GCC study highlights an insurance profitability deterioration trend over the last four years across top 30 conventional insurers dropping from 28% in 2007 to 9% in 2011.
Revamping operating models with profitability pillars prevents further decline and will steer insurers on the road to rebound, according to A. T. Kearney, a global management consultancy.
Strong market pressure on all insurance segments is driving down the profitability of GCC insurers. Motor premiums, for example, have decreased by 23 percent over the past three years in the United Arab Emirates.
In medical insurance, healthcare provider costs have increased as much as 50 percent over the same period, while return on investment still remains low at 3.9 percent, down from 10.9 percent four years ago.
“Insurers are competing on prices for motor to gain market share at the expense of profitability. In medical, insurers without a structured approach to managing healthcare provider network management are failing to limit price increases and struggling to pass on the full cost increase to clients,” said Cyril Garbois, Partner and head of A.T. Kearney’s financial institutions practice Middle East.
Overall, technical profitability across business segments has reduced by 10 points over the past four years across the GCC. According to the analysis, lower technical profitability and suboptimal investment strategies are key contributors to the continuous decline. Insurers also suffer from lack of scalability of their operations. Operational and staff costs have increased much faster than the development of their business activity over the past four years.
“Administrative and staff expenses have increased two times faster than business activity. This is mostly due to inefficient processes combined with a lack of proper integrated systems. Increasing size should provide insurers with the opportunity to leverage scale and decrease their costs,” said Garbois.
According to the study, unsuitable investment strategies have reduced investment income profitability by 17.5 percentage points. The A.T. Kearney experts said insurers must consider that financial markets might not provide strong returns.
Establishing dedicated asset and liability management (ALM), distinct from the traditional finance function, secures commitments to policyholders by ensuring capital is always available to meet periodic asset value shortfalls. Effective ALM permanently evaluates liquidity needs and develops appropriate investment and asset allocation strategies limiting volatile financial returns.
Nevertheless, many insurers have managed to limit their insurance portfolio losses with more efficient reinsurance programmes. From 2007 to 2011, indeed the top 30 GCC insurers have increased their retention from 48 to 57 percent of gross written premiums.
“Leading insurers are taking confidence in their underwriting capabilities and progressively retaining more premiums. They are also managing more balanced treaties with reinsurers capturing greater values from reinsurance,” added Garbois.
The insurance market growth remains promising in the GCC but insurers must maintain profitability to benefit from this growth. As current market trends—combined with inefficient operations—are expected to erode insurers’ capital across the GCC, now is the time to create a road map for sustainable growth and continued profitability and to steer clear of potential profitability collapse.
“Building pillars of profitability now will prevent further declines in the future and, if addressed comprehensively, will prime insurers for a rebound,” concluded Gourp.
