Shooting in the dark

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The insurance industry in Oman is marked by a lack of innovation, coordination and cooperation. Everyone is saying the boat is rocking, but there is no concerted effort to steer it clear. A report by Visvas Paul D Karra.

The Sultanate’s insurance industry is on the cusp of change due to the poor performance brought about by losses in the section of the underwriting business namely the motor claims. Incredibly, most insurance companies seem to be caught in a pack mentality and everyone is doing what the other is doing with slight cultural differences depending upon the company and the management. But the type of business that is available in the market and what these companies are doing is fragmented with a mixture of retail, SME segment and commercial risks.

One of the reasons for this is the small size of the market. In India, for example, the population is touching 1.2 billion whereas the whole population of Oman is a little over a three million. The market premium in India excluding life insurance is around $13-14bn with 23 players. But in Oman, the premiums including life, just touch $700mn with the same number of 23 players. Out of this around 40 per cent is in the motor insurance.

Industry experts point out the competition is too intense which means that all hands are in the same pie and the pie does not seem to be getting any bigger, atleast in the near future. To top it, the gains that could be accrued by any company are being literally wiped out by unabated losses in the motor insurance segment. Effectively it means that insurance companies are bleeding away unless some remedial steps are taken.

According to a report by Business Monitor International, Oman will likely remain home to an insurance sector that is small, fragmented and highly competitive. In recent years, retention rates are low, often well below 50 per cent. What is of interest to note is that over the last year or so, motor-related claims have been unacceptably high, notes BMI.

None of the local companies have the benefits of economies neither of scale, nor, with the clear exception of al-Ahlia which is an affiliate of global non-life major RSA Insurance, are any owned by major shareholders that have a clear competence in insurance.

Motor insurance
Motor insurance has become a double-edged sword for almost all the insurance companies in the country. One the one hand, motor business seems to be occupying a fat portion of the books – actually more than 40 per cent of the total premiums – but on the other hand, it is gnawing at the bottom lines of the companies mainly due to high number of claims and the steep costs of the claims.

Says Taher T Al Heraki, managing director and CEO, of Dhofar Insurance, “We have faced problems with the motor insurance but we tried to improve the way we underwrote the business within the regulatory limits. But the number of claims from minor accidents continued to rise and we are working hard to reduce the expenses by controlling the costs of the claims. But 2012 has been much better than 2011 without a doubt.”

However, some costs are beyond the control of the insurers like the costs of the spare parts which is fixed by the car dealers. Another sore point for the insurers is the regulatory clause which stipulates that all new cars which meet with accidents in the first year have to be given to the dealer for repairs.

With the increasing number of road accidents, the legal costs and the blood money have also gone up. “We feel sorry for the increasing number of people who die in road accidents but for us as a company, our main aim is to reduce the claim costs. And I believe that one of the ways to do it is create a system, a data base of insurance claims. A person who has accident claims with one insurer goes to another insurance company the next. But the other company has no history of the earlier claims. So it is important for all concerned parties, which includes the regulator, the police and the insurance companies to come together to stem this leak,” adds Taher.

Hardening of rates
“Hardening of rates is the only way forward for most companies to tide over losses which arise chiefly due to the motor business,” says A R Srinivasan, general manager, Falcon Insurance. In the post 2008-period with the global financial systems in trouble, the easy availability of capital is not there anymore and the pressure on companies to perform is increasing because the investment of returns as expected earlier is not there.

“Perhaps up to the year 2008, all the companies were having investments or the other income which was hiding these kinds of losses. But it is not possible anymore and people will have to look at the core insurance business to start making money. If you have been following the market, most of the insurers have lost the support of major re-insurers as the market has not reacted to have proper technical rating in terms of premium and deductibles,” adds Srinivasan.

It’s one of those situations where if companies continue to make losses, they don’t invest in future growth, innovation and training. If they don’t do that, then the industry retracts. At the same time, the percentages of Omanisation have been increased which requires a lot of investment for salaries, training and development. Then you also talk about building a certain amount of credibility in the local market. And all of that can only be addressed if the market is relatively profitable, which seems uncertain in the present circumstances.

Consolidation of market
Due to the intense competition, market experts opine that the sector should see some consolidation to ensure that everyone stays afloat. But actually it has to be seen how it happens. Because, in the last so many years, except in Bahrain, no mergers have happened between local companies. The merger between Royal Sun Alliance and Al Ahlia Insurance is an exception because it was the merger of one international player with a local company. If the regulator comes with new rules to increase the capital base, that could make companies to think of consolidation as opposed to raising capital.

“Most companies are deeply entrenched in the traditional methods of operations. There is a need to have vision, foresight and innovation. Most companies are thinking on a need-basis as they get comfortable with what they are doing,” says Gautam Datta, CEO, Al Madina Insurance Co.

Even though insurance is all about dealing with uncertainty, the reason why the insurance industry is risk averse is because they want a certain amount of certainty on their balance sheet. “And how do you bring about the certainty, by looking at the risk exposures and how the capital will be exposed,” adds Datta.

Continuing further, Datta says, most companies are looking in the rear-view mirror but we need to look ahead if we have to survive in the future. We have to prepare ourselves in terms of how we need to look at the risks. The public also needs to be educated about the issues and importance of voluntary insurance. The industry is not able to retain its capital and what is retained is not put to good use. And you cannot put it to good use if you don’t have the sufficient skills sets and for this you need to train people, which means the industry has to invest, and to invest the industry needs to make a profit. So it is a Catch-22 situation.”

