Dubai: Recent regulatory changes have adversely impacted the profitability of UAE’s insurers, but in the medium term rules should in the medium term underpin insurers’ profitability as well as their capitalisation, asset quality and reserve adequacy, according to insurance sector analysts.
“We expect a medium-term improvement in the credit profile of the UAE- based insurers as the sector adjusts to financial regulations introduced in February 2015, overcoming initial compliance hurdles, At the same time, price competition may ease as increased regulatory costs trigger industry consolidation and price hardening,” said Mohammad Ali Londe, Assistant Vice President — Analyst at Moody’s.
Despite, the improved medium term prospects analysts expect to see continued pressure on profits of UAE insurers in 2017 as they adapt to the new regime, particularly smaller players.
The UAE’s introduced actuarial reserving requirements in 2015. These have led to reserve strengthening and retrospective restatement of financials, increasing insurers’ loss ratios and in some cases pushing combined ratios (claims and costs as proportion of premiums earned) above the 100 per cent break-even point for several insurers in 2015.
Reserve strengthening is currently weighing on underwriting profitability. However, in the medium to long term stricter reserving requirements are expected to encourage adequate premium rate setting market-wide. This should lead to stronger and more sustainable underwriting results, as seen in 2015 and 2016 in Saudi Arabia, where the introduction of actuarial reserving requirements in 2013 led to an increase in premium rates over 2014 — 2016.
Regulatory thresholds
The immediate concern for the sector’s performance is the overall weak investment returns. While the sector strives to comply with new capital and invested asset rules, in the short term this will lead to losses following the sale of assets that weigh on solvency-based capital, or that lie beyond the new regulatory thresholds. The sector’s 2015 investment performance was weak in terms of returns which, in cumulation with the reserve strengthening, led to negative return on capital for several insurers in 2015.
“UAE insurers’ investment performance is currently under strain due to the weak market performance in 2015 and as they offload volatile investment assets to comply with new regulations on asset quality. However, we expect their performance to stabilise as fixed income instruments gradually take up a larger share of their portfolios,” said Harshani Kotuwegedara, Associate Analyst at Moody’s.
Industry representatives agree. In the 2016 GCC Insurer’s CFO survey by Moody’s all respondents said they intended to keep a significant portion of invested assets in investment-grade bonds so as to raise the quality and stability of their investment returns.
A regional economic slowdown triggered by fall in oil prices is weighing directly on commercial business, with some additional knock-on impact on personal lines business.
“While the decline in oil price and the consequent contraction in economic activities have impacted the underwriting volumes in the GCC region, robust infrastructure investments across the region has opening up new growth opportunities,” said Inga Beale, chief executive of Lloyd’s at the recent Dubai World Insurance Congress.
Factbox: Consolidation on cards
Additional costs associated with the new regulations may prompt consolidation of smaller insurers, or encourage them to focus on business lines that yield adequate returns according to analysts.
Both developments will reduce overcapacity and ease competitive pressure.
UAE insurance premiums have been growing at double digit rates, with a compound annual growth rate of 15.6 per cent over the last decade (2006-2016), reaching a total of $12 billion (Dh44 billion) in 2016. However, the market, made up of over 60 insurers, remains highly fragmented. Excluding the top 5 listed insurers, average premiums per insurer were just $163 million in 2016, albeit up from $135 million in 2015. The spread of mandatory health insurance will provide further growth, whilst rising motor premium rates will also relieve some of the pricing pressure.
Analysts expect that the requirement for actuarial reserve setting, monitoring and reporting will enhance reserve adequacy and improve underwriting profitability by encouraging insurers to set premiums in line with underwriting risks and become increasingly selective.
