UAE insurers face up to a new market dynamics

There’s no denying that the insurance industry, here in the region and internationally, is going through a period of examination. The large number of competitors entering the market, the pressure on pricing and margins, the systemic risks created by mispricing and the tectonic shifts in the global economy are all factors that have impeded the growth of insurers over the past two years.

In the UAE, we have had our fair share of realignment to these new market dynamics and will have to continue being vigilant to stay profitable and resilient. The first signs of stress emerged with fiercely competitive markets for high-volume medical and motor lines resulting in mispricing of certain risks. This was further compounded by the oil market volatility of last year. Nonetheless, it is fair to say now that there is reason for cautious optimism.

Despite slower economic growth and increased price competition, the new insurance regulations have brought much-needed financial discipline to the sector. Some companies have proactively focused on selective underwriting amid tough market conditions, enabling a departure from legacy underwriting practices, which have been an industry norm.

Product innovation has emerged as a key focus for the sector as a means to explore untapped segments of the market. All these factors indicate that the green shoots of growth are not far off.

However, key challenges remain as the industry seeks to regain growth momentum this year and beyond.

As the insurance landscape becomes increasingly competitive, there is growing concern around mispricing of risks.

One example is pricing for consumer lines, such as motor and medical insurance, which has been subject to intense undercutting for the past few years and that has negatively affected the performance of many companies.

As regulatory changes come into effect, it is likely to stabilise pricing pressure and impart better claims control for these product lines. Regulations for implementing mandatory insurance in some markets will also help to regain the growth curve in this area. Adnic, for example, has implemented a revised strategy based on selective underwriting and fair pricing for medical and motor policies and is getting some positive results.

Looking at commercial lines of business, especially within the construction, energy, marine and engineering sectors, underwriters are facing some clear challenges. These sectors have traditionally formed the bedrock of commercial underwriting in the region.

However, given the growing number of insurance providers, there is risk of excess capacity servicing sectors that are unlikely to experience high growth this year, thereby restricting bottomline growth for insurers.

Moreover, the increasingly complex nature of clients’ business exposure is making the process of risk analysis more difficult, as risk assessment techniques need more time to adapt to changes in business fundamentals. Technological advancement, climate change and uncertain political and economic conditions are among other key factors making risk assessment and pricing more complex in these lines of business.

On the bright side, changing market dynamics come with new risks, which corporate clients would like to leverage while keeping associated costs at acceptable levels. To achieve this, clients demand insurance partners that are able to not only manage their risks effectively and efficiently but also have the resources and expertise to develop appropriate solutions that allow them to optimise business opportunities.

This demand for increased expertise and adaptability is likely to give rise to unique differentiators among insurers. We are now seeing corporate clients recognise the importance of developing long-standing relationships with insurance partners, who are reliable and have an unsullied track record of offering superior service in terms of underwriting, claims and documentation.

Considering the current period of slow economic growth, most customers expect reduction in premiums, wide coverages and increased limits. While these expectations are challenging to meet, some underwriters are able to work more closely with clients to reduce their risks through additional services such as periodic risk inspections and recommendation of suitable risk management techniques.

This not only improves the overall performance of risk management for clients but also allows insurers to share resulting benefits with customers in terms of pricing, profit sharing, etc.

Insurers that are able to show such adaptability and breadth of expertise are likely to extract the best market share over the next few years.

Operational adaptability and underwriting discipline apart, there are also some silver linings on the product front.

There are few insurers currently capable of investing in product innovation given high margin pressure. Consequently, non-conventional products are under less competitive pressure and have the potential to offer significant market share.

Credit insurance and cyber liability are examples of non-conventional products that could offer stable returns over the next few years. In fact, cyber risk is an increasingly relevant phenomenon in the region requiring corporates to be insured. It is a typical example of changing market dynamics creating new risks and thereby new opportunities for product innovation.

Apart from cyber-liability, other lines that can be expected to grow are sabotage and terrorism and political violence covers, due to the uncertain political and economic situation in some markets within the region.

A few years ago, most insurers were hesitant to commit to 12-month policies covering such risk given the political volatility and high level of uncertainty involved. However, we are now seeing some underwriters willing to consider these risks due to the inherent high-risk, high-reward nature of the situation. The feasibility of these products for clients will of course need to be carefully considered by the industry at large.

These are the themes on which I base my cautious optimism for the future. Clearly, as in every economic cycle, there will be winners and losers. Some companies will be able to adapt and leverage opportunities better than others. The insurance sector in the region is at a crossroads; the strategic decisions we make today will shape the industry landscape for the next decade.

Ahmad Idris is chief executive of Abu Dhabi National Insurance Company.

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