The largest segment of Oman’s insurance sector, auto policies account for two-fifths of premium income. This line of business is arguably the most important one in the sector and has been singled out for extra attention under the effort of government agencies to improve road safety and reduce risk for insurers. This includes more data collection and data sharing, strong oversight of the market as it evolves, and the pursuit of more sophisticated pricing for insurance policies.
Third-party liability coverage is currently the only form of compulsory insurance in Oman and consequently accounts for a significant share of premiums. Insurers tend to retain the risks associated with these premiums to their own account, buying reinsurance in the event of exceptionally large losses.
The government’s efforts come in the midst of rapid growth in car ownership in Oman. Automobile sales touched a record high in 2012, when more than 200,000 vehicles were sold. Another strong year for auto sales is anticipated in 2014. Several factors are pushing this fast pace of growth. One is the government’s commitment to developing the local workforce in both size and buying power. It pledged in 2011 to add an additional 50,000 public sector workers, and is in the process of hiring to meet that goal.
Every Omani now working for government is, in economic terms, another potential consumer who can afford to buy a car for the first time, upgrade, or buy another for a family member. Also in 2011, the government boosted the minimum wage for existing state employees, putting more money in the pockets of workers, leading to the record car sales of 2012. The increase was from OR140 ($363) per month to OR200 ($518). Another major hike to the base pay rate came in the summer of 2013, from OR200 ($518) to OR325 ($842), which is a key reason for the expectations of a repeat performance of sales in 2014.
The growth in the past two years, and that to come in the years ahead, is nothing new, as Oman has seen significant leaps in automobile ownership since at least 2000 – the number of cars jumped by 52.4% from that year to 2009, according to a study by the Department of Mathematics and Statistics of Sultan Qaboos University, which was published in 2012 in the “Journal of Emerging Trends in Economics and Management Sciences”. More than 85,000 vehicles were registered per year during the study period. About 70% of the vehicles on the road as of 2009 were private cars, with commercial traffic accounting for 21%.
For the auto-insurance segment to thrive in this period of rapid growth, particularly with a high number of inexperienced drivers on the road, the challenge will be to foster a reduction in accident rates. Further, insurers require an improved ability to assess risks so as to avoid price wars in which they chase market share at the cost of profitability. Getting to this point will likely require a phased approach, including data collection, developing analytical tools, and helping insurers to use them effectively for risk-based underwriting. Some first steps have already been made, including an increased effort to collect data, such as the 2012 study published by the Sultan Qaboos University researchers. The data show that traffic accidents are the top cause of deaths in hospital as well as of serious injury and disability. As of 2009 the World Health Organisation ranked Oman 57th worldwide in terms of the accident rate and ensuing injuries and deaths. Despite a constant stream of new and inexperienced drivers taking to the streets, however, the risk of accidents fell from 2000 to 2009 by 44%. This may be a result of traffic safety measures, such as enforcing tougher conditions for issuing a licence and more road safety information, education and communication programmes via the media, according to the study.
At the government level, the insurance regulator, the Capital Markets Authority (CMA), has teamed up with the Royal Oman Police (ROP), which is tasked with road safety, to build a database of accidents and infractions. The data date back to 2009 and allow for analysis on a macro level as well as an increased ability for insurers to see driving histories of their customers. As the database grows bigger and covers a longer period of time, insurance companies will have a clearer sense of the risks specific drivers present.
This is a first step toward building the comprehensive client databases seen in developed insurance markets, with extensive data sets and algorithms that help insurers set prices based on risk evaluation. Some of Oman’s market leaders in auto insurance have developed their own software to do this, and created proprietary databases with information on customers, but the CMA’s version will be available to all. Mohammed Taki Al Jamalani, vice-president for insurance operations regulation at the CMA, said the idea would be to make its mandatory for insurers to use the database when setting rates, although they can select and weight criteria within the data sets as they see fit. Until then, the CMA has implemented a system that rewards safe drivers through discounts. Drivers can get a 5% discount on their premiums for every consecutive year without a crash or a ticket, Al Jamalani said. The maximum discount available is for nine years of incident-free driving, implying 45% savings. However, in practice the ROP data only offers five years of history as of 2014.
The CMA in 2013 singled out one particular segment of the motor market for reform: commercial passenger vehicles such as rented cars and taxis. This is typically a higher-risk segment because these vehicles tend to spend more time on the roads than private ones. The regulator found that costs of insurance were rising faster. “Two companies had ended up capturing all the business and prices were going up,” Al Jamalani said. The CMA’s response was to mandate that all insurers dedicate at least 2.5% of their motor business to these types of customers, in hopes of restoring a balance in market share. Insurers argued that meeting the regulation’s minimum would be difficult as customers did not tend to seek bids from most firms, and insurers are typically not in direct contact with them – they instead rely on indirect distribution channels such as brokers and bancassurance. To accommodate the market’s concerns, in June 2013 the CMA halved the level of the requirement to 1.25%. Since then there has been a fall in prices for these policies, from a range of OR180 to OR270 ($466-699) per year to OR90 to OR110 ($233-285), Al Jamalani said.
Another concern among insurers is the cost of auto repairs after claims are made. Individual firms, as well as the Oman Insurance Association, have highlighted the spiralling cost of parts and labour at dealerships as a threat to margins. Oman United Insurance, has developed its own auto-repair facility in an effort to limit exposures to this problem. The facility fixes 2000 vehicles annually, and its gross operational profit rose to OR144,000 ($372,960) in 2011, up 44% from OR100,000 ($259,000) in 2010, according to media reports. The CMA and the Public Authority for Consumer Protection have agreed to monitor prices; insurers have been invited to provide details on the cost of parts to the two bodies, and the latter may develop regulations on pricing, according to the CMA’s 2012 annual report.
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