Despite good premium growth, listed insurance companies in the UAE are showing further earnings strain amid new regulatory demands, increasing the likelihood of business cessations, Standard & Poor's said in its latest report.
Gross premiums grew nine per cent year-on-year basis to Dh13.5 billion in the first nine months of 2015, in line with expectations set earlier this year, the ratings agency said.
"The growing maturity and expansion of the Dubai compulsory health scheme, launched in the last quarter of 2014, was one reason for the increase, but others were the favourable economic and political climate. For instance, Abu Dhabi and Dubai are sustaining capital spending on housing, schools, and roads, with gross domestic product (GDP) forecast to rise more than an annual 3.5 per cent through to 2019," S&P said in its report - UAE insurance market: Earnings and regulatory pressures are on the rise.
The report pointed out that the 29 listed companies recorded an aggregate net underwriting deficit in the first nine months, representing a 103 per cent net combined (loss and expense) ratio (NCR) - the market's main profitability measure).
Some 45 per cent of the listed companies (13 insurers) posted underwriting deficits. Net profits tumbled 90 per cent from September 30, 2014, and 10 companies reported net losses.
"We see three key factors behind the disappointing results: intense competition in all lines of business, technical reserving corrections, and weak investment returns," S&P said.
"With 60 licensed insurers, we see the UAE domestic market as overpopulated. As a result, insurers are fighting for an income stream to cover their operational cost bases. That competition has been indirectly fed by overcapacity in the international reinsurance markets, making protection cheaper to buy," it said.
The corrections to reserves come on the back of new regulations passed into law in 2015, which are forcing all insurers to have fully independent actuarial reviews of technical reserves. "We see signs of reinforcement this year, and expect additions to reserves to continue through 2016," analysts at S&P said.
The ratings agency said weaker investment returns reflect the region's sagging equity and real estate markets.
"We believe these factors will remain in place through 2016. Plus, low oil prices are now a fact of life for the Gulf region and will eventually likely bring other economic consequences. And though interest rates are rising in response to tighter liquidity, the additional yields generated may not fully offset any normally resulting erosion in asset values," S&P analysts said.