With increasing demand in a number of segments, the insurance sector has some positive momentum and favourable growth prospects over the medium term. Still, rising claims and costs have been squeezing profits. With 28 providers and no clear market leader competition is fierce in a smaller market of 6m people.

Insurers are focusing on improving technical profits following the poor performance of investments in the stock exchange. The emphasis is firmly on achieving a balanced portfolio with disciplined underwriting. Slow economic growth provides a challenging context with Jordanians experiencing rising costs and stagnant incomes. However, insurers are looking to expand sales to middle-income workers in key segments like life, medical and professional indemnity premiums.

ROBUST FUNDAMENTALS: Results across 2011 were mixed during difficult economic conditions, with gross premiums for the market growing by 7% from JD408.6m ($574m) in 2010 to JD436.7m ($613m) in 2011, according to statistics from the Insurance Commission (IC). Overall, claims rose by 22% from JD282m ($396m) to JD345.2m ($485m). According to the IC, motor insurance was the largest individual category, accounting for 43% of all gross written premiums (GWPs) and worth JD183.8m ($258m) in 2011. Motor insurance claims grew by 19% to JD190.8m ($268m), resulting in a net loss for a number of insurers in this sector. Reflecting the overall economic slow-down and reduction in motor sales, vehicle insurance grew by just 4% year-on-year. Expanding demand for motor premiums had previously driven much of the market’s growth.

Medical insurance accounted for 24.3% of GWPs and was worth JD105.9m ($149m). Premiums rose by 13% while claims grew by 22% and reached JD98.4m ($138m). In response to rising health costs insurers had to raise premiums. The segment is dominated by Arab Orient Insurance Company (AOIC) and Arab German Insurance, together comprising 46% of premiums, with other market leaders including Jordan Insurance Company (JIC). Of sectors considered low-penetration, life insurance premiums grew by 7% to JD40.8m ($57m) and accounted for 9% of all GWPs in 2011, while claims increased by 5% to JD21.4m ($30m), indicating life was one of the most highly profitable segments. Metlife Alico, the sole specialised provider in this segment, was the largest underwriter of life insurance in 2009 with market share of about 33.5%. Factors affecting the sale of life premiums include a decline in retail banking and mortgages (two areas considered drivers for this product line) and consumers preferring to invest in health plans that provide more immediate peace of mind.

Premiums for fire and other damage to property were worth 13.2% of all GWPs, but increased 2% over the year to JD57.4m ($81m). Despite claims growing by a staggering 128%, their value only reached JD25.6m ($36m) and so the segment remains profitable.

Overall, current premiums amount to 2.2% of GDP, of which life insurance accounts for just 0.2%. While recent growth has been half of what was seen between 2010 and 2011, some companies still managed to achieve some profit from core business activities.

The relatively underdeveloped nature of the market presents strong growth opportunities, but at the same time there are challenges. These include the difficulties inherent in introducing new products and educating future customers, along with the critical need to develop a fair legislative environment to both support the industry and protect individuals.

MARKET STRUCTURE: There are 28 insurance providers in Jordan with 17 offering all types of insurance, 10 offering general products and one company offering only life insurance. Three companies are sharia-compliant providers. The market is considered highly fragmented with only four companies having a market share over 50%. The largest firm is AOIC, with a share of 15% in 2011, according to the IC. The second largest is the JIC, with a market share of 9.3% as of December 2011.

STIMULATING GROWTH: The IC is taking an active role in boosting penetration and strengthening the role of insurance in economic growth. Key is creating a legal framework conducive to new product development. Thus, a new regulation may be introduced to make fire and earthquake insurance compulsory for all industrial and commercial facilities, as well as many government buildings. This regulation, if approved, is to be fully implemented over the course of 2012. Although it is too early to tell what its impact might be, it should add some margin of growth for insurers.

Professional indemnity regulations are also being strengthened to provide insurance coverage against mistakes made by practitioners of certain professions including lawyers, accountants and contractors.

