Risky business: UAE insurers make more profit, but 'fierce' competition in medical insurance could see margins eroded

Zawya Express presents the top story, topic or trend highlighted by our editorial team as recommended reading to start your working day

 Image used for illustrative purpose.

Image used for illustrative purpose.

Getty Images/Virojt Changyencham

The combined profits of insurance companies listed on financial markets in the United Arab Emirates continued to climb in 2018, with aggregate net profit growing by 6.4 percent, according to a study released last week.

The report by A.M. Best, a credit rating agency for the insurance industry, said that based on preliminary disclosures by insurers, the combined profit of the UAE’s listed insurers reached 1.4 billion UAE dirhams ($381.2 million), as it said underwriting returns continued to benefit from improved underwriting discipline following changes introduced in 2017 that set minimum pricing levels both for motor and medical insurance.

However, the same report pointed out that gross written premiums rose by a smaller amount of 0.5 percent, as it said that “in the absence of regulatory intervention, A.M. Best has observed that underwriting discipline appears to have weakened, with market practice returning to its historic levels of fierce competition and heavy rate discounting”.

It said this has been most acutely felt in motor insurance, where “market reports suggest that pricing for motor softened materially in 2018”. Prices fell by 15-18 percent, it said. It also said that it expects 2019 to be a “challenging year”, expressing concerns about enforcement of mandatory health cover.

Although a policy making health insurance mandatory in order to gain visas for workers and dependents in Dubai was implemented in March 2017, “there are increasing indications that many employers are not renewing their health insurance programmes for years in which visas are not up for renewal”.

“The lack of continuous monitoring of employers regarding compliance with the DHA medical programme, could create volatility in the level of premium volumes generated by insurers,” it warned.

Saleh Al Hashimi, an advisor for the Dubai Health Insurance Corporation told Zawya last month that instituting compulsory health insurance had been a “huge uphill task”, with the number of insured individuals increasing by almost three million people since the legislation was introduced. However, he said the emirate was in the final testing phase of a system blocking visa renewals for uninsured employees. (Read more here).

AM Best’s report also said that despite the 1.4 billion dirhams made by the industry in profits last year, shareholders’ equity remained unchanged at 16.6 billion dirhams as most of the profits made were paid out in dividends. (Read more here).

Although around half of the profits made by the industry in the UAE last year were generated by the four biggest insurers, according to A.M. Best (Oman Insurance, Orient Insurance, Abu Dhabi National Insurance and Al Ain Ahlia Insurance Co), the UAE’s insurance sector remains fragmented, with a report by consultancy Miliman published last year highlighting that there are 30 conventional and Islamic firms listed on capital markets in the country, and a further 29 privately-owned companies.

A separate note published by ratings agency Fitch on Thursday into the health insurance markets in the Middle East said that the UAE market suffered by weak profitability, with margins eroded by “fierce pricing competition”, an accompanying press release said.

It added that although Daman leads the health insurance market with a 32 percent share in 2017, “below the top tier of the insurers, the market is highly fragmented, including a large number of companies with minimal scale and weak franchises”.

Asked by Zawya why there hadn’t been more consolidation in the market, Salman Siddiqui, an associate director in A.M. Best’s analytics division, said: “From speaking to industry participants, it would appear pricing multiples being demanded are too high. It would appear existing owners have a very elevated view of their own companies. Additionally, whilst companies have ample capital for their own operations, they are not yet accustomed to raising debt to fund acquisitions.”

Siddiqui said in an emailed response to questions on Thursday that the issue of non-compliance with mandatory health insurance policies was important, as “this product has been responsible for material volume growth and has been quite profitable thus far”.

“It would be very beneficial for insurers if enforcement was improved,” he said.

The Fitch Ratings note issued on Thursday said that the market regulator, the UAE Insurance Authority, had “increased its regulatory scrutiny, and this could support profitability through more accurate pricing in the medium term”.

Further reading:

(Reporting by Michael Fahy; Editing by Mily Chakrabarty)


Our Standards: The Thomson Reuters Trust Principles

Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here

© ZAWYA 2019

More From Financial Services