With 22 insurance companies competing for total market premiums of around US$950 million, the latest move to double the minimum capital to $26 million is expected to trigger consolidation among smaller players.
Many have labelled Oman’s insurance market as small and fragmented, with most companies operating with a fairly small share of the market. To put things into perspective, the top five insurers controls around 61% market premiums, while the remaining portion is shared by 16 insurers, according to the latest quarterly report released by the Capital Market Authority (CMA). The list did not include Takaful Oman Insurance which commenced operations in the second quarter.
Only three insurance companies have double-digit market share and the rest of the insurers have a single-digit share of the market. It is worth noting that six insurers have a market share of less than 1% each.
According to the CMA report, total direct premiums grew by 12% y-o-y to OMR226.79 million (US$588.91 million) during the first half of 2014. Most segments registered good growth, with health insurance topping growth with an increase of 30.7%, followed by engineering insurance with 23.3%. However, property insurance and other lines declined by 4.7% and 4%, respectively. During the same period, total net earned premiums after reinsurance amounted to OMR122.01 million, up 19.1% y-o-y.
New rules to strengthen market
Following the announcement of the capital increase from OMR5 million to OMR10 million, 16 of the 22 insurance companies will be required to raise their issued share capital to meet the new minimum requirements. The remaining six insurers have either OMR10 million or more paid up capital. The regulator has also asked national insurance companies to float shares on the Muscat Securities Market (MSM).
Effectively, all insurance companies not incorporated and/or registered as public joint stock companies are required to convert to public joint stock companies within three years from the date of amendment of the Insurance Companies Law in August 2014.
One key reason cited for raising the minimum capital is to make the insurance companies large enough to underwrite more risks and retain more premiums within the Sultanate, as well as ensure that local companies are able to withstand competition by strengthening their financial, technical and human resources.
The move will also increase public participation in the private sector as part of the Omani government’s strategy to enlarge and diversify the equity base of insurance companies which will enable insurers to reduce the cost of funding their operations.
Push for consolidation
More importantly, the new law could trigger consolidation, which many believe is long overdue and necessary to ease competition and boost profits. However, existing firms have been reluctant to merge their operations, hence raising capital requirements could provide the impetus for encouraging consolidation as long as the increase is large enough to make it difficult for smaller players to meet the new threshold. According to market reports, the regulator plans to seek approval for another boost, to OMR15 million, once the current round of capital hikes is completed.
The most recent deal in Oman was the merger of Al Ahlia and with RSA Oman in 2010. In late 2013, Falcon Insurance and Vision Insurance were in discussions for a potential merger but the deal was called off in March 2014 because the terms were not mutually agreeable.
As the insurers are given three years to comply with the new capital standards, it is probably only a matter of time before the first deal emerges.