Raising awareness
According to Srinivasan, the awareness levels about the importance of voluntary insurance was minimal all these days but now the situation is changing. Earlier, it was only the high networth individuals, both expatriates and Omanis who used to buy insurance. But these volumes were very low. In other countries, bancassurance is the main form of insurance where people have life insurance, home insurance and other insurances and then the balance is used for daily expenses. Here it is the reverse. People think of insurance, if anything is left after all expenses.

Slowly there is a cultural shift happening within the local population. Now as husband and wife begin to work and move to the city, they see other things happen and since both are working, they are saving for the child’s education, 10 years down the line. Such personal savings may snowball into a bigger thing ten years down the line. So savings insurance is slowly gaining and along with this, the retail insurance also will gain.

New opportunities
Over the last few years, especially in the last two or three years, the medical insurance business is picking up as more companies take medical insurance for their employees.

AXA Oman, part of AXA Gulf and one of the largest non-life international insurers in the Middle East, has registered phenomenal growth. Primarily, the growth sectors are health and motor insurance. Says, Deepak Kamath, country manager, Oman, “Health and motor insurance are two of the fastest growing sectors for us despite strong competition. In the past, AXA had not been very active in these sectors primarily for two reasons: the insurance premium was considered low which would have resulted in our profits being eroded and secondly we were not fully geared up to provide the high quality service expected by our customers. Today, we have successfully addressed both these issues and continue to work harder to keep our service levels at international standards. I personally do not believe in selling any product unless I am confident that we can deliver the best possible solution and service to our customers at the right price.”

“On health insurance, it was surprising to note that many customers are asking for a very limited cover with very low limits, even as low as RO1,000! This is not the right way forward, which in my opinion should cover the insured against the unexpected and hence, has to be significant. Nowadays, there is a lot more awareness among people on what they need – ranging from better healthcare facilities, more options, higher limits, 24 hours service and much more! As AXA is able to offer all of the above, we have grown significantly on our health insurance,” Kamath adds.

Infrastructure business
Companies like the UAE-based Oman Insurance Company eye the government infrastructure spending for their growth. Spending by the government on airports, roads, railways, fresh water and wastewater purification plants will continue for many years. “But economically, if you look at the industrial sector as such, the growth is slow. For example, in the manufacturing industry, growth is limited. The government is also concerned about this. Even though the drive for spending is there, the growth is slow. For us, as a company, engineering (infrastructure projects) is where we see the immediate growth,” says Niel Brand, country manager for OIC.

One of the reasons why OIC is able to concentrate on the larger businesses is because of the strong capital base provided by its parent company. “We also have strong re-insurance treaties with international RI companies, so we have the capacity,” says Brand. The other growth area for OIC is the facultative business, meaning, if the company underwrites a large project in Oman, the head office will re-insure it with a large re-insurer. However, occasionally the reinsurance or coinsurance is done with local companies with a similar, strong rating. This keeps the insurance in the country itself and it is good for Oman.

Takaful
Takaful is coming to Oman at long last, after almost 22 years of being present in the GCC and one of the first companies to get into this business will be Al Madina Insurance. It is expected that takaful will add depth in the financial industry and activate the industry. Despite criticism, there are many advantages with takaful. Basically, it is based on certain codes of ethics and concept of Sharia. Takaful requires transparency and this requires a high degree of ethics in terms of disclosures which means there is far more information sharing. Datta believes that there is a segment of population for whom this will be catering to their spiritual requirements.

Datta adds that on the whole, the change is positive for the economy and a lot of money will come out as investments. He also disclosed that Al Madina is in the process of getting its takaful license. “Our company was set up with the concept of akaful and we are the only company in the GCC which is converting its full business to Takaful which should provide confidence to investors. We will be in a far better position to declare surpluses provided we get the product pricing right and correct underwriting,” adds Datta while saying they will be able start operating from early next year as a takaful company.

Insurance intermediaries
The insurance intermediaries or commonly known as brokers have begun to play a major role in the insurance industry. And approaching the right kind of intermediary is extremely important for anyone who wants to buy insurance. “When life catches you off guard, you are sometimes left with nothing. This is why we say, get proper advice from a professional insurance intermediary regarding the right type of insurance cover, sum insured, values for insurance, limit of indemnity etc and choose the right insurer and the right insurance for your needs,” says Dr J Retnakumar, CEO, Gargash & Trade Links Insurance Services.

“Individuals, businesses and organisations are exposed to various physical and financial hazards. A professional insurance intermediary will help you understand this and help advise possible measures to counter these impacts with risk management services. Insurance covers and policies evolve continuously. A professional insurance intermediary can help you in getting access to up to date insurance products and services,” he says further.

Gargash & Trade Links is a joint venture between the leading National Chartered Insurance Intermediary, based in Dubai and Tradelinks Group of Oman. Recently the company opened a new branch in Sur and is expected to have a presence in the other major cities of Oman.

Retnakumar says his company has plans to open kiosks in the hypermarkets and thus be closer to customers. The company also has plans to develop a special insurance package for SMEs as well as launch a new health product and another one for the low-income expatriates.


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