Jordan: Push to remove auto insurance cap

While motor coverage is a low-profit line of business in many countries, Jordan has seen this segment of the insurance market make headlines in 2013, with industry players suggesting that without significant changes, the sector as a whole could face serious challenges.

At the heart of the issue are the state-set tariffs for compulsory third-party liability (TPL) auto insurance. Liberalising this system has been the subject of extended discussion for a number of years, with the Jordanian Insurance Federation (JOIF) pushing to remove fee caps set by the Insurance Commission, the sector’s regulator. Third-party insurance costs around $140 a year, with the JOIF saying that a floating of the rates would result in a price increase of about 10-15%.

Implementation of reforms had been planned for the beginning of this year, a date that was later pushed back to March and then further postponed. The delay is a result of the JOIF and the Insurance Commission being unable to finalise the details of the new regulations, the local media reported.

Without an increase in TPL prices, the industry says, the sector will continue to be unprofitable. Automotive insurance makes up 42% of all premiums but accounts for more than half of all paid claims, data from the JOIF show. Due to this imbalance, the sector will accrue losses of around $28m this year, according to the federation. This would come on top of the $85m that the JOIF says companies lost in 2011 and 2012 as a result of artificially low prices for TPL insurance.

Automotive coverage is also showing less growth potential when compared to most other segments, expanding by 4.4% in 2011 – the last full year in which JOIF data is available – as against the 25% increase for the marine and aviation component of the industry, 12.6% for medical coverage and 7.3% for life policies. Health insurance is the second-largest segment of the market, representing around one-quarter of gross premiums, followed by fire coverage with 13%, according to JOIF data.

Some insurers have worked to reduce their volume of TPL policies in an attempt to lessen the hit on their bottom line. For example, Jordan Insurance Company, one of the largest providers in the country, aims to lower the automotive segment’s share of its business to less than 30%, a policy its CEO, Imad Abdel Khaleq, said will allow the firm to focus on more profitable operations.

“This is in line with our long-term plan, which we started few years ago to reduce our reliance on motor insurance and expand other promising lines, especially in personal lines,” he said in April when announcing the firm’s 2012 results.

For firms that continue to promote their TPL motor product line, floating prices may not be the panacea that it appears to be at first glance. While the JOIF has forecast a modest increase in charges, some insurers may maintain their fees at the present level, or even lower them, to win clients away from their rivals, covering any short-term losses from their reserves. This would lead to further price competition and potentially further losses, even for those firms that are financially sound.

Whatever the eventual outcome, TPL tariffs are likely to rise in the long run. As Othman M Bdeir, chairman of the JOIF, told OBG in 2012, “Forcing insurers to accept losses is not the solution, because there cannot be a healthy economy or an attractive investment environment without a strong and stable insurance system.”