Insurance returns to growth path Rising competition and narrowing margins remain hurdles to fledgling recovery

Posted on ذو الحجة 10, 1432

Dubai: There is a fledgling recovery in job creation and recruitment, more new automobiles are starting to hit the roads, and the health care sector continues to be on a growth curve. By any measure, these three key benchmarks would be enough for the local insurance sector to start feeling bullish about 2011.

But it has not exactly panned out that way. It could be that the very nature of the profession prefers to watch out for risks lurking under what might seem a benign surface. That the local construction sector is yet to stage a full-scale recovery is definitely a concern for insurers, who have historically relied a lot on providing risk cover to projects.

Also, growth in the personal insurance business is growing, but within a narrow range. And it may be some time before growth in this category develops to a size on par with more mature markets, on a per capita basis. Abdul Muttalib Mustafa Al Jaidi, CEO of Oman Insurance Co., the UAE's largest in terms of gross premium written, provides an insight into what's in store for the industry and what that would mean for the company.

GULF NEWS: The informed opinion is that 2010 was a pretty healthy one for the local insurance sector. What do you think?

Abdul Muttalib Mustafa Al JaidI: If you say "healthy", there's still the question — "In what sense?" Volumes as compared to last year are certainly better. Premium-wise growth is there, but happening in the loss making categories such as medical and motor.

The other corporate business is better, but not much. What is worse about the present state of the market is that competition has reached a stage where it's eating into all the margins. That's why it's difficult to maintain the networth of the business.At most of the companies, you can see that their technical reserves are declining compared to last year. That's principally because of the competition on premium rates.

What about your capital? Do you feel it's being used to optimum potential? If you see our capital, it's substantial. The paid-up capital is Dh420 million, which is the highest in the UAE and one of the highest in the Gulf. Shareholders' equity is touching almost Dh1.6 billion. We have enough capital, there is no issue with that. I will not say the need going forward is to use our capital more aggressively, but would prefer to do so wisely. That means using it in ways that are technically sound and in the right lines of business.

Aggressive implies you are looking to have a business irrespective of results, your knowhow and standing. I would like to concentrate on ensuring there's no compromise on services and none on providing added value to the customer. At the end of the day, these are shareholders' funds. I have to get them the returns, and they are expecting dividends. The stakeholders' interests are paramount.

But insurance company stocks are underperforming… There is the declining atmosphere when you are looking for investments that can pay back. However, the insurance sector is one that is still paying good dividends to shareholders. That's an incentive for everybody to hold on to his stake. There are not many alternatives. And those alternatives should be ready and better rewarding. I don't see that.

But countering that is the still weak environment for income from investments. How will your company overcome this? Prudent management requires you have to seek diversification. If you have a decline in one line, there's compensation to be had in another. From our side, we have a most diversified — and balanced — portfolio in the local insurance sector. There's no dependence on one line. Our lines are growing except in construction, which as a sector remains in decline. We are concentrating on other lines, particularly personal, because its penetration in the country is very much below the global average. We have life, the investment schemes, bancassurance, travel, homeowners' insurance — there are so many categories under personal. Lots of potential as well.

But when it comes to investment-linked products, local residents, or a good portion of them, prefer to sign up with global majors. Is that a hurdle for you? It's changing. The economy is changing, the demographic is changing, and that's one of the factors that would influence more growth in investment-linked schemes. It's still a growing category and there's room for many players. Even local insurers.

Would you consider aligning with a global player to better your chances? If there's an opportunity. There are no borders for that. But we have to find the best, the most secure schemes available that would reward our investors with the returns. We have to find a player who has a track record and is well-rated in the market. We have initiated a dialogue with a prospective partner. Within a month's time, we should be ready to announce the details.

Going back to your investments, what will be your priority for 2011? Investments will continue to support the core business. The focus is to rebalance our investment portfolio to be more stable in these volatile times. What we are trying to do now is to bring back a balance between investment income and that derived from the core business. I hope we will achieve such a balance this year. We are not market makers, and a lot of what we hope to achieve rests on the economy and how it performs. Comparatively, we are in a better place, taking into consideration the market situation.

What would you say about the trend towards a greater role for Islamic insurers? When someone says something, he has to at least have a minimum level of responsibility to what he says. I am not against the principle [Islamic insurance]. Those who are fully compliant with Sharia, I have no issues. As an observer, I can say they aren't that many who are compliant in the fullest sense. They have certain violations or compliant on some. It's not 100 per cent Sharia compliant. I see what's happening is these companies are adding another distribution channel, not necessarily adding value for customers.

Is that a concern you intend to raise with the authorities? It's not our job to raise these concerns. The Insurance Authority is there to legislate and monitor the industry.

In the past, you have talked about bancassurance growing to be a major category in itself. Has it happened? In our company, it's growing and contributing to a sizable percentage of the business. We implemented the programme with the proper infrastructure, the needed resources and the experienced people to run it. We are controlling more than 70 per cent of the bancassurance business in the UAE. And we have bancassurance in Oman and Qatar, and not far from now, will have it in Kuwait and Bahrain. Our non-UAE operations are well under 10 per cent of the total business. But we will remain active in the outside markets.

Your early forecasts for 2011? This is going to be the year when the direction in the post-crisis environment will be decided. We should witness a slight improvement in the overall sectoral business. We remain optimistic, but there's a lot of work to be done by all concerned.