Special Reports

A Sophisticated But Crowded Market

David Anthony finds 2010 a challenging year for many Jordanian insurers.

Despite the current buzz of excitement surrounding the Hashemite Kingdom of Jordan as it hosts this month’s GAIF Conference by the Dead Sea, most of the kingdom’s insurers will nonetheless return to their offices once the event is over still resigned to the probability of their business proving little easier in 2010 than it was last year. Intense competition and government regulation together continue to constrain premium rates while costs rise due, for example, to increasingly steep increases in health care expenses, and steadily rising staff bills as insurers pay more and more to prevent their best employees moving abroad to work in burgeoning GCC insurance markets.

So, although many Middle Eastern insurance markets have now started to rise above the difficulties of late 2008 and 2009, the Jordanian insurers’ dilemma – and that of their regulators and shareholders also – remains simple: there are still too many local companies with too much capacity chasing too little insurable activity, notably 28 licensed insurers with approximately JOD510m of current market capitalization writing (according to preliminary official estimates) some JOD361.8m of total gross written premiums in 2009, a figure expected to rise by approximately 10 per cent in 2010 to around JOD400m (US$560.5m), with nearly all of this being written domestically in Jordan itself. Meanwhile, the Amman Stock Exchange, on which all 28 insurers are listed, has tracked the morose local insurance sector and seen its Insurance Index fall by -11.8 per cent in 2009 and by a further -4.5 per cent to-date in 2010.

True, some Jordanian insurers still appear remarkably optimistic. Yet as often as not their enthusiasm is based on opportunities – some real, some imagined – to buy into local equity and property markets at what they believe to be today’s depressed prices. In other words, Jordan’s insurers are using their often considerable capital bases less to support underwriting risk and more to fund their activities in the capital markets, with property and equity investments to the fore. Undoubtedly, both investment and underwriting opportunities exist alongside the threats confronting the insurance sector (see Fig 1), and long-term assets can be an appropriate asset class for companies writing long-term business such as life or pensions. Nevertheless, shareholders of many of Jordan’s smaller insurers must sooner or later ask themselves why they invest in insurance? Are they hoping to participate in the rewards of a company’s underwriting expertise or are they, in effect, placing their cash in what is tantamount to an unusually opaque, expense-laden investment fund that will speculate in land and shares on their behalf? Similarly, do they have a long-term commitment to investment in the future of the country’s insurance sector, or are they merely hoping for windfall gains if and when the long-awaited consolidation of the Jordanian insurance sector eventually occurs?

Macro-economic considerations
Jordan’s currently constrained macro-economic situation is all too clearly reflected in Standard & Poor’s recent lowering in March 2010 of the kingdom’s local currency sovereign rating to a still good, but nonetheless diminished BBB-/Stable/A-3 from the previous BBB/Stable/A-3. The economic issues identified at the time of the sovereign downgrade were varied but principally included weakened medium-term fiscal flexibility and an associated likely rise in government indebtedness. Although the severity and term of the economic difficulties may be debated, even an optimistic assessment of the Jordanian position suggests that 2010 will, at best, see only a stabilisation of the present situation, and that any such stabilisation will only be achieved through
carefully controlled government borrowing and expenditure.

So, unlike some GCC neighbours, Jordan’s insurers cannot realistically hope to see economic recovery jump-started by government infrastructure spending, and any sustained, strong upturn will likely prove dependent on a resumption of foreign inwards investment. Meanwhile, sovereign economic considerations may also impede recent initiatives to turn Amman into a regional reinsurance hub.

A sophisticated but still imperfect marketplace
Potentially serving a domestic population of some six million, the Jordanian insurance sector may appear relatively small by many international standards but it is unusually open and liberal for the region and many of its better-managed insurers can offer a broad and often sophisticated range of products to both retail and commercial customers, including rated insurers such as Middle East Insurance (BBB-/Stable/–), and Euro Arab (BB+/Stable/–). The principal exception to this is in the area of motor third-party liability (TPL) where insurance is compulsory but also closely controlled by government, which lays down a uniform template for policy terms and conditions, as well as the amounts to be paid out against legitimate bodily injury claims.

The problem is that motor TPL represents a significant part of the Jordan insurance sector’s revenues (total motor, including TPL, represented 45.5 per cent of the market’s gross premiums in 2009, and 60.7 per cent of total paid claims) – and a particularly large percentage of the under performing businesses of many small, and some not-so-small players. Yet even now tariffs are set at levels that are insufficient to generate reasonable underwriting profits. As already indicated, this may have encouraged some insurers to try to supplement their disappointing underwriting results through somewhat “adventurous” investment strategies, with land and equity investments even today representing a surprisingly large share of many insurers’ total assets. However, the sector’s more prudent management teams have sought to encourage their retail customers away from simple, low margin motor TPL covers towards fully comprehensive policies, where tariffs are not controlled. This is a positive initiative but one which nonetheless leaves the profits on “good” (properly priced) business being used to subsidise the losses on “bad” (under-priced) compulsory TPL.

Although the authorities are believed to be sympathetic towards the liberalisation of tariffs in this area, it is unlikely that significant changes will be made while the population continues to suffer the difficulties of the current economic downturn. In February, for example, the Jordan Insurance Federation called on the government to raise motor TPL rates by 58 per cent, this being the estimated amount required to bring the line into technical profitability through to 2012. The authorities themselves proposed a more moderate increase of 25 per cent (together with a higher rate of compensation for injury) on the previous fixed rate of JOD55 for renewals from March 1 onwards.

What the numbers are saying
Although 2008 and 2009 were rollercoaster years on the investment front, the Amman Stock Exchange General Index nevertheless ended 2009 having fallen 8.1 per cent during the calendar year and has remained virtually flat so far in 2010 at around 2,560. Nevertheless, the available statistics suggest that reasonable momentum has been maintained technically, with the market’s gross premiums rising 9.8 per cent to JOD189.4m by the end of June last year relative to JOD172.5m in the first six months of 2008. Similarly, the still provisional official statistics suggest total gross premiums for the whole of 2009 at JOD361.8m, implying year-on-year growth of 8.6 per cent.

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