National insurance takes a blow in the UAE

As compared to the performance of the insurance market in the United Arab Emirates (UAE) in 2014, the results of 2015 have been disappointing. According to preliminary disclosures of national insurers listed on the Abu Dhabi Securities Exchange and Dubai Financial Market (DFM), there has been a marked deterioration in operating performance, resulting in losses. Despite that, however, the UAE remains an attractive market, with a growth in premium revenue of 7.4 per cent during 2015. The market is also highly competitive with national, regional and international insurers in the fray.

As per the data, the aggregate results for 2015 indicate a market loss of approximately AED 106 million (USD 29 million) compared to a healthy profit of AED 859 million (USD 234 million) in 2014. Of the 29 listed insurers, 20 have recorded weaker operating results than in 2014 and 13 reported a net loss for 2015. However, the bulk of the market loss was generated by three companies: Islamic Arab Insurance Company (Salama), Abu Dhabi National Insurance Company (ADNIC) and Al Sagr National Insurance Company (Al Sagr), which between them recorded operating losses of AED 648 million. The performance for the market during the year translated into a poor return on equity of minus 0.7 per cent.

Given the situation, some insurers have adopted prudent strategies to maintain their market profile in challenging market conditions, and have demonstrated strong underwriting discipline to produce sound operating results. As per the market review of Best’s Briefing, the downturn is due to three key factors: a deterioration in underwriting performance due to intense price competition, weakened investment performance due to the effect of the decline in oil prices on equity markets, and reserving requirements as prescribed by the Insurance Authority (IA), the UAE insurance regulator.

The UAE market is intensively competitive, with a large number of insurance companies targeting a limited pool of premium. There are approximately 60 insurers operating in the UAE, including regional and international companies, and many of them are keen to gain market share and improve their economies of scale through growth. As such, many insurers are still chasing topline growth over profitability. This has led to declines in pricing, particularly on key lines such as motor, medical and property, often to levels below the technical price. As a result, loss ratios have risen sharply in recent years, leading to underwriting losses or slim profit margins on the core segments.

According to the study, most national insurers are highly dependent on inward commission income from high-value risks to offset the weak and deteriorating performance of their motor and medical portfolios. In 2015, the regulator introduced rules that required local insurers to adopt more robust methods of reserving. These regulations require actuarial-led reserve setting in contrast to the approaches previously prevalent in the market. Additionally, the regulator introduced updated requirements for unexpired risk reserve, incurred but not reported (IBNR) claims and premium deficiency reserves (PDR). The regulator has also mandated certification by an IA-approved actuary. The reserve strengthening experienced during 2015 is reflective of the under-reserving of business written during both 2015 and prior years, primarily on motor and medical business lines, which have higher premium retentions in the market.

Expectations for 2016

According to A.M. Best’s Briefing, the underwriting environment will remain fiercely competitive. Until there is market consolidation, insurers exiting the market or an improved level of underwriting discipline, a significant increase in pricing seems unlikely. UAE insurers maintain relatively aggressive investment portfolios, which will continue to result in volatile investment performance, affecting both operating performance and balance-sheet strength. Capital buffers have reduced as a result of 2015 performance. With the inherent volatility in asset prices any further deterioration may have a negative impact on balance-sheet strength for some insurers.

The study views the increase in technical reserves as a ‘one-time item’, assuming that insurers’ actuaries have access to reliable data and have followed the regulator’s guidelines on estimation of reserves. However, there is still some variation in the adoption of new reserving practices, particularly as companies are inconsistent in holding premium deficiency reserves. Meanwhile, further reserve strengthening remains possible, particularly if underpricing continues.

Source: A.M. Best Company, Inc.