Insurance business must have stability

Something has to be done to save the UAE's insurance industry from itself.

How many insurance companies are too many? The answer, according to the UAE Insurance Authority, is 61. Ibrahim Al Zaabi, director general of the regulatory agency, called this week for consolidation among the 61 insurers now operating in this country.

The Authority’s concern is that too much competition, especially in pricing, can be dangerous in an industry that is based on, and so must both have and display, a high degree of stability and reliability.

But for a regulator to push competing companies into each other’s arms is not a simple matter. As The National reported yesterday, only one new insurance company has been licensed since 2008, and now the Authority is preparing to introduce new, tougher capital requirements for companies, to step up supervision and to streamline the procedures that would be used in case of any mergers.

These salutary steps, while necessary, may not be sufficient. In an industry where the appearance of solidity is so prized, no company wants to go cap in hand to another to propose a consolidation. If the planned gentle encouragement does not produce the desired results, the Insurance Authority may eventually need to take further steps.

The planned initiatives follow years of squeezed profits. The Islamic sector of the industry, known as takaful, faces a particularly difficult set of problems, the rating agency Standard & Poor’s noted this summer.

But that sector is not alone. When Abu Dhabi mandated universal health insurance in 2005, insurers rushed into the field; low profit margins have been leading to sharp premium increases recently. In property and life and auto insurance, as well, the struggle for top-line dominance has hurt the bottom line: that is, companies have tended to compete for market share, rather than for net return.

The idea that the industry needs to be more profitable will not be welcome to employers and individuals who must pay premiums. But cut-price coverage brings its own risks in an industry where front-line insurers pay big reinsurance firms to protect them from catastrophe. Also, an insurer facing a profit squeeze may be inclined to clamp down on payouts, fighting to hold onto every dirham it can.

For these reasons, the regulator is correct to be working towards an industry which strikes a balance between competition and stability.