industry braces itself for tougher times ahead - … · industry braces itself for tougher times...

28 November 2013 www.meinsurancereview.com

Country profile – Jordan

Industry braces itself for tougher times ahead

Urgent reforms are needed to keep Jordan’s insurance market, already suffering from losses, from slipping into chaos. The overall socio-political situation – including regulatory uncertainty – is creating further challenges, and players are seeking to weather the storm at this critical stage.

By Osama Noor



Jarash, Jordan

Jordan.indd 28 21/10/2013 16:18:10

www.meinsurancereview.com November 2013 29


ordan’s tough economic situation along with the overall uncertainty on the political front in recent times have added to the problems facing the

insurance industry. Arab Spring symptoms, including demonstrations calling for policy reforms, have

persisted for the past three years. The government has responded by taking measures to cut public spending, including the decision to scrap several independent agencies, such as the Insurance Commission (IC).

Floating the motor TPL tariff is believed to have been deferred more than once for the same reason as the government is probably unwilling to raise public discontent by liberalising motor TPL prices.

The market continues to struggle with the same issues, and there are no signs that these will be resolved in the short run, noted Mr Imad Abdel Khaleq, Managing Director of Jordan Insurance Co (JIC). “Market GWP increased by only 2% year-on-year until the end of August 2013, a notable drop from previous years’ growth rates.”

In 2012, seven operators reported losses, while the f inancial standings of others worsened this year, pointed out Mr Isam Abdelkhaliq, CEO of Arab Orient Insurance Co (AOIC). “These seven companies should exit the market. It is unlikely that they can recover after losing their credibility and image.

Besides, most of them already had their second chance and failed.”

The collapse of an insurer affects the rest of the market, said Dr Ali Al Wazani, CEO of First Insurance Co (FIC). “Insurers have mutual financial transactions and are unlikely to recover the debts from collapsed players. Also, reinsurers will be cautious when dealing with the market.”

Exit sooner rather than laterHowever, troubled companies which have no option but to exit should leave at the proper time to limit damages instead of causing more troubles to all parties, noted Dr Al Wazani. “I expect more companies to be forced to exit the sector every year in the coming five to six years. The sooner this happens, the better, to limit damages.”

Special attention should be given to liability covers as the third party is the one who incurs losses and has no say in which insurer is covering him. “It is not af fecting the policyholder as much as the third parties,” he said.

Over the past 20 years, an insurer has been collapsing every three to five years, said Mr Isam. “This shows that the whole system needs to be reconsidered. One of the troubled companies used to be among the market’s top

five income generators.”Plans by the IC to strengthen solvency margin

requirements could indirectly force insurers to raise their capitalisation or exit the market. “And this could be a solution to avoid the socio-political ramifications at the current phase,” he added.

Dr Al Wazani supports doubling the solvency margin to 300%, but said a clear action plan for violations should be laid out. “So far, violations have been handled on a case-by-case basis, and intervention comes rather late. One of the operators had a less than 150% solvency margin ratio for four years before being suspended. Presently, many of the market operators fail to meet this standard, but continue to write business. The IC should take firm action against the violating companies, otherwise we will continue to see companies collapsing.”

Unsettled regulatory statusThe IC’s status has been uncertain for more than two years, and this is believed to have affected its overall stability and performance. Last year, the government announced its plan to scrap the IC, along with several other independent governmental bodies, to improve the state’s performance and cut public spending. Later, the plan was changed to merge the IC with the Ministry of Industry and Trade.

This uncertainty is putting the IC in a tough situation, and adds to the pressure caused by the overall socio-political conditions, said Mr Isam. “But the IC should not succumb as it has to fulfil its mission in preserving the soundness of the sector. It should not seek to satisfy the public opinion at the expense of making the right decision.”

Still, the present market status questions the validity of the whole system, including the IC’s methodology, he pointed out. “Though it has been operating for over 10 years, the market remains oversaturated with several weak insurers, there is no insurance institute or earthquake pool, and the motor TPL issue remains unresolved. All

Mr Imad Abdel Khaleq

Mr Isam Abdelkhaliq

Dr Ali Al Wazani



Figures in JOD million

2008 2009 2010 2011 2012

Total investments 479.6 484.6 473.9 453.8 488.6

Total assets 678.0 695.5 718.7 719 746

Shareholders’ equity 355.4 359.1 353.6 314.8 306.4

Gross written premiums 333.0 365.2 408.6 432.1 466.5

Paid claims 219 263 282.1 339.5 335

Net profit before tax 22.6 7.3 15.9 -8.6 5.6

Solvency margin (%) 311.8 293.5 280.9 223.2 233.5

Loss ratio (general lines)(%) 82.9 89.0 85.4 95.8 96.6

Source: IC

Insurance sector development

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this in a sector which dates back to almost 80 years. Inter vention is needed before it is too late.”

