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12 April 2024

Reinsurers tighten terms for local firms in UAE

Demand from construction, tourism and auto insurance sectors is falling. (PATRICK CASTILLO)

By CL Jose

Reinsurance companies are tightening their terms for local insurance companies as the latter's avenues of profit making are under pressure.

Top officials in the local insurance industry told Emirates Business that more than the increase in rates, the reinsurance companies are tightening conditions for the local insurers in the Gulf, including UAE, as part of the new annual treaties being signed between insurance companies and re-insurers.

"Our underwriting capacities have been pruned, the commissions are reduced, at a time when our earnings are under increasing pressure owing to the financial crisis that has gripped the whole world," said Abdul Muttalib Mohamed Mustafa, general manager, Oman Insurance Company (OIC), one of the largest insurance companies in the UAE. Moreover, he added, the reinsurance protection premium charged on the net retention of the insurance companies has also been increased across the board.

"With insurers' position being overcast by depressed underwriting results, negative investment yields and capital constraints, the stage appears set for markets to return to a 'back-to-basics' policy that would allow the industry to improve its 'terms of trade' in an effort to increase profitability from the liability side of balance sheet," said Khalid Ali Al Bustani, Chairman of Arab Insurance Group (Arig) in his report to the shareholders.

The reinsurance treaties are signed on January 1 and July 1 and hence those who have not signed their treaties yet will renew their new deals on July 1. Since the conditions that led the local insurers to hard times are likely to worsen further, they do not expect anything better from the reinsurance companies in the next treaty as well.

While some companies have reported loss, most of the companies had to be content with a contraction on their earlier earnings. While the investment income has dried up, the technical income has fallen substantially for several local companies last year.

On the one hand the capacity with the local companies has increased markedly leading to undercutting in premium, on the other, the recession has taken off the 'once fast-growing' demand from construction, tourism and auto insurance sectors.

However, the overheads of the insurance industry, as any other sector, have gone up in the last two years mainly because of the surge in the cost of living during

this period in the UAE, especially Dubai. The year 2009 could have more difficulties as the investment income is unlikely to improve, and so will the technical income. This will lead to reduction in prices across the board and more so in construction, professional indemnity and even in vehicle insurance which has been a major cash flow factor for these companies.

"The vehicle sale has come down drastically taking a toll on the bottom-line of the industry," an industry official said.

"The re-insurance companies want the insurance companies to charge higher rates in order to have a comfortable reinsurance treaty," said a top official with a reinsurance company. Though most of the reinsurance treaties are still being done with European reinsurance companies, there has been a marked shift taking place as more such reinsurance treaties are being signed with Malaysian companies, especially in takaful (Islamic) insurance.

Major European reinsurance companies have already set up their takaful outfits in Laguan, an offshore centre in Malaysia, in a view to attracting the Middle East market.

Swiss Re, the French company Scor and Munich Re, are some of the companies that have started their operations from Malaysia during the last one year or so.