Complex Made Simple

Regulating the lost city of stone

Country profile: Jordan

Jordan has found itself in a unique position. Although the country shares cultural similarities with northern neighbours, such as Lebanon and Syria, political stability through a largely respected royal family and immunity from the Arab Spring show that its financial services sector has continued to grow in similar ways to other Gulf states’.

However, how did this happen? Why has the kingdom avoided the worries of the Arab Spring? Why is Jordan’s regulatory system one to be admired?

POLICY explores everything that is insurance in the Hashemite kingdom to present a comprehensive profile of its financial services sector and, more specifically, its insurance market.

Looking at key indicators that define the industry and why it has continued to grow in the backdrop of regional instability, POLICY speaks with Rana Tahboub, director-general at the Insurance Commission (IC) of Jordan, and Ali Karakuyu, associate director at Standard and Poor’s. It endeavours to shed some light on the success of the kingdom’s insurance industry, but also looks at its various problems. POLICY also investigates the country’s inability to host a reinsurance market, recent issues surrounding the compulsory TPL motor insurance of 2012, and key challenges facing both the industry and authorities, while finding out what to expect in the coming years.

The Jordanian insurance sector, at the moment, comprises 514 agents, 98 brokers, 11 reinsurance brokers, 50 loss adjusters and surveyors, 13 actuaries, 22 consultants, one cover holder, 15 companies administrating insurance business and nine banks licensed to practice bancassurance.

It experienced considerable growth after 1995, when the industry was re-opened for investors, with a minimum capital requirement of JOD2.0 million. During that time, this was considered a low minimum capital requirement, which favourably positioned the sector on a high growth trajectory.

The current state of affairs 

When analysing Jordan’s insurance landscape, it is important to understand the market’s segmentation by life and non-life, market size and future projections. Meanwhile, vitality also plays a role in the segmentation of the entire non-life segment and market shares of major players.

Rana Tahboub of Jordