Oman’s motor insurance industry is in the grip of a no-holds-barred pricing slugfest as insurance brokers, new entrants and well-established players jockey for a slice of a pie that has remained stagnant, for the most part, thanks in large part to the fiscal downturn triggered by the international oil price slump in 2014.
Much of the metaphorical bloodletting is occurring primarily in the fleet insurance segment of the sector, with large corporates, oil and gas operators, ministries, schools and colleges, transport and logistics firms, and assorted businesses with large vehicle fleets, enjoying record low premiums.
Fleet coverage has slumped to an unprecedented one per cent of the sum insured value this year, down from an average of three per cent at the outset of the fiscal downturn in 2014. According to figures obtained by the Observer, motor fleet premiums averaged 2.75 per cent during 2014-2015, and have since been plummeting at the rate of one-quarter of a percentage point to reach an average of one per cent this year. Recently, a new low was set when a prominent transport firm secured coverage for a premium of less than 1 per cent of the sum insured value.
“It’s a disturbing trend that we currently see in the market,” lamented Deepak Arora, Senior Vice President – ACE Insurance Brokers Oman. “This scramble for short-term gains at the cost of the industry’s long-term well-being is definitely not sustainable. If not remedied, this undercutting could have adverse consequences for brokers, insurers and policy holders alike,” he warned.
Natural catastrophes
Rock-bottom motor insurance premiums can be particularly worrisome for the industry if viewed in the context of the catastrophic storms combined with acute flooding currently being witnessed in parts of the United States, the Caribbean Islands, and the Indian sub-continent. Property damage caused by Hurricane Harvey alone is threatened to cost insurers upwards of $170 billion in claims, not to mention the devastation caused by other storms in that part of the world.
“Let’s not forget that the Sultanate is not entirely immune to natural catastrophes,” Arora pointed out. “Tropical Cyclone Gonu, which caused quite a bit of damage and flooding in 2006, is a reminder that disasters can hit Oman too. In the circumstances, if insurers offer motor insurance coverage at throwaway prices, what will they do if and when a flood event destroys a lot of vehicles? After all, a city like Muscat has a heavy concentration of vehicles at any given time, which leaves open the possibility of significant exposure for insurers that fail to adequately factors in natural catastrophes when writing policies. In such an eventuality, they will likely face a deluge of claims from vehicle owners. And how will they protect themselves if the premiums charged amount to just 1 per cent of the sum insured value?”
Indeed, by offering heavily discounted fleet insurance policies, many insurers are running a huge gamble themselves, particularly if faced with claims arising out of a severe flood event or related natural disaster.
“Let’s say a corporate client comes to me with a request for insurance coverage for his fleet of 100 new saloon cars, each of a value of around RO 10,000 at the dealer. If I charge him the prevailing rate of 1 per cent of the sum insured value, aggregating RO 1 million, then the premium he pays is RO 10,000. In practical terms, this amount may still earn me a slim profit if any accident claims raised against these vehicles are moderate.
But what happens if there is a natural catastrophe, or flooding, and a portion of the cars are washed away? RO 10,000 will barely make a dent in the claim amount that I will have to settle in such an eventuality. This example illustrates the huge risk being taken by insurers when they offer policies at cut-rate prices!” Arora points out.
Fierce competition
So what’s fuelling this dire state of affairs in the motor insurance business in Oman? Arora attributes the tumbling premiums to two key factors. “The principal factor is competition, which has turned cut-throat since the downturn began in 2014. Insurers and brokers think they have no other choice but to retain clients at any cost, often by charging very low premiums. And in the event they receive claims that they cannot handle, the policy holder invariably ends up short-changed in terms of the quality of repair, and so on.”
Also exacerbating this situation is the underlying worry that fewer vehicles are currently being insured relative to trends that prevailed before the downturn. “With government spending in major infrastructure projects curtailed as a result of budget cuts, investment in fleet additions and expansions has shrunk as well. This sentiment is behind the current desperation on the part of the insurers to retain their existing clients at any cost.”
Some relief may be forthcoming when new insurance guidelines introduced by the Capital Market Authority (CMA) in April this year come into effect from January 1, 2018, according to Arora. One key provision that will help insurance companies in particular requires that premiums be paid into the account of the insurer within seven days of the policy being issued. Consequently, brokers will not be able to hold on to premiums for inordinate lengths of time – a shortcoming of the current system.
Additionally, corporate clients can no longer seek extended credit terms for payment of premiums. Under the new guidelines, premium may be paid up front.
In concluding, the industry executive argues that a healthy, competitive, profitable and vibrant motor insurance industry is not only good for customers, but also crucial for the long-term development of the economy as well. “The customer is king in the current circumstances, thanks to the cheap policies being written by insurance companies and brokers. But if insurers, faced with a spike in claims, cannot meet their obligations, it may result in policy holders potentially paying the price in the form of substandard services, shoddy repairs, and other hassles.”
CONRAD PRABHU
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