Most small and medium-sized insurance firms in the UAE are functioning like "brokers" and increasingly relying on commission paid by reinsurance firms to shore up their profit, according to the industry analysts.
Speaking to Emirates Business, Mustafa O Vazayil, Managing Director, Gargash Insurance Services and a veteran in the UAE's insurance industry, said most companies are focused on making short-term profits and hence they resort to retaining very less risk with them and cede most of the premium revenue out to reinsurance firms.
"These companies do not have proper risk appetite and hence are playing extremely 'safe'. Companies should be encouraged to build up sufficient capital and technical reserves so that they will be able to retain greater risk and weather any unforeseen underwriting situations, and this will help the industry grow," Vazayil added.
According to Omer Elamin, Senior Managing Director, Arab Orient Insurance Company, one of the leading insurance companies listed on Dubai Financial Market (DFM), the retention ratio among UAE insurance companies is very low – maybe in the region of 10 to 20 per cent, excluding motor insurance.
"Insurance companies retain 100 per cent of motor insurance which account for about 50 per cent of the total premium revenue of the insurance companies. So excluding motor, the retention will be negligible," he explained.
With the motor insurance volume having dropped substantially, the value of retained premium has fallen further. According to industry sources, even the large companies such as Oman Insurance, Arab Orient Insurance (Orient), Abu Dhabi National Insurance Company (Adnic), etc do not retain much with them and instead cede a big portion to reinsurance companies.
Out of the Dh992 million insurance premium revenue posted by Orient for 2009, more than Dh700m was ceded as reinsurer's share of premium leaving behind only Dh271m as net insurance premium.
While the company's profit for the year was Dh186.311m, the commission income received from the reinsurance companies alone was to the tune of Dh100m.
In the case of Oman Insurance Company, the largest insurer in Dubai, almost half of the Dh2.325 billion premium revenue made by the company during 2009 was routed outside as reinsurers' share of premium. While Oman Insurance received about Dh154m as commission income from reinsurers, the net profit for the year was only Dh189.635m.
In the case of Adnic, while the gross premium written for 2009 was Dh1.5bn, more than Dh940m was ceded to reinsurance companies. The net commission income for the year was Dh45m and the company's net profit for the year was Dh52m.
"I think the minimum capital requirement for the insurance companies should be raised to at least Dh200m. This will encourage companies to retain larger premium within the country. Our insurance companies should become risk carriers," said Elamin.