Sunday, Dec 27, 2015

Dubai: The UAE’s insurance sector is expected to face a tougher 2016 as the industry is facing increased pressures on earnings and regulatory requirements, according to analysts.

Despite good premium growth, listed insurance companies in the UAE are showing further earnings strain so far this year, according to rating agency Standard & Poor’s. Gross premiums grew 9 per cent year on year to Dh13.5 billion in the first nine months of 2015.

The growing maturity and expansion of the Dubai compulsory health scheme and sustained capital spending is supporting the premium growth in the Industry. “However, underwriting and net earnings show real weakness so far this year,” said Standard & Poor’s credit analyst Kevin Willis.

The 29 listed companies recorded an aggregate net underwriting deficit in the first nine months, representing a 103 per cent net combined (loss and expense) ratio (NCR; the market’s main profitability measure). Some 45 per cent of the listed companies (13 insurers) posted underwriting deficits. Net profits tumbled 90 per cent in the first 9 months of the year compared to the same period last year.

“We see three key factors behind the disappointing results: intense competition in all lines of business, technical reserving corrections, and weak investment returns,” said Willis.

These factors are expected to remain in place through 2016. Plus, low oil prices are now a fact of life for the Gulf region and will eventually likely bring other economic consequences. And though interest rates are rising in response to tighter liquidity, the additional yields generated may not fully offset any normally resulting erosion in asset values.

Investment losses resulting from equity market corrections will be reflected in the performance of insurers. Both the Dubai (DFM) and Abu Dhabi (ADX) stock markets showed relatively modest declines in the first nine months, but these accelerated in October and November. As short-term recovery on these markets seems unlikely, investment losses for the full year will likely deepen, further depleting capital resources.

“We do not expect to see any meaningful recovery in the UAE insurance market’s earnings, either technical or net, before 2017,” said Willis.

Regulatory challenges

Recent regulatory changes are expected to apply further pressure on earnings of UAE insurers. The new insurance laws introduced in February 2015 by the Emirates Insurance Authority may constrain earnings recovery. If fully adopted implemented this year, the sector is likely to see further corrective actions in terms of reserve strengthening by insurers, and this may keep underwriting results depressed.

Under the new requirements all companies must file standardised risk-based solvency returns from January 2018. Those companies most in need of capital include many with the worst earnings records. 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. To comply with these significant regulatory changes, a number of insurers will need to take action, including moves to add capital.

“As insurers complete independent actuarial reviews, we believe the insurance market is likely to continue to need reinforcement of technical reserves through 2016, and this will tend to depress earnings. We think the combination of new regulatory demands and poor earnings increase likelihood of business cessations in the years to come,” said Willis.

New regulations impose a broad obligation on insurers to ensure that all assets, in particular those covering minimum capital requirement, minimum guarantee fund and the solvency capital requirement, shall be invested in such a manner to ensure the security, quality, liquidity and profitability of the portfolio as a whole. “Under the new regulations, insurers are required to ensure that their assets are diversified and in compliance with the new limits regarding aggregate exposures in individual asset classes and sub-limits for exposures to a single counterparty,” said Sanjay Vig, Managing Director, Alpen Capital

Greater costs

New regulations would help ensure insurance companies in the UAE stay solvent and provide a better regulatory framework for the UAE insurance sector. However, under a more complex regulatory regime, insurers should expect to incur greater costs, and will require additional staff, in order to ensure compliance with the new requirements.

The tighter new regulations may hurt some insurers and drive smaller players out of the market but may help the market overall where the low profitability is becoming a problem for international players in the market. For example, multi-line insurer Zurich has announced it plans to close down its general insurance business by end of 2016.

By Babu Das Augustine Banking Editor

Gulf News 2015. All rights reserved.