Interview: Ali Abduladheem Al Lawati

From the private sector’s view, what are the most influential changes under the new insurance law from the Capital Market Authority (CMA)?

ALI ABDULADHEEM AL LAWATI: There are a few important reforms to the insurance sector that the CMA has recently implemented. The first is increasing the minimum capital of insurance firms to OR10m ($25.9m). The implications of this change will vary from company to company. The bigger the capital, the greater the liability and the need to service the capital.

Companies that do not have a high retention rate will have to look at ways to service their existing capital. From the perspective of the CMA, a minimum of OR10m ($25.9m) is required to build a strong financial institute; however, this requirement will not be applicable to branches of foreign firms in Oman.

The other change that was proposed in the new law is for all insurance firms to be listed on the exchange through an initial public offering. Some international firms do not feel this model is very successful in all markets, so we expect some resistance to this. As of now all companies will have a grace period of three years to fulfil these requirements, so the coming years will be interesting.

How might the consolidation of firms raise the overall capacity of the insurance sector in Oman and stimulate its appetite for higher risk?

AL LAWATI: When the capital requirements were first increased to OR5m ($13m), we thought there would be consolidations within the sector – now we are expecting consolidations at OR10m ($25.9m). There were talks of mergers in the past, but nothing materialised, so I do not have reason to believe that the capital requirements are the only thing that will force consolidation. Even if two insurers merge, it does not mean that the new firm will be better or stronger. Indeed, the way the company is governed, the policies for reinsurance and retention, and the management of risk must all be changed in order to make a difference. If a company is retaining 40-50% of its risk, it will not automatically jump to 80% because it has more capital; business will continue as usual.

It is fair to say that in Oman the nature of risks are often too big for local companies to cover, so there are limitations to the market’s ability to retain the risks of mega-projects that require a lot of resources and capital. Regardless of the underwriting and technical abilities of a company, the nature of these risks forces insurance companies to cede them out. For example, infrastructure projects like roads are considerable risks. In these cases, it may not be good risk management for insurance companies to retain them. Small to medium risks can be retained while larger risks may need to be reinsured. The end game is to choose the appropriate level of risk retention.

What is the nature of the relationship between the demand for medical insurance solutions and the rising cost of health care in the country?

AL LAWATI: Medical insurance premiums in Oman increased some 38% between 2012 and 2013, from OR46m ($119.1m) to more than OR63m ($163.1m) in one year, which is a substantial jump; however, the retention rate has not changed, holding steady at 40%.

If the retention rate continues to grow at similar levels, then the sector will require fundamental infrastructural enhancements. The insurance sector will not be able to sustain itself if there continues to be such a marked disparity between advanced medical insurance products on the one hand, and out-of-date medical therapies and practices on the other.

Most of the private health care providers in the country were not considering insurance to be a primary revenue stream when they began operations.

With the growth of medical insurance; however, this quickly became a very important source of revenue, so now some health care providers rely heavily on medical insurance. As the capacity of each sector grows, so will their dependence upon each other.