THIRD-PARTY LIABILITY: As the economy expanded during the previous decade the number of cars on the road increased by an annual rate of 5-7%. As a result, in the past motor premiums were responsible for major growth, providing a 17.8% increase in 2010 and registering 43% of all GWPs, according to figures from the IC. But as the economy has slowed and new car purchases have declined, the growth in vehicle premiums fell to 4% by the end of 2011.

So, while motor remains the largest market segment, insurers have recently struggled to turn a profit, especially those with heavy exposures specifically to this product line. The problem lies in government-set tariffs for third-party liability (TPL) cover, restricting premiums to JD93 ($131) per annum – well below the true market price. One insurer told OBG losses were outweighing gains in comprehensive premiums and the industry was subsidising third-party policies by some 30-50%. Comprehensive motor cover has also come under pressure as the price of premiums has failed to keep pace with inflation, driving up the cost of repairs.

Statistics from the IC highlight the problem, revealing gross motor premiums of JD183.8m ($258m), while gross motor claims paid out at JD190.8m ($268m) during 2011. In addition, while premiums increased by 3% motor claims rocketed by 18.9%. As a result, the majority of insurers turned a loss on motor coverage.

With the government under pressure to alleviate economic pressures on citizens, it is unlikely motor premiums will be deregulated anytime soon. Those licensed to offer motor insurance are still required to offer third-party cover and premiums are allocated to providers on a random basis through the Jordan Insurance Federation. In addition, due to regulations issued by the IC, insurers are limited to 75% value of shareholder equity in TPL. When this is reached others must take up market share. In practice, this means a company cannot turn away customers to reduce losses.

THE SECTOR’S REPLY: In February 2012 insurers temporarily stopped issuing TPL coverage policies to pressure policymakers to increase tariffs. By assuring insurers that – while it was not the right time to liberalise prices – it would support the sector to help reduce its losses, the regulator encouraged insurers to back down.

Unable to increase premiums, insurers have begun to decrease losses by reducing costs. A key regulatory change expected for 2012 will allow insurers to repair damaged automobiles rather than handing out cash payments and is designed to eliminate an incentive for fraudulent claims. Companies will also stop paying out “loss of value” compensation to customers who claim major accidents reduce their car’s sale price. Insurers have also introduced deductibles to personal liability.

“Moving forward, the biggest focus among insurers in Jordan should be to encourage policymakers to make the legal framework more conducive to business growth,” Imad Abdel Khaleq, the managing director of Jordan Insurance Company, told OBG.

A few companies, including Al Nisr Insurance, have pulled out of motor altogether. Many are reviewing the situation with more expected withdrawals later in 2012. However, those that are highly exposed to motor may find it difficult to pull out of motor cover because they need the income from new premiums to remain liquid enough to honour pay-outs on existing premiums.

TAKAFUL: Sharia-compliant insurance, or takaful, is a small but growing market in the Jordan insurance industry. Takaful is an Islamic insurance concept similar to cooperatives of mutual insurance, where members contribute to a common pool, which is used to cover claims.

Mirroring growth for other sharia-compliant financial products that have received considerable attention across the region and in South-east Asia, takaful looks to be set for modest mid-term growth as the major providers seek to further expand their customer base.

According to research from Capital Investments (CI), a Jordanian investment bank, the takaful market grew by 21.2% per year between 2003 and 2010, far higher than the 13.2% for the market as a whole, although starting from a lower base. Up until 2008, the takaful market was dominated by The Islamic Insurance Company (IIC) with 70% of market share and Al Barakah Takaful with the remainder. Then First Insurance was launched in 2007 and now takes over one-third of the market, with IIC taking just less than half the market and Al Barakah the remainder.

With three providers in the relatively small takaful market ( just 7.95% of the total market in 2010, there is a level of competition that should encourage an increase in the number of products.

