Dubai: Amid depressed earnings and new regulations, ratings agency Standard & Poors feels that there is a likelihood of “cessations” in the UAE’s insurance industry.
With 60 licensed insurers, the ratings agency sees the UAE domestic market as overpopulated. This has triggered an intense competition among insurers for an income stream to cover their operational costs.
According to a report emailed by S&P, the 29 listed companies recorded an aggregate net underwriting deficit, a key measure of profitability, in the first nine months, representing a 103 per cent of net combined ratio. Some 45 per cent of the listed companies posted underwriting deficits.
Going forward, the insurance market is likely to continue to need reinforcement of technical reserves through 2016, and this will tend to depress earnings, S&P said in the statement.
“We think the combination of new regulatory demands and poor earnings increase likelihood of business cessations in the years to come,” the S&P said.
Below requirement:
On September 30, 2015, the S&P noted that five listed insurers had capital employed below the regulatory minimum capital requirement of Dh100 million. Those companies most in need of capital include many with the worst earnings records.
“We see 10 companies (that’s 35 per cent of the listed market) with accumulated deficits depressing capital employed below the level of subscribed capital. In addition, all insurers will have to undertake a full independent actuarial review of their technical reserves by January 2017, a step that is fully aligned with the introduction of a risk-based solvency regime,” S&P stated in its report.
To comply with these significant regulatory changes, S&P said it believes a number of insurers will need to undertake moves to add capital.
This including the general economic environment has taken a hit due to low oil prices, with tighter liquidity triggering a rise in interest rates. So the S&P does not see any meaningful recovery in the UAE insurance market’s earnings before 2017.
However, in the first nine months of 2015, gross premiums grew 9 per cent year on year to Dh13.5 billion ($3.7 billion) in the first nine months of 2015, in line with expectations.
The growing maturity and expansion of the Dubai compulsory health scheme, launched in the last quarter of 2014, was one reason for the increase, but others were the favourable economic and political climate.
For instance, Abu Dhabi and Dubai are sustaining capital spending on housing, schools, and roads, with GDP (gross domestic product) forecast to rise more than an annual 3.5 per cent through to 2019.
This report comes a week after Zurich Insurance said it plans to exit its general insurance business in the UAE by the end of 2016, saying the investment needed in the market was not justified by its limited growth potential.
Zurich, which will continue to offer life insurance in the UAE, has been reviewing its global general insurance business, its biggest source of revenue and which sells things like property and casualty insurance.