Changing market landscapeThe number of licensed operators has dropped to 27, after Gerassa Insurance exited the market at the beginning of this year. Another two insurers – Arab German Insurance and Al Barakah Takaful – have had their licences suspended for over a year now. Both operators are now undergoing restructuring to correct their financial positions.

D e s p i t e t h e s e developments, the quality of business is questionable, said Mr Imad. “Our market share is not expected to grow notably though the number of players has dropped. This is because the quality of the suspended companies’ business is not rewarding. Actually, that was the reason behind their failure in the first place, as their business was highly concentrated in motor.

“We can easily double the size of our GWP if we are targetting volume, but that comes with a costly bill. We prefer to concentrate on the bottom line.”

Prohibitive capital requirementsAnother unresolved issue is the size of capital, which should be commensurate with written premiums, opined Dr Al Wazani. “In general, the sector’s GWP is not proportionate with market capitalisation. This is obvious in the life segment where premiums stand at

around JOD40 million (US$56.5 million), and hinders investors from injecting the minimum capital of JOD25 million to establish a new life operation.”

Mr Isam added: “AOIC has over JOD20 million in capital, the largest GWP and is affiliated with a bank, but still has to invest JOD25 million to obtain the life licence. Yet, some composite players do not even use their life licences.”

Another negative impact is that the high capital requirement makes returns look scanty regardless of their size, added Dr Al Wazani. “Returns on capital – along with shareholders’ equity – hover around 1%, which pushes investors away.”

M&As opportunities are few in Jordan, said Mr Isam. “There are few acquisitions available for those interested in entering the life market and don’t wish to pump in large capital. We will consider this option if the price is right. Otherwise, serious investors would prefer a new setup.”

The IC should provide incentives to encourage M&As, such as tax incentives, said Mr Imad. “This should

be considered to help smaller players merge to create stronger insurance entities.”

Operators share responsibility tooCompanies’ management have a responsibility as well, said Mr Isam. “The people in charge should meet certain qualifications to protect the profession.”

“Manag ement s a r e cutting back mainly from investing in human capital, research and development du e t o p r o f i t a b i l i t y constraints,” added Dr Al Wazani.

Management shapes companie s ’ s t r ate g ie s and goals regardless of regulatory constraints, said

Mr Imad. “For instance, we are keen on preserving our high standards and rating, and this requires the support of the Board and management in preserving sound underwriting policies and not to pursue short-term returns. Unfortunately, this is rarely followed in our markets.”

This sector needs only 10 strong providers, noted Mr Isam. “To change public perception, the law must force insurers to branch out as currently only around five operators have branches. People trust banks more because they see them everywhere.”

New challengesA variety of factors have been influencing Jordan’s demographic and socioeconomic map over the past couple of years. Among them is the Syrian crisis, which has led to Jordan’s population increasing by about one

Figures in JOD

1H 2013 1H 2012

Total investments 479,295,683 488,638,164

Total assets 773,218,881 764,049,154

Technical reserves 311,708,517 292,979,279

Paid-up capital 295,686,430 294,375,680

Shareholders’ equity 309,520,235 306,394,852

Technical profits 11,951,924 5,571,108

Investment income 11,493,378 9,087,891

Net profit 10,532,028 4,423,706

Source: IC

Financial indicators

“Our market share is not expected

to grow notably though the

number of players has dropped.

This is because the quality of the

suspended companies’ business is

not rewarding. Actually, that was

the reason behind their failure in

the first place, as their business was

highly concentrated in motor.”Mr Imad Abdel Khaleq,

Managing Director, Jordan Insurance Co

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compared to less than 5% five years ago, noted Dr Al Wazani. “Takaful operators are growing at a faster pace

compared to other insurers. It has to do with the quality of services as our strategy is based on providing quality ser v ice s to a l l marke t segments. And this is what has differentiated us. After all, being a good provider serves the image of takaful.”

Jordan has two takaful providers, Islamic Insurance Co, established in 1996, and FIC, the country’s newest operator, licensed in 2007. Both are among the five largest insurers in terms of premium income. Takaful market contributions in 2012 reached JOD40 million, up from JOD30 million in the preceding year, a 33% increase compared to the

overall market growth of 7.5%.

Expectations for 2013 It is not going to be a good year for the market, even though the demand for insurance is increasing, especially for political violence covers, said Dr Al Wazani. “There will be a few winners in the market, but these are not considered so when compared to other sectors. We ought to compare ourselves with other financial institutions, like banks.”

The market growth in the first half of 2013 did not exceed 2.5% and is the lowest since 1999, he said. “In addition, in 2012, the market’s loss ratio was the highest in 10 years. Last year was also the lowest in premium growth and the highest in paid claims. This will be reflected in the market loss ratio.”

