Despite difficult economic conditions, Oman’s insurers have succeeded in posting consistent net profits in recent years. With the economy recovering from the decline in global oil prices starting at the end of 2014, the industry is well positioned to take advantage of new opportunities. This is especially true as the government moves to implement mandatory health care coverage for both foreign and domestic employees. The sector is not without its challenges, however. Competition in the market remains intense, and in some cases the pursuit of premium has eroded underwriting standards and become a challenge to the long-term sustainability of the sector. Still, increasing awareness of offerings, a growing population, new compulsory lines and ongoing market reforms are combining to give the industry notable momentum.
Oman was slow to develop an insurance industry for both cultural and political reasons; the prohibition against speculation under sharia law and the conservative political climate that existed for much of the 20th century presented a constraint to sector growth. However, this changed in 1970, when Sultan Qaboos bin Said Al Said came to the throne. This ushered in a period of social, economic and political reform that transformed the nation, boosted lifespans, improved education and opened business opportunities. The sultanate’s insurance companies expanded alongside economic growth, initially growing their premium on the back of the hydrocarbons and trade industries, but more recently, they have benefitted from efforts to diversify the economy and the emergence of a lucrative corporate sector – both of which have provided additional opportunities.
According to Omani investment bank Ubhar Capital, the insurance penetration rate stood at 1.63% of GDP in 2017, suggesting there is still considerable potential for expansion. To compare, the average penetration across the GCC was about 2.3% in 2017, according to global ratings agency Standard & Poor’s (S&P), below the emerging market average of at 3.2% and considerably short of the global average of 6.2%.
At the outset of 2018 the market was served by 21 insurance companies, though its GDP – at around $80bn as of October 2018, according to the IMF – makes it one of the smaller economies in the GCC, on par with developing markets like Kenya and Myanmar. Of these 21 firms, 11 are domestic companies, licensed by the Capital Market Authority (CMA), the body tasked with overseeing and regulating insurance activity, while the remaining 10 are classified as international insurers that are permitted access to the domestic market through agents, branch offices and other local service agents. Foreign firms are also overseen by the CMA and must adhere to a number of additional restrictions. The most significant of these is the requirement that all policies covering risks in Oman be issued domestically and that no more than 25% of each insurance policy be reinsured with a national company.
Foreign and domestic insurers operate around 150 branches across the country, the bulk of which are concentrated in the Muscat, Dhofar and North Batinah governorates. Since 2009 Oman has been home to a single domestic reinsurer, Oman Reinsurance (Oman Re), which was established with the aim of increasing the proportion of insurance premium retained in the local economy.
Looking back at the five-year horizon, Oman’s insurance sector has managed to show an aggregate profit each year, despite some challenging conditions. The decline in oil prices resulted in a slowdown in the economy. This period saw the industry’s net profits declining from OR29.3m ($76.1m) in 2013 to OR15.6m ($40.5m) in 2015, according to the CMA Insurance Market Index 2016-17. Profits continued to decline, with 2016 recording a record low of OR8.7m ($22.6m) for the year. However, in 2017 the industry recovered with net profits amounting to OR23.7m ($61.5m) – a result that was largely attributable to increasing oil prices and an improving economic backdrop. Throughout this period, however, direct premium has steadily risen from OR359.9m ($934.7m) in 2013 to OR451.6m ($1.2bn) in 2017.
Looking at underwriting performance, CMA data shows that the loss ratio – the relation between claims and premium – stood at 104% for national insurers in 2017 and 57% for foreign companies. The overall net profit achieved by domestic players, despite technical underwriting losses, is due mostly to their ability to derive profit from their investment activities. The industry’s total proceeds from investments increased by 52% in 2017, to reach OR19.4m ($50.4m) – more than OR12m ($31.2m) of which was generated by national companies. Beyond interest bearing deposits, the sector has also enjoyed particularly strong returns from government and corporate bonds, as well as real estate investments.
Despite the highly fragmented nature of the market, around 60% of total sector premium is claimed each year by the five largest insurers. The largest of these is the National Life and General Insurance Company, which accounted for 25.4% of total direct premium in 2017. The Muscat-based company is particularly strong in the health segment, where in 2016 it accounted for almost 75% of sector premium, according to Ubhar Capital. Other major players in terms of market share are Dhofar Insurance, which comprised 9.9% of total direct premium in 2017, followed by Oman United Insurance (8.5%), Axa Insurance (8.2%), Al Madina (6.6%), Vision Insurance (5.8%), Al Ahlia Insurance (5.6%) and New India Assurance (5.3%), which is the largest foreign player in the market and wholly owned by the government of India. Other notable foreign presences in the industry include American Life Insurance (1.9%), AIG Middle East Insurance (1.7%) and Iran Insurance (0.3%).