Takaful providers also face stiff competition from conventional insurers able to offer premiums at competitive prices. Takaful providers spend more money on marketing campaigns to increase visibility, while income from investments is less due to the lower returns from the Islamic banks they work with.

Opportunities for takaful expansion are positive, with a growing and predominantly Muslim population, an increased interest in ethical investments, existing low penetration rates that signal room for general growth and an expanding Islamic banking sector, which could increase demand through bancatakaful. Challenges for takaful insurers are more limited investment opportunities (due to the absence of sharia-compliant instruments), higher advertising costs to raise exposure and a shortage of skilled professionals with experience of implementing sharia standardisation.

FOCUSING ON TECHNICAL PROFITS: Insurers have been hit hard by the poor performance of the Amman Stock Exchange (ASE), which fell by 16% during 2011, reducing potential profits from investment portfolios as well as having negative effects upon their own share prices. All insurance companies within Jordan are listed on the ASE, with the exception of the foreign-listed American Life Insurance Company (Metlife Alico).

According to Awraq Investments, an investment intelligence firm, insurers witnessed an aggregate drop of 10% in share value across the index, which – while unwelcome – was less than the 45% drop in financial services or 12% in the banking sector, and underlined the positive fundamentals of the insurance sector.

BY THE NUMBERS: An analysis by Awraq Investments in January 2012 revealed results from eight of the 27 insurers listed on the ASE that posted results for the third quarter of 2011. Aggregating results from all eight companies, third-quarter revenue increased by 6% to JD89.6m ($126m). While five companies made profits, accumulated net losses were JD900,000 ($1.3m), compared to a third-quarter profit in 2010 of JD3.6m ($5.1m).

Highest net profit was achieved by takaful provider First Insurance, which reported profit of JD0.5m ($700,000) for the third quarter on revenue of JD11.7m ($16.4m), an increase on the JD9.5m ($13.4m) generated in 2010. The most significant losses were reported by the Mediterranean and Gulf Insurance Company, with a loss of JD1.5m ($2.1m) on revenue of JD8.2m ($11.5m), a drop on the JD10.7m ($15m) generated in the third quarter of 2010.

Al Nisr Al Arabi Insurance Company increased revenue from JD13.8m ($19.4m) to JD15.7m ($22.1m) in the third quarter of 2011 year-on-year, but increased liabilities reduced profits over the same period from JD1.2m ($1.7m) to JD400,000 ($560,000). While stock performance across 2011 was poor, the Mediterranean and Gulf Insurance Company, which suffered losses in the third quarter, saw stock prices increase by 15.6% through the whole of 2011.

This poor market performance forced a renewed concentration on achieving technical profits and a reduction in reliance on investments. The IC told OBG total investments from the Jordanian insurance sector had fallen from JD484.6m ($681m) in 2009 to JD473.9m ($665.8m) in 2010. Of the JD15.9m ($22.3m) net profits made by insurers, 94% were from technical sources.

MARKET CONSOLIDATION: Various attempts to encourage consolidation between multiple insurance providers have not yet borne fruit. However, market observers believe that due to a small market size, growing compliance and operational costs, and poor performance from investments, a round of consolidations would help restore profitability. “With 28 companies, the insurance industry is oversaturated, which is driving down premium income and profits for many market players,” Khaleq told OBG. “To encourage consolidation, the government should give insurers strong incentives to merge, including tax breaks.”

While there has been talk of offering willing companies tax breaks, these will be insufficient to overcome the basic drivers of any consolidation: solid fundamentals, a good business case and supportive shareholders. The sticking point is the majority of companies are family owned and unwilling to relinquish a degree of authority through a merger with another company. The most likely scenario is that the market will find its own level as the larger players grow and emerge as the most competitive, and the smaller companies are consumed as market shares become negligible. In the meantime, insurers will battle for market share – likely to the benefit of consumers searching for quality.

