Facing an economic slowdown and a fragmented operating environment, Abu Dhabi insurers will continue to implement new industry regulations in 2017.
The federal regulatory body, the Insurance Authority (IA), has been incorporating new legislation finalized early in 2015 in an effort to streamline the sector and create stability in the market. The move came after a period of poor pricing and high competition that hindered industry performance.
With aggregate profits improving in 2016, insurers will now look to the next phases of implementation, targeting solvency margins and investment allocations, as financial services in the broader region continue to mature.
New requirements for financial reporting, solvency and asset allocations were first signed into law in early 2015, having remained in the draft phase for several years.
The first phase of implementation – which saw full compliance by the beginning of 2016 – required companies to appoint an external auditor, an actuary and a regulatory compliance officer, while also establishing an internal audit department.
The IA’s eForm is the foundation of the improved financial reporting required from insurance firms, who use it to declare their financial performance and business activities to the regulator on a quarterly basis.
In May the IA then issued a board of director’s resolution concerning pricing policy, requiring insurance companies to explain the principles and rules adopted in setting prices, and mandating they review this policy twice every fiscal year. It also outlined the minimum requirements of actuarial reviews submitted to the IA.
“These moves were prompted by the realization that companies across the industry were not performing well, with the main reasons being poor pricing and the way many were approaching underwriting,” Ahmad Idris, CEO of Abu Dhabi National Insurance Company, told OBG. “Most firms participated in price wars, so the authority’s measures ensure pricing is now based on actuarial analysis, a proper assessment of risk and reporting that is built on templates.”
Having completed phase one, companies are now looking to the next round of regulatory adoption.
Among changes announced in the way assets are allocated, insurers can now invest in real estate and equity instruments at no more than 30%, and no more than 20% in non-UAE equity instruments. However, 100% may be invested in UAE government debt securities, while for all other classes compliance was required by the end of 2016. Property allocations and full compliance with solvency margins will take effect in 2018.
UAE insurers have often relied on investment income to support operations given diminishing profit margins from policy business. New regulations aim to rein in exposure to specific asset classes.
“We believe that compliance with such regulations, which are risk-based, represents an opportunity for insurance companies regardless of their size,” Ebrahim Al Zaabi, director general of the IA, told OBG. “They are a step further towards excellence and international standards.”
With 61 insurers operating across the federation and with gross written premiums (GWPs) totaling approximately $10bn, according to the IA, many UAE-watchers consider mergers to be a necessity.
It is expected that in the medium term, new financial obligations will require firms to consolidate operations in order to meet capital requirements, expand their investment base and improve service offerings to customers.
In the meantime, the IA continues to encourage mergers between small and medium-sized enterprises to create stronger financial entities and overcome many legacy ownership issues that have prohibited such moves in the past.
In the first six months of 2016, net profits of listed insurers grew to $156m, a 118% rise year-on-year. Likewise, GWPs increased 9% over the same period in 2015, signaling a modest recovery.
Industry players also remain optimistic about the future. “Penetration remains low by global standards with lots of room for improvement,” Idris told OBG. “Furthermore, the performance of classes like medical and motor are improving, helping counteract the slowdown being experienced by others.”
However, in October, ratings agency Standard & Poor’s highlighted that regulatory changes can create uncertainty, stating that “any material strengthening in provisions could undo the improvements in profitability we have seen in the first half of 2016”.
Oxford Business Group