By Damian Reilly
Is Oman’s insurance market the fastest maturing in the Middle East?
When Cyclone Gonu came calling in 2007, many of those affected in Oman were not insured. By the time Cyclone Phet arrived last month, this situation had largely been rectified. Is Oman’s insurance market the fastest maturing in the Middle East?
The gulf insurance market is relatively sleepy place, whatever the industry players tell you. A lack of natural disasters means the industry does not have the persecuted feel of those in many other parts of the world; the annual numbers of fires, floods and traffic accidents all conform by and large to the predictions churned out at the start of each year by the industry’s sophisticated software.
Oman then, could easily have been forgiven, in June 2007, for wondering what it had done to deserve the devastation visited upon it by Cyclone Gonu, the biggest tropical cyclone ever to tear through the Arabian Sea.
It was the nation’s worst natural disaster on record, and unsurprisingly caused havoc in the sultanate’s domestic insurance market.
Last month, Oman again was in the path of a cyclone, considerably weaker, but still terrifically damaging. The event has thrust insurance back into the spotlight in a country where so much is already happening, or is on the cusp of happening, in the industry.
Gonu may have been considerably angrier than cyclone Phet, but if those individuals and companies damaged by Phet find they are protected against loss after insuring themselves because of Gonu, then some good has come of bad.
Adil Al Lawaty, Oman country manager for regional insurers Arab Orient Insurance Company, explains: “Phet has had much less effect than Gonu. We are currently estimating total damage of OR300m ($779m). That was the officially announced figure. Gonu cost us OR2bn ($5.19bn). Of that OR300m, though, how much was insured will become clear over the coming weeks.
“In 2007, of the OR2bn ($5.19bn), only OR250m ($649m) was insured. This time, probably the majority of it will be insured, because after Gonu people insured themselves. It is expected that above 50 percent will be insured.”
Cyclone Gonu’s effect wasn’t just to cost Oman enormous sums of money in repairs — in its wake the domestic insurance players ramped up premiums to try to recoup losses, a trend that quickly spread across to other sectors of the market, such as motor insurance. It was a trend that eventually caused the government to intervene.
“What happened after Gonu [was], prices increased. They stayed high for about a year in 2008. The government resisted some of the changes in the premiums, specifically in the motor sector. In 2008, when the financial crisis happened, prices still went up. Motor insurance is about 60 percent of the whole market,” says Al Lawaty.
“In addition to the Gonu effect, and the economic recession, insurance companies doubled and tripled the rates of motor insurance. But the Capital Markets Authority (CMA) which controls the insurance regulations in Oman, did an audit and challenged the insurance companies on the basis of their increases. Some were forced to reduce the premiums to reasonable increases; fifteen percent to twenty percent.
“Now prices are expected to go up after this cyclone, but not too high. Once we know how much of the cost was insured, then every company will do its own analysis and then increase prices,” he says.
Oman’s insurance industry, in the aftermath of the cyclones, made headline in the Gulf, but it is certainly not the region’s largest market. Still, its worth is set to rise steeply should ministers approve proposals currently under consideration to make medical insurance mandatory.
Wayne Jones, a partner at Clyde and Co, says: “This legislation would transform the market in one way or another, and it would follow in the footsteps of Saudi Arabia and Abu Dhabi, which have introduced similar legal requirements. Dubai was supposed to do it of course, but didn’t. Qatar is looking at it, Bahrain is looking at it, too.
“Oman is not the biggest market in the region, but it is quite a balanced market. It suffers from some of the things other jurisdictions here suffer from. Historically it has had a lack of regulation, although I think that is being corrected by the CMA which has quietly been going about its work putting in place policies and procedures.”
Medical insurance laws, should they go through, would only be for expatriates in the country. After all, local people already enjoy free healthcare in the country’s government hospitals. Ministers are deliberating over whether the companies most likely to have to pick up the tab for the insurance will be able to cope.
Al Lawaty says: “The proposal has gone to the board of ministers for signing to make medical insurance compulsory. The discussion going on now is not to make it compulsory for all companies, but to start with big companies, and then roll it out year after year to all companies.
“It will only be for expats, not Omanis. It will be an expense for the companies and the ministers don’t want to make it too heavy. There is a feeling now medical insurance premiums will jump up because it is compulsory, but I am sure the CMA will stop this," he continues.
“Everything is in place, we are just waiting for the approval of the board of ministers. It has been with them for three months, it is expected to be put in place by 2011. The ministers are discussing the consequences of this on the economy. There will definitely be a 50 percent increase on premiums.
“But the ministers are concerned for the companies who will have to buy this insurance. Because international companies in Oman already have insurance. They are worried about the small, mid-sized companies. They are already competing hard with companies in places like India, and this extra cost could make it difficult for them.”
With a million expats in Oman, the industry is salivating at the prospect of being legally obliged to insure them all. Al Lawaty adds that hasty preparations are underway — he says the industry expects the bill to be rubber stamped sooner rather than later.
“Everyone is talking about it and preparing for it. The Ministry of Health is trying to prepare for it, tying up with insurance companies,” he says.
The current global industry trend for mergers and consolidation is unlikely to pass Oman by over the coming months, Jones says. As a market, it compares favourably to others in the region that are less mature, and as such is becoming increasingly attractive to large multinational players.
He says: “Oman is probably one of the more advanced locally-regulated markets, as opposed to a financial centre like the Dubai International Financial Centre and the Qatar Financial Centre. But certainly the CMA... is further ahead than the insurance authority in the UAE. It is a small, self contained market.
“Oman will be subject to the trend we see around the region where we are expecting a certain amount of consolidation in the future, and we also see multinational insurers trying to extend their footprint around the region.”
Regulated, increasing in size, and attracting the attention of multinationals, it would be easy to conclude that all is rosy for Oman’s insurance industry. Cyclones aside, what’s not to like? It’s a suggestion that elicits a rueful chuckle from Al Lawaty, followed by what sounds like sucking of teeth.
He says: “The biggest challenge for the insurance market now is the motor insurance. The loss ratio is doubling and tripling. One of the regulations introduced last year tripled the compensation money for deaths on the roads, per person, from OR5,000 ($12,900) to OR15, 000 ($38,900. And the number of deaths on the road is increasing by 20 to 25 percent every year. Compensations for injuries has also increased.
“Spare parts, inflation, repair, labour costs — all these also increase the loss ratio of insurance, and it is 60 percent of premiums. One of the local insurance companies in 2008 paid out more than OR2m ($5.19m) on motor insurance claims," he continues.
“But they cannot increase the rate as they want, because of regulations. That is a big challenge. At the moment the firms are working to try to educate Omanis about driving. Others are opening their own garages to try to control the cost of accident repairs.”
Al Lawaty says he expects the government will turn its attention to the issues facing motor insurers.
Cyclones may make the news, but as is the case in every insurance market, it’s the small day-to-day claims that make the industry go round. After two cyclones in three years, everyone surely will hope the focus returns to the quotidian.
In any Insurance company Motor business is always a loss portfolio. There should be a product mix in the place to get profit from at least from one trade. At the same time nobody speaks about loss minimization activity or risk management at all. Increase of premium is not a solution but should learn dealing with "moral hazard". I am not very sure about the narrow view of the situation but Insurance companies waiting for the premiums hike is not good sign for the industry. Insurance companies can probably keep an eye on claimable claims and non claimable claims, warranties can decrease claim ratio and imposing loadings, changing conditions case to case etc can increase premium inflow. Probably this is the time entire industry should have brainstorming session.