campaign and prevention measures the government conducted ahead of the cyclone landfall and the instantaneous intervention of civil defence and armed forces following the event. “This exceptional effort largely contributed to limiting the impact of the cyclone. Oman Re received claims intimations from the market and our contribution will be below $4m. The affected classes are property, engineering and motor,” Mr Nouiri said.
Oman insurers witnessed similar events in the past and gained experience in handling large Nat CAT losses from incidents such as Cyclone Gonu in 2007 and Cyclone Phet in 2010, he said. “They have the support of reputable national and international reinsurers who are well equipped to handle Nat CAT events. On the other hand, the CMA is closely monitoring the claims settlement process to ensure swift and fair compensation to policyholders.”
Mr Nouiri said the insurance sector in 2018 is not expected to change materially despite the Cyclone Mekunu disaster. “This is due mainly to the relatively low retention level. Although reinsurance terms may be tighter by year end, that will not be significant enough to affect the direct market in the presence of a large number of players.”
Cyclone Mekunu: A wake-up call for the industry
The sector is exerting a big effort to support those who were affected by the cyclone, said Mr Srinivasan. “Losses are generally less than those incurred in 2007 from Cyclone Gonu, but this is a signal that the region is prone to such events since this is the third major cyclone in 11 years.”
He added that insurers are capable of handling the claims and the industry has been providing advice to clients on how to improve their risk management. “The government and other stakeholders are taking many precautions. This is why the cyclone did not cause much damage.”
Motor losses were very minor because the police banned people from going to areas of risk, he added. Another factor which mitigated losses is that many of the losses were uninsured, especially from small businesses.
Mr Srinivasan warned that the industry continues to be competitive and players are not charging enough premiums to build capacity for such events. “This is a challenge as it all boils down to unhealthy competition. Insurers have to work collectively going forward.”
To Mr Nouiri, a national effort for the protection of the Omani economy against large and more frequent Nat CAT events in recent years might lead local stakeholders to consider a nationwide reinsurance solution similar to what has been established in other countries exposed to similar catastrophes.
Looking ahead
AFIC looks to preserve its accomplishments and continue to concentrate on business based on the propensity of the bottom line rather than top line moving forward. “We are not chasing volume, and that is what matters. The sector looks promising, but competition and crowdedness of the market are big challenges,” said Mr Srinivasan.
He added that the key task today is to empower locals to get new capabilities as the authorities have raised the Omanisation ratio to 75% from 65% in all managerial levels.
In the absence of large infrastructure projects in 2018, no major hike in production is expected, said Mr Nouiri. “Premium growth in Oman is likely to come in 2019, driven largely by the introduction of mandatory health insurance for expats.” M