Recent changes herald the beginning of a new phase

A raft of new legislation and development plans put in place in 2014 have the potential to bring about a sea change in Oman’s insurance sector in the coming years. In August 2014 the Capital Market Authority (CMA), the industry regulator, introduced a number of amendments to Oman’s insurance law, requiring underwriters to raise their minimum paid-up capital to OR10m ($25.9m) – up from OR5m ($12.9m) previously – and to list a certain percentage of their shares on the Muscat Securities Market (MSM), the stock exchange. These new requirements indicate the beginning of what local players expect will be a period of restructuring and market consolidation. Under the legislation local players have three years to institute the changes put forward by the CMA. “Insurance is still nascent here,” John Spencer, head of the department of strategy and business development at the CMA, told OBG in August 2014. “These new requirements are meant to boost risk management throughout the industry, which we think will eventually lead to market maturity.”

Growth Agenda

Underwriters have also taken matters into their own hands. In January 2014 the Oman Insurance Association (OIA) – an industry organisation that counts as members more than 40 local players in total – announced a two-year development strategy for the sector. The plan involves improving customer service across the industry; facilitating better communication between providers, the CMA and other sector stakeholders; utilising technology more effectively; and improving the quality of the workforce through training and education. Together these initiatives constitute a comprehensive plan for boosting the quality and the reach of insurance in the sultanate. “Ultimately the goal is to derive a majority of the industry’s income from underwriting activities,” said Gautam Datta, CEO of Al Madina Takaful, a local sharia-compliant insurance firm. “Right now almost all revenues at most firms come from investment activities, which makes it very hard for us to invest in insurance operations, and build underwriting skills and stand on a strong footing.”

Reforms 

The CMA has taken a proactive role in the industry in recent years, working with the OIA as a whole – and individual insurers in particular – to ensure that the local market develops in line with global best practices. The regulator has, for example, worked to develop and institute a new framework for the provision of Islamic insurance (see analysis) and to boost the number of nationals employed in the industry.

The amendment to the Insurance Companies’ Law that was introduced in August 2014 had been under discussion since at least 2012, and the CMA worked to ensure that the industry was prepared for the changes well in advance of the introduction of the law. “We would like to enhance the financial strength of insurance companies,” Ahmed Ali Al Mamari, director-general of insurance supervision at the CMA, told local media in August 2014. “It is the right time for the companies to raise capital, human resources and internal systems to enhance underwriting and retain more business within the country.”

Retaining Risk

The new requirements are widely expected to have a major impact on profitability and the development of the sector going forward. At the end of 2013 the industry’s overall premium retention rate was 54%, up slightly from 52% the previous year, but still relatively low by international standards. By requiring companies to boost their paid-up capital reserves, the CMA hopes to encourage firms to hold more risk – and therefore a larger percentage of the premiums – as opposed to selling it on to reinsurers. “We need to redefine the market and make the companies increase their financial capacity to help them take and retain more risks,” the CMA’s Al Mamari told local press. “Minimum base capital is only one way towards achieving that.” Oman’s 22 existing primary insurance companies – which include 11 domestic firms and 11 branches of foreign firms – have been given three years to implement the changes. According to data published by the CMA, by the end of the second quarter of 2014 just five primary insurance groups held the new capital requirement of OR10m ($25.9m) or more, namely Al Ahlia Insurance, Oman United Insurance, Dhofar Insurance, National Life Insurance and Al Madina Takaful. The remaining 17 firms are expected to either raise their capital base by mid-2017 or risk penalties imposed by the CMA, which could potentially include losing their operating licence. Meanwhile, any new firm looking to set up as a risk underwriter will be required to meet the new minimum requirements from the beginning of operations.

On The Course 

In line with the other key requirement put forward as part of the CMA’s 2014 announcement, a large number of the sultanate’s domestically incorporated insurance companies plan to sell shares on the MSM before mid-2017. This component of the insurance sector development programme is widely expected to boost transparency and corporate governance throughout the industry and, perhaps just as importantly, deepen Oman’s capital market.

When the insurance law amendment was introduced in August 2014, just four underwriters were listed on the MSM – namely Dhofar Insurance, Oman United Insurance, Al Madina Takaful and Takaful Oman. The remaining eight national firms – including seven primary insurers and the country’s sole reinsurance underwriter, Oman Reinsurance Company (Oman Re) – are required to carry out an initial public offering of at least 40% of their capital by mid-2017. The companies expected to list on the exchange include Al Ahlia Insurance, Muscat Insurance, Muscat Life Insurance, National Life Insurance, Oman and Qatar Insurance, Falcon Insurance, Vision Insurance and Oman Re.

Come Together

The new minimum capital and share sale requirements are widely expected to result in a period of market consolidation. This was intentional on the part of the CMA. With a population of around 4m, according to the National Centre for Statistics and Information, and insurance penetration – a measure of gross written premiums as compared to GDP – at less than 1%, the regulator and many private firms consider the market to be somewhat overcrowded in terms of provision. “There are still too many players in the Oman insurance sector,” J Retnakumar, the former CEO of Gargash & Trade Links Insurance Services, a local insurance broker, told OBG in early 2014. “Higher minimum capital requirements would force consolidation and raise the capacity of serious companies.”

At the same time, some local players remain sceptical that the recent changes will in fact result in a round of mergers and acquisitions. Indeed, consolidation is relatively uncommon in GCC countries as a whole. Most businesses in Oman, as in many neighbouring countries, are owned and operated by individual families. These firms rarely consider mergers to be a valid option, and instead prefer to build their base by steadily acquiring new business. Similarly, many family-owned firms are opposed to the idea of selling shares to public shareholders on the capital market, which would require them dilute their influence and formalise management structures. As of the time of publication the extent to which these issues might affect Oman’s insurance market in the coming years was as yet unclear.

Supporting Expansion 

The OIA’s two-year development blueprint for the insurance industry was introduced in January 2014, more than half a year before the CMA rolled out the new capital and listing requirements. Regardless, the association’s plan is considered to be very much in line with the regulator’s new rules. The OIA aims to improve corporate governance, risk management and overall profitability. The CMA shares these objectives for the industry. Indeed, under the OIA’s two-year plan the association announced that it would meet with the CMA on a monthly basis to discuss upcoming initiatives and to ensure that the regulator and the private sector are on the same page.

Key issues that have come up for discussion between the two authorities since these meetings began in early 2014 have reportedly included training and career development opportunities for sector employees, ideas for ways to improve customer experience; ways to enhance customer payments; and the range of insurance products and services currently on offer in Oman.