AMMAN - The compulsory third party liability (TPL) insurance is behind the sector's poor performance and not competition in a crowded market, insurers said Wednesday.
According to Jordan Insurance Federation (JIF) Director General Maher Al Hussein, around one-third of the 28 insurance companies in the country are incurring JD30 million in annual losses, mainly because of the compulsory insurance on vehicles.
The ratio of profits to capital revenues is 1.2 per cent, he told The Jordan Times yesterday, indicating that the overall profits of local insurance companies, whose capital is estimated at JD350 million, stood at JD5.5 million during the first half of this year.
Hussein said the sector's average contribution to the gross domestic product (GDP) is less than 2 per cent, while the average contribution to the GDP worldwide is higher than 8 per cent.
Ali Wazani, the general manger of First Insurance Company, agreed that the TPL is the main reason draining the operational revenues of insurance firms.
As a remedy to revive the performance of financially troubled companies, Wazani suggested mergers that would create entities offering specialised insurance services.
"The problem is not having 28 firms in the local market but rather it is that all of them provide a wide range of services with small capitals," he explained.
For example, he noted, a company with a capital of only JD4 million sometimes apply for tenders to cover risks of a large company, whose capital is over JD2 billion.
He indicated that government incentives, such as tax and fee exemption for several years and giving priority to merged companies in public insurance tenders, may encourage troubled firms to consider mergers.
But Ziad Masri, deputy chairman and general manager of the Jerusalem Insurance Company, said the size of the Jordanian insurance market is only JD400 million shared by 28 firms stressing that government priority should be given to solve the issue of compulsory insurance before encouraging mergers among companies.
TPL is the reason for financial losses of insurance services suppliers, he stated, adding that if prices of TPL are floated, companies can enhance their financial conditions and then may consider mergers to improve their performances.
However, Masri indicated that mergers do not necessarily lead to profitability, pointing out that 60 per cent to 70 per cent of mergers worldwide proved to be a failure.
But the JIF director insisted that government incentives should be considered to encourage acquisitions of troubled firms and not mergers.
He rejected the idea that the sector is not performing well because the small local market is crowded with 28 firms, noting that in Lebanon, which is a smaller market, there are over 50 insurance companies.
Local insurance firms should not all be ranked as first class, Hussein said, adding: "It is like that all hotels in the country should be five stars."
On Tuesday, during discussions among members of the finance, banking and monetary subcommittee, which is part of the wider economic dialogue panel, experts said the government should give incentives to insurance companies to encourage merger among them, blaming financial losses to the fact that there are 28 companies.
Hussein argued that merging a troubled company with a profitable one is like injecting a virus into a healthy person.
Government incentives should target investors to purchase shares in troubled firms to increase their capitals and improve their performance, he stressed.
© Jordan Times 2011
