Insurers expect earnings recovery on premium hike

(MENAFN- Khaleej Times) Competition drove down prices for medical and motor claims

Dubai — The UAE listed insurer market which posted its worst-ever underwriting performance in 2014 is poised for a major recovery in overall earnings with insurers raising prices Standard & Poor’s Ratings Services said on Tuesday.

In 2014 the insurance market suffered a setback mainly as a result of “fierce competition” that drove down premiums in medical and motor insurance. However “the positive economic outlook for the UAE is likely to expand the insurance market in 2015 and we believe overall earnings will recover by year-end as insurers raise prices” S&P said.

“Insurers have become more sensible with their pricing now and trying not to be dragged into reckless competition. As a result they have hiked premiums — in motor insurance by 15 to 20 per cent and in medical sector on a selective basis” an insurance industry executive told Khaleej Times.

Another positive development is the new insurance regulations. With the UAE Insurance Authority implementing a raft of new regulations for Islamic and conventional insurers in February a further consolidation in the industry is widely expected.

As most analysts expect the new rules which have been under review for almost three years are expected to be a game changer for the overcrowded insurance sector which has sometimes relied on income from investments rather than policies where fierce competition has eroded profit margins into negative territory. As per the new rules insurers must invest no more than 30 per cent in equity instruments of UAE companies and a maximum of 10 per cent per single stock fund or instrument.

“The disappointing market earnings of 2014 do not lead us to view the UAE market as less creditworthy but our view could change if earnings continue to be weak combined with fallout from new insurance laws passed this year and some consolidation in this overcrowded market” the ratings agency said in a report titled ‘UAE Listed Insurers Are Digging Out From Worst-Ever Underwriting Earnings’.

“Despite the highly competitive market insurers had held onto their balance sheet strength and investment returns and return on equity are weaker but acceptable” said S&P credit analyst Kevin Willis. “Underwriting earnings were however clearly worse than we had expected.”

The balance sheets remained solid indicating strong overall capital adequacy though varying from insurer to insurer.

For the first time in many years the 29 listed insurers as a whole showed a net underwriting deficit with an aggregate combined ratio of 102 per cent (versus 97 per cent for 2013) and return on equity of 5.6 per cent (versus 10 per cent). (A combined ratio over 100 per cent represents a loss and under 100 per cent a profit as it measures claims and expenses to premium income.)

“The main reason why 2014 earnings sagged was the fiercely competitive market for high-volume medical and motor lines. We believe that insurers will stop reducing prices in these lines of business which should help earnings start to recover by end-2015” said Willis.

Of the 29 insurers 12 reported combined ratios of more than 100 per cent of which six were conventional and six were takaful. Of those 12 companies in deficit at the underwriting level 11 were also in deficit in 2013.

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