LONDON — The challenges faced by insurers in the United Arab Emirates (UAE) in relation to insurance debtors can apply additional pressure on already distressed technical margins, according to a new report by AM Best.
In the Best’s Special Report, titled, “Cash Collection Remains Problematic for Insurers in the United Arab Emirates,” AM Best notes that while average insurance debtor days for listed UAE-national insurers has showed an improving trend, they were well above the average for the Middle East and North Africa (MENA) region.
Salman Siddiqui, associate director, analytics, said: “Insurers often point to a different payment culture in the MENA region, with outstanding amounts always being delayed but ultimately fully recoverable. However, this issue appears exacerbated in the UAE compared with other MENA countries. Additionally, the ageing of insurance debtors in the UAE continues to present a concern.”
The report adds balances due from other insurers in the market is a material component of insurance debtors for the UAE market.
Mahesh Mistry, senior director, analytics, said: “The root cause of poor cash collection from other insurers in the UAE stems from the lack of a marketwide, regulatory-enforced mechanism to reconcile subrogation accounts between parties. This results in disputes between companies regarding the correct amounts owed to each other, and can result in delays of up to three years in receiving funds. Furthermore, given the insufficient level of communication between companies, there is significant uncertainty around the recoverability of these balances.”
AM Best notes the UAE, however, is not the only market that has suffered from a culture of poor payments. A number of African countries have historically demonstrated a track record of poor cash collection. Action by regulators in implementing “no premium, no cover” (NPNC) regimes have materially altered cash collection dynamics. For example, debtor days in Nigeria decreased materially after companies began implementing NPNC rules in 2012.
The report states that despite issues in cash collection, overall liquidity in the UAE remains reasonable, with companies maintaining sufficient cash balances to cover net liabilities. However, failure to clear debtor balances has caused a number of companies to take significant bad debt provisions. AM Best expects the implementation of IFRS 9 is likely to lead to further write-offs that would impact capitalisation levels.
To access a complimentary copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=282009.
Source: AM Best.