Special Reports

A Sophisticated But Crowded Market

The most obvious comments to be made are that despite the sometimes ferocious competition for business, the insurance “pie” in Jordan is steadily getting bigger, even if total premiums continue to struggle to exceed a fairly low two per cent of gross domestic product. So, on balance, growth in 2009 was quite impressive overall, particularly given the estimated 0.7 per cent fall in the consumer price index during the year. Meanwhile, the recent increase in motor liability rates allowed by government should permit further real growth in 2010, despite the expectation that the consumer price index will jump by some 6.0 per cent this year. Additionally, looking at the various lines of business written, it is clear that particular growth is occurring in medical, where premiums last year again grew strongly by 25.7 per cent to a forecast full-year total of JOD82.1m, up from JOD65.3m previously, while strong growth in life in percentage terms appeared to stall at minus 2.2 per cent, presumably as nervous employers offered less group life cover as a perquisite to their employees, and as Jordanians generally borrowed less – and less frequently – from banks, and therefore required less term-life assurance to assign to banks as security against their loans?

Getting away from the up and down “escalator” analysis of the statistics, it is also interesting to look at the bigger picture apparent in Fig 2. For example, it shows that of the country’s 28 insurers, only one had a market share in double digits as of the end of June 2009, while 12 held less than a five per cent share. It also indicates that the Insurance Commission’s move to impose much-increased minimum capital requirements has successfully curbed the flow of new requests for insurance operating licences, with the last new entrant, First Insurance, obliged to carry a significant level of still under-utilised capital. Yet somewhat perversely, this same regulatory requirement has also inhibited consolidation as it has made some longer-established but nonetheless weak, small insurers more “valuable” as they are exempt from the new minimum capital requirements, which has meant that they have felt able to demand a premium price for the value of their exemption when approached by would-be acquirers.

Tomorrow’s winners and losers?
There is little doubt that the Jordanian insurance sector will soon again move into a forward, positive mode. However, the question is “when?” closely followed by two supplementary queries: “will market consolidation precede or follow recovery?” and “who are going to be the eventual winners and losers?”

However, the probability is that improvements in the sector will start to become much more apparent in 2011 but that the principal catalyst for consolidation – in the absence of any near-term, mould-breaking mergers within the ranks of the current market leaders – will come from abroad in the form of cross-border investors who are themselves strategically active in the more general reconfiguration of the equally fragmented Middle Eastern insurance landscape itself.

However, most would-be acquirers are likely to wait a little longer before announcing any strategic moves as it remains a useful “rule-of-thumb” in insurance that mergers and acquisitions are best made when target companies appear “expensive” rather than “cheap”. The reason is that it is not impossible for ailing companies to inflate their profits for a year or two by under-estimating liabilities and by inflating their apparent market position through aggressive underwriting. Consequently, perverse as it may seem, it can often prove cheaper in the long run to pay a visible premium to acquire a secure company during the good times when the incentives for dissimulation are low than unwittingly to pay a far higher but hidden premium by paying less to acquire a company in difficulties, when the incentives for “window dressing” of the accounts are much greater. In other words, we expect to see many more headline-grabbing examples of insurance consolidation in Jordan – as well as elsewhere in the Middle East – in 2011 and 2012, once the recovery is clear, with less conspicuous activity this year while the probable winners continue to rebuild their balance sheets, and the likely losers seek to hide skeletons in their cupboards for just a little longer.

Ultimately, what we expect to see is the further emergence across the region of formerly local groups that are increasingly seeking a broader, more pan-regional business profile. To-date, the main regional groups have included the likes of Qatar Insurance Co, Salama/IAIC, Nest/Trust, Gulf, Medgulf and others. However, the likelihood is that more and more domestic insurers across the Middle East and North Africa will seek to establish regional operations, and when viewed from this perspective, Jordan becomes just another piece in the jigsaw, with a presence in the Jordanian market increasingly being seen as a facet of broad regional coverage and not a strategic imperative in its own right. The response of Jordan’s insurers will likely be two-fold. Firstly, they will seek to secure their position in the domestic market through merger and acquisition. Secondly, they will look cross-border for opportunities elsewhere in the Middle East, although such expansive – and expensive – strategies will only prove realistic for Jordan’s largest, strongest and best-managed insurance groups.

With the prospect of gradual economic recovery, sector consolidation and eventual cross-border expansion, the best of Jordan’s insurers have good grounds for optimism. Indeed, the long-term prospects for insurance in Jordan appear as buoyant as the GAIF Conference attendees as they enjoy the waters of the Dead Sea.

Insurance Sector

STRENGTHS
• Effective, still improving supervision by regulators
• Well-established insurance sector & infrastructure
• Reasonably liberalised, open marketplace
• Insurance-aware population seeking greater protection
• Good supply of well-educated, well-trained staff
• Capital still available for investment in insurance

OPPORTUNITIES
• Many individuals & companies still under-insured
• Medical, life & pension lines enjoy attractive prospects
• Possibility to expand into large neighbouring markets
• Currency links facilitate diversified investments
• Still room for marketing & operational improvements
• Considerable potential for market consolidation

WEAKNESSES
• Too much capacity for too small a market
• Whole market’s gross premiums still relatively small
• Fragmented market with too many small insurers
• Business style can sometimes lack customer focus
• Nature & terms of motor liability cover set by gov

THREATS
• Impact of local & regional economic downturn
• Competition from foreign & other new entrants
• Salary costs up as best staff  tempted to work abroad
• Use of foreign reinsurers becoming a dependence
• Natural perils (earthquake) & periodic security concerns

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