New UAE insurance rules may lead to mergers and consolidations

New insurance regulations are expected to spur further consolidation in the industry, according to PwC, one of the four largest professional services firms.

The UAE Insurance Authority passed new regulations this month that address how insurance firms can invest their money and how much exposure they can have in a particular asset class. The new rules also require them to have an independent investment committee as well as a raft of changes that strengthen corporate governance, compliance and risk management.

The legislation, which has been under review for almost three years, is expected to be a game changer for the overcrowded insurance sector, which has sometimes relied on income from investments rather than policies, where fierce competition has eroded profit margins into negative territory.

But they also incurred big losses in their investment portfolios in the years following the 2008 global financial crisis.

While many local insurers shied away from tie-ups with bigger players, the watchdog’s comprehensive legislation is expected to test the industry, which has been given three years to implement the requirements.

“The valuations expectations [of insurance companies] are a little bit high, but with this new legislation the writing is going to be a lot clearer on the wall,” said Raymond Hurley, a deals partner at PwC.

“Smaller insurers with too small of a sale will struggle to adapt to rules in a profitable manner,” and may be subject to interest from larger UAE players and international insurance majors, Mr Hurley said.

“I’ve spoken to a number of chief executives in the last two to three years and they’ve all said there are too many insurers in the market, chasing the same premiums, and we are not doing any favours to anyone. No one is making money from underwriting, while they are relying on investment books to drive profits,” he added.

Insurers also expected the new rules to trigger more mergers and acquisitions in the industry.

“Hopefully this will bring different behaviour when it comes to the pricing methods on some of the lines of businesses of insurance companies,” said Hassen Bennour, the chief executive at Green Crescent Insurance, which benefited from a Dh100m investment from France’s Axa last year. “If the regulations are enforced properly, it might encourage weaker players to seek support, and consolidation could be a solution.”

Under the new rules insurers must invest no more than 30 per cent in equity instruments of UAE companies — and a maximum of 10 per cent per single stock, fund or instrument.

Insurance companies can now invest a maximum of 20 per cent of their funds in foreign equity investments and have a maximum of 10 per cent exposure to a single counter party.

Still, they can allocate up to 100 per cent of their funds in government securities or instruments issued by the UAE and by one of the emirates in the UAE, but a maximum of 25 per cent per security or instrument.

They can also invest in loans secured by life policies issued by the company to a maximum of 30 per cent. They can allocate up to 1 per cent in financial derivatives, up to 30 per cent in secured loans and deposits with non-lenders, and another 10 per cent in other invested assets.

Many insurers reported losses after the 2008 global financial crisis because they were heavily exposed to property and equities.

The new regulations also require insurers to establish an independent investment committee to ensure policyholder premiums are invested in the correct way.

“That is not something that exists in the majority of insurers in the UAE,” Mr Hurley said.

The development is good news for the UAE’s small asset management industry.

“This can only be good, it’s part of the maturing for the financial services industry and for the insurance sector. Stand-alone businesses probably didn’t have enough scale, and now that space is mostly dominated by banks.

“With insurers needing to have more well-defined investment strategies, it should help in terms of the asset management industry as well.”

A handful of stand-alone asset management businesses were forced to close after the crisis amid a lack of investor appetite to deploy funds into managed mandates.

halsayegh@thenational.ae

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