LOOKING EAST: The proportion of gross premiums to be paid for reinsurance is set by the IC to international standards and follows the frequency of claims to payments. About 10% of motor premiums are ceded to reinsurance, whereas for marine and aviation nearly 90% of the total is ceded due to their lower frequency but higher potential claims.

There are no standalone re-insurers in Jordan – most reinsurance is provided by international re-insurers traditionally from the US and Europe. These companies are large global players that were badly affected by the number of claims from natural disasters in early 2011. As a result of the relatively low rates paid in Jordan (and with the potential uncertainty of the Arab Spring) many reduced exposure in the region during 2011 and decided to concentrate on growing their profits elsewhere.

This has left opportunities for reinsurers from Asia, notably including Japan, South Korea and India, to take a larger slice of the market.

BOOST TO HEALTH: The health insurance market has witnessed a reduction in profitability as increased competition has put downward pressure on premiums, while costs have risen. As a result, premiums are set to increase as insurers reflect higher hospital charges brought on by rising pharmaceuticals prices and increased electricity tariffs. The reduction in profits is reflected by the 26% annual growth in premium value between 2007 and 2011, offset by a 37% annual growth in value of claims over the same period.

Despite this, insurers require the valuable revenue from medical insurance and cannot afford to limit exposure. In addition, international interest in the sector is growing, as signalled by the deal struck between AOIC and the French company SCOR, which agreed in December 2011 to reinsure AOIC’s health insurance portfolio. The agreement will enable AOIC to utilise international experience and improve the quality of those services offered. The move will no doubt heighten interest from other foreign providers.

Two separate policy initiatives are also set to boost the health segment. The first proposes a requirement for all expatriates working in Jordan to be covered by medical insurance. Many foreign workers are currently not covered and add a rather significant cost to the government, so introducing premiums should help to reduce outgoings in this regard.

The second change, which is potentially more significant, was introduced by the Ministry of Health in September 2011. It changes eligibility requirements so that location will no longer be the main indicator of whether to include families under public health insurance.

A family’s inclusion in the scheme will now be based on family income. To qualify, a family’s income should not exceed JD180 ($110) per month. The policy shift comes at a time when the cost of living is rising and the government is being pressured to provide a more comprehensive social safety net while working within a tougher climate when it comes to fiscal spending.

Despite moving away from the system based on geography, which excluded many Jordanians in need of coverage while including many who did not, the cost of expanding medical provision to some 120,000 new beneficiaries means the Health Insurance Fund faces a shortfall of JD19m ($27m) as the budget climbs from the JD100.9m ($142m) spent in 2010. Those that cannot be treated in ministry hospitals for capacity reasons are treated in affiliated facilities, or even abroad.

The increase in government-led health insurance coverage will bring more people into the system, while boosting spending on health care in both public and private provision. With increased pressure on government facilities it is likely more Jordanians will choose to upgrade or supplement coverage with private plans.

To identify those families most in need, the Ministry of Health is coordinating with the Ministry of Social Development, the Social Security Corporation and the National Aid Fund to compile data to provide a list of potential families to survey. Jordan’s “Population Report 2010” showed 87% of Jordanians are currently covered by public or private schemes and the government has stated its intention to ensure that all citizens are fully covered by the end of 2014.

OUTLOOK: Overall, those companies that combine disciplined underwriting and strong claims management with a diversified portfolio look to be in a position to perform strongly. Those that do have very high exposure to motor may have to hold on until TPL tariffs are deregulated while working at reducing liabilities through careful claims management. Although Jordan in undergoing a period of subdued economic growth, key demand drivers are in place, including a relatively young population and rising life expectancy levels. While the market for insurance provision needs time for big players to separate from smaller providers, there are attractive growth areas for foreign investors. In particular, there are opportunities to provide services to increase the competitiveness of operations, especially in data management and the restructuring of health care provision. Jordanians will continue to demand better services at competitive premiums and the sector is preparing to soon compete on both a broader and a higher level.