A recent buyout in Jordan’s fragmented and overcrowded insurance sector could mean some much needed market consolidation is finally underway. But even so, big challenges still loom large.
By Dina al-Wakeel
Over the summer, First Insurance, which provides services based on Islamic principles (Takaful), acquired Yarmouk Insurance for $14 million to gain access to the life insurance market and to upgrade their portfolio. First Insurance CEO Ali Wazani said the deal was also designed to maintain the 18 to 20 percent compound annual growth rate his Bahraini-owned company had been clocking up since it was established in 2008. “In six or seven years, it would be difficult for us to sustain this growth so we’ve been looking for a company to merge with or acquire,” he explained.
The acquisition is expected to raise First Insurance’s market share from around 5 percent to 7 or 8 percent.
The deal was the first real sign of consolidation to occur in the Kingdom’s insurance sector, which is dominated by medical and motor insurances at 65 percent, for almost 30 years. With 24 companies, 10 of which are insolvent, collectively generating an income of just JD540 million, Wazani, who is also the chairman of the Jordan Insurance Federation, makes a convincing argument for greater consolidation in the market. “The market is overcapitalized, fragmented, with too many players,” he explained, adding that while the market in general is profitable, the profits being made are too small in comparison to the capital invested, which amounts to almost JD700 million.
Lubna Hmoud, the acting director of the Insurance Directorate at the Ministry of Industry and Trade, agrees the sector’s main problem is that there are too many companies chasing too few customers. While declining to state how many companies she thought the sector could reasonably sustain, she said it was clear more consolidation was needed.
“We encourage mergers. It’s one of the solutions to the problems of the sector and it will develop the market further when the operating companies have a stronger financial base that helps them to diversify the products they serve,” she said.
Isam Abdelkhaliq, the CEO of the Arab Orient Insurance Company, called for government intervention to reduce the number of players in the market. He said a precedent had been set for this during the mid-1980s, when the government stopped issuing new licenses for insurance companies, while raising the capital of existing companies to JD600,000. This forced the companies to either merge or increase their capital, resulting in the total number of companies to drop from 33 to 17, according to the Jordan Insurance Federation.
“That was the best decision they’ve taken. It was forced merger,” said Abdelkhaliq. While Wazani said he was more in favor of voluntary mergers, Hmoud said compulsory mergers were not on the cards.
Nevertheless, economist Salameh Darawi cast doubts that the recent acquisition would have ripple effects on the sector where most local companies are family-run. “They don’t look at the matter from a financial and a feasibility perspective to develop their companies,” he said. Darawi called on the government to provide incentives for the companies that merge, such as writing off their debts, or providing tax incentives.
Another major hurdle facing the sector is the compulsory third party motor insurance. The companies have long called for the prices of this type of insurance, whose premiums are set by the government, to be floated.
According to Wazani, since 2008, his company has paid one-quarter of its capital to subsidize products for the compulsory insurance. While Abdelkhaliq said: “The compulsory motor insurance is still the biggest hurdle to the sector. It’s bad … You force people to accept a product and when they lose you don’t subsidize them. You don’t do that to bakeries and gas stations.”
Abdelkhaliq said his company made losses for the past nine years in the compulsory insurance market, and only now have they started to break even, or make small gains like JD50,000 or 100,000 a year.
But he admits that most of the market isn’t as lucky as his company. Arab Orient is one of the biggest insurance companies in the Kingdom with a 20 percent market share. The company has assets worth JD110 million, and has been offering a myriad of innovative products, including the recently launched insurance cafe in Abdali’s boulevard. The idea, which they hope to franchise, allows customers to buy their services off a menu.
“It could be a bigger sector if the compulsory insurance is higher, and the number of companies is lower, then it could grow to become a $2 billion market,” said Abdelkhaliq. He added that opening the compulsory insurance market would result in greater competition, thus the availability of different prices for the customers to choose from.
Darawi said that many Jordanians wouldn’t mind paying more in return for better services. He cited the Arab Orient company whose services in general are known to be more expensive than those provided by other companies in the market, but still has managed to build a significant client base.
Blame for many of the problems facing the sector has been placed at the government’s doorstep. But Hmoud insisted it hasn’t been sitting idle. “We took different actions that have reduced the losses,” she said, referring to the police liability report which decides who’s at fault in case of an accident and who ends up paying JD40. As of 2011, the JD40 goes to the insurance company, said Hmoud.
The Insurance Directorate also gave insurance companies the authorization to increase by 25 percent the compulsory insurance in case of an accident, and 50 percent or 100 percent if the accident results in death or complete disability.
Hmoud added that these procedures have resulted in better bottom lines for the companies in the sector. In 2011, the losses in the compulsory motor insurance sector reached JD20 million, compared to JD5.7 million in 2014, she said.
Nevertheless, Hmoud said she was in favor of finding a final solution, and that liberalizing the market was going to happen soon. “A free market is the best for any product,” she said. All parties agree that the potential is huge. If run correctly, said Wazani, the relatively small market could expand significantly, thus benefiting both the private sector and the government itself.
“The government is not fully benefiting from the sector’s potential, in terms of taxes and fees,” he said. “What’s being paid at the moment, although it’s quite high, it’s nothing compared to the potential.”
He said although First Insurance’s mother company is not too happy about their investment in Jordan due to the difficulties in the insurance sector, they still saw prospects.
To develop the market, Wazani believes that companies need to work on raising awareness about their products, work on product development, marketing, social responsibility, and quality of service. But he argued that “when you squeeze the company’s bottom line, it is no longer able to invest.”
While Abdelkhaliq is a passionate advocate for talent building. Arab Orient is planning an insurance simulation center where people can get training for three months in the aim of growing the sector in Jordan and the MENA region as a whole.
“I’m trying to help create talent. People make sectors, not the other way around. We’re not making cars and we need robots, it’s all about people and relations, know-how, and your credibility to gain people’s trust,” said Abdelkhaliq, adding that many of the people his company trained ended up in London and the Gulf states. “I’m doing something totally different, I’m changing the sector.”
To increase cooperation between the private and public sectors, Hmoud said the government is currently working on a health insurance project to provide each citizen with coverage. If this falls through, the project will include the Kingdom’s private sector, which will also involve insurance companies.
Industry insiders believe that sooner than later, the most debt-burdened companies and those failing to make the grade will exit stage left, as the success of the industry highly depends on a greater cooperation between the government and the sector, and the sector’s ability to diversify, innovate, and help its employees hone their skills.
Wazani said this was not the last consolidation for his company, which is currently finalizing the details for the recent merger to go into effect by the end of the year.
“This consolidation for us is not the last one, not necessarily to buy, we may merge,” said Wazani. “I think the expenses in the sector are too high because there are too many players. There are 24 CEOs and 24 CFOs. We are running a business that can be run by two companies. In Dubai some companies handle portfolios worth JD540 million, which is the size of our whole market.”