Growth is not expected to be achieved f rom introducing new products or services this year, said Mr Isam. “Besides, the prices of new business or renewals have been slashed because of negotiations, and intermediaries are also squeezing the rates. The

million since 2011.Linked to this is the challenge in premium collection,

forcing companies to limit their credit facilities by preferring cash to instalments, said Dr Al Wazani. “It has to do with the demographic changes in terms of the increased population which has driven prices and unemployment up, and affected the economy in general.”

Another challenge is the increase of fraudulent claims in general lines. “This used to be confined to motor and medical, but is now extending to other lines,” he added.

Moral hazard is increasing for general lines, added Mr Isam, attributing this mainly to the lack of proper risk management, especially for large accounts.

Intermediaries are also intensifying competition, said Mr Imad. “They are cutting prices and expanding coverage. And they get commissions, which further affect profits.”

Lamenting the sharp drop in prices, he said: “Life, medical and personal lines have satisfactory results, but general lines, which used to be prof itable, are achieving slimmer returns and being sold at unprecedented rates.”

He warned that medical insurance – the second largest line after motor – is a ticking time bomb. “The costs of medication and hospitalisation are increasing, claims are rising and the price of medical insurance is decreasing. For us, we are firm when it comes to medical prices and have in place our reserves, but the market prices are decreasing. It is going to be harmful for companies which have no control, diligent management and TPA.”

Takaful outperforming conventionalTakaful is gaining ground in Jordan as its contributions currently account for around 10% of the market GWP

1H 2013(JOD’000)

1H 2012(JOD’000)

Growth (%)

Non-life 153,808 150,333 2.3

Medical 73,949 70,060 5.6

Life 25,751 24,178 6.5

Total GWP 253,508 244,572 3.7

Paid claims 159,318 174,186 -8.5

Source: Jordan Insurance Federation (JOIF)

Company Gross premium

(JOD’000) Market

share (%)

Arab Orient Insurance 41,904 16.63

Jordan Insurance 25,697 10.14

Middle East Insurance 18,641 7.35

First Insurance 12,429 4.85

Islamic Insurance 12,288 4.85

Source: Jordan Insurance Federation (JOIF)

Top 5 players – 1H 2013

Market GWP and claims

“The prices of new business or

renewals have been slashed because

of negotiations, and intermediaries

are also squeezing the rates. The

socio-economic situation is forcing

insurers to respond to that pressure

and reduce the rates sometimes.

This year’s market growth will not

be higher than 5%.”– Mr Isam Abdelkhaliq,

CEO, Arab Orient Insurance Co

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The future could still be promisingThe coming year might see the situation change for the better if certain conditions are met, said Mr Isam. “Firstly, the motor TPL issue needs to be resolved by floating rates in any form. Secondly, increasing the solvency margin ratio should force insurers to increase capital and push

underperformers to exit the market. Thirdly, M&As will be good for the market.”

He added that the economic situation could improve once the Syrian issue is resolved. “This will benefit Jordan as it will be the gateway to rebuilding Syria. On a positive note, foreign direct investments are coming back slowly but surely; solar and nuclear energy as well as sewerage and road projects are in the pipeline.”

Mr Isam a l so hope s f or government intervention to boost the market. “I am optimistic

that the government will intervene by taking the right decisions and coming up with a roadmap for successful players to grow the sector, which is an indispensable pillar in securing Jordan’s economy.”

socio-economic situation is forcing insurers to respond to that pressure and reduce the rates sometimes. This year’s market growth will not be higher than 5%.”

2013 is not going to be promising, said Mr Imad. “We are monitoring the motor results; it is almost impossible to make profits from this line. Prudent companies are setting aside larger reserves to deal with its possible adverse ef fects, which puts an extra burden on their balance sheets.

“We have security in other areas such as real estate and deposits, but the core business is what matters. Premiums are increasing but profits are not improving despite the tight control over cost and expenses.”

Moreover, investment returns are worsening. “Investment returns used to make up for the drop in technical results, but both are retreating these days. We hope to make up for this through our overseas expansion.”

The priority now is to protect the business and maintain the bottom line rather than to increase profits, he added.

“I expect more companies

to be forced to exit the

sector every year in the

coming five to six years. The

sooner this happens, the

better, to limit damages.”Dr Ali Al Wazani, CEO,

First Insurance Co

Mark Your Diary

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Organised by:

14th Asia CEO Insurance Summit18-19 February 2014, Jakarta, Indonesia

Theme: “Getting Ready to Tap the Huge Potential in Asean Economic Community” Doing Insurance Business in an Integrating Market

Jordan.indd 32 22/10/2013 15:06:22

industry braces itself for tougher times ahead - … · industry braces itself for tougher times...

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