The CMA assumed regulatory responsibility for the sector from the Ministry of Commerce and Industry in 2004. As well as day-to-day oversight, the CMA is charged with developing and restructuring the legislative and regulatory framework in ways that support the growth of the sector. To this end it regularly issues new legislative updates, circulars and decisions that directly affect the operations of Oman’s insurance companies.
Its most significant market intervention in recent years was the 2014 amendment to the insurance law, which raised minimum capital requirements for insurance firms from OR5m ($13m) to OR10m ($26m). The effect of this change has been to boost both sector stability and the capacity of individual firms to maintain risk on their books without resorting to reinsurance. The amendment also requires local insurance firms to convert to public joint stock status and carry out an initial public offering on the Muscat Securities Market – a requirement not applied to foreign insurers. Although officials were expecting an era of industry consolidation due to the legislative reforms, most insurers were able to meet the new minimum capital requirements without engaging in mergers.
Despite its relatively late entrance into the market in comparison to the rest of the GCC, the introduction of a takaful (Islamic insurance) segment in 2014 has increased competition in the sector. Domestic takaful gross direct premium grew by 9% in 2017, to reach OR45.8m ($118.9m), accounting for 10.4% of the sector’s gross direct premium and 19% of the gross paid claims, according to the CMA.
The Takaful Insurance Law was approved by the State Council, the sultanate’s upper house, in February 2015 and enacted in March of the following year. This reform brought the sharia-compliant segment in line with the conventional industry, including minimum capital requirements and the necessity of listing on the stock exchange.
Being the last jurisdiction in the region to introduce a distinct regulatory framework for takaful and other Islamic financial services means Oman’s domestic sharia-compliant segment remains one of significant potential. A 2018 report by regional investment firm Alpen Capital showed that the GCC region dominated the global takaful industry, accounting for approximately 77% of the world’s gross written premium in 2015. By comparison, elsewhere in the Gulf takaful often accounts for more than 30% of domestic aggregate premium, suggesting the Omani segment has significant room for expansion, especially if is to gain a larger share of the regional and global markets.
Major players in the takaful segment include Al Madina Takaful and Takaful Oman. The former was founded in 2006 but converted all of its insurance business to takaful in January 2014 as legal regulation stipulates that only dedicated takaful companies may offer sharia-compliant insurance products. In 2017 Al Madina’s gross written premium amounted to OR29.9m ($77.7m), according to the company’s financial reports. Meanwhile, Takaful Oman, a newcomer to the industry has proved to be a useful disrupter of the market as it has set about expanding its customer base. In 2017 gross written premium stood at OR15.8m ($41m).
Retention & Reinsurance
Insurance markets in the GCC are characterised by relatively low retention rates, and Oman is no exception. Until recently, many insurers held modest amounts of capital, which meant that in some cases they were only capable of acting as virtual brokers, passing on risk to global reinsurers. For some larger-scale commercial projects, insurance companies continue to play what is effectively a middleman role, transferring risk to reinsurers, who in effect determine market rates. The internationally accepted retention ratio for premium is 50% or more, according to the CMA. In Oman, the figure for both foreign and domestic firms averaged 57.46% in 2017, up from 56.53% the previous year. National companies retained approximately 55% of their total premium over the year, up from 52% in 2016, while rates at foreign companies, although higher, dropped by 3.87%, from 70.1% to 66.2% over the same period.
It must be noted that retention rates can vary widely by segment, however. Domestic players showed the highest retention levels in automobile, individual life insurance and health provision in 2017, with retention rates of 86.7%, 76.7% and 54.5%, respectively. Areas where premium continue to be ceded to reinsurers include the engineering, marine and property segments, with retention rates of 11.3%, 10.4% and 6.8%, respectively.
Most insurers in Oman maintain treaty arrangements with North American and European reinsurance institutions, although the emerging GCC reinsurance industry is starting to play a more prominent role in the market as regional capacity and expertise develops. Currently, Oman Re is the only domestic firm offering such services, writing facultative and treaty business policies for domestic and international markets.
Looking at the wider sector, much of the industry’s future expansion will be secured by the intermediaries that operate through various channels, where the bulk of new business is channelled. There are nearly 40 licensed insurance brokerages operating in Oman, and in 2017 they collected 27% of total sector premium, for a value of OMR119.8m ($311.1m).
Direct sales play a smaller part in distribution, although Dhofar Insurance and Muscat Insurance have both managed to build their businesses on a predominantly direct sales model by investing in large branch networks. Banks have sold insurance products on behalf of underwriters since 2004, but sales via bank branches largely failed to take off in subsequent years. Because the bancassurance model relies on scale, Oman’s relatively small market size, and the dominance of a relatively low number of lenders in the banking industry, act as checks on expansion in this channel.
However, new tie-ups between banks and insurers continue to be announced. In April 2018 Bank Muscat and Met Life revealed they had struck a 10-year deal to provide a range of insurance solutions to bank customers. In a press release issued at the time Abdul Razalk Ali Issa, former CEO of Bank Muscat, highlighted the prospects of insurance sales over the near term, stating that the domestic market is projected to grow at an annualised rate of 12.1% in the period to 2021, driven by a growing population, ongoing and prospective infrastructure developments, and a revitalisation of business activity.
As is typical in the GCC, the sultanate’s insurance industry is largely powered by general lines. The expansion of life insurance, which in developed markets tends to equal or exceed general insurance as a source of premium, has been hampered by a number of obstacles, including the generous provision of welfare by the state, religious concerns regarding the role of insurance, low insurance awareness and large populations of expatriates who prefer to purchase savings products in their home countries. In Oman, therefore, life insurance accounted for approximately 9% of direct premium in 2017, according to the CMA’s 2017 annual report. Motor insurance was the single-biggest source of direct premium, comprising 36% of the total for the year, followed by health (32%), property (9%), engineering (4%) and marine (3%).
Automobile coverage is one of the most competitive segments in the market, a situation that is exacerbated by the relatively liberal approach taken by the regulator regarding underwriting activity. A lack of risk-based regulation and an absence of stringent actuarial controls means that underwriters have considerable room for manoeuvre when it comes to pricing. While this ability has proved useful for companies wishing to undercut competitors in a bid to gain market share, stakeholders have noted that it potentially undermines both the stability and aggregate profitability of the sector.
However, while pricing remains a key determinant, there are encouraging signs that insurers are increasingly offering better services as a means of securing growth. Al Ahlia Insurance Company, for example, has recently introduced a repair-time guarantee for motor policies, as well as a daily compensation rate for repairs that exceed this period.
Dominated by local firms, medical insurance is one of the most promising segments in the market. A number of factors are expected to help drive future growth, including rising treatment costs and plans to cover all employees, both foreign and local, at private companies. Announced in April 2015, the implementation of mandatory medical coverage for workers has long been anticipated by the domestic industry, but the complexities of setting up systems and linkages between health care providers, insurers and the regulator have caused the plan’s rollout to be postponed.
However, government statements suggest that in 2019 the first stage of the scheme will finally be implemented. In July 2017 the CMA tweeted that a draft plan for mandatory health insurance for expatriates in the private sector was near completion, and in August 2018 Waleed Al Zadjali, the head of the Oman Medical Association, announced to local press that, “Compulsory national health care insurance [would] be introduced from January 2019 if all its requirements are met”.
Following a phased introduction, starting with the expatriate population, Oman is following a model adopted by other jurisdictions throughout the Gulf. In Dubai, for example, authorities oversaw a staggered introduction of mandatory health care coverage for employees between 2014 and 2017, and in 2016 this development was credited with supporting the profits of insurers despite the tough market conditions caused by low oil prices.
While estimates vary, it is thought that around 12.1% of expatriates in Oman are medically insured, leaving around 1.8m uninsured foreigners. The potential inherent in this demographic prompted S&P to forecast a 10% expansion in the nation’s insurance industry for 2018.
A return to profitably in the medical segment would be a welcome development for Oman’s insurers, who in 2016 and 2017 suffered aggregate losses in this area, with a combined loss ratio of over 100%, according to data from S&P. When the scheme is fully implemented, it will likely provide a useful revenue stream for the domestic insurance industry – provided that the pricing scheme established by the authorities is favourable.
Longer-term growth in Oman will be driven by the emergence of an affluent middle class, a growing awareness of the benefits of insurance and the introduction of new products, such as sharia-compliant life insurance offerings. Premium expansion in the short term will be tied to economic developments in the sultanate and domestic insurers have good reason for optimism, with the IMF predicting that in 2019 Oman will have the highest GDP growth rate in the GCC, at an estimated 5%. Forecasts of strong economic growth, combined with Oman’s low insurance penetration rate, have resulted in a positive outlook for the industry.
However, challenges remain. The implementation of a nationwide value-added tax (VAT) in 2019 is likely to negatively affect the margins of some insurers, especially those with high numbers of individual retail policies, which require a significant amount of taxable administrative work. Life insurers using brokers to distribute their product, for example, are also likely to face increased costs, as brokers’ commissions are subject to the new VAT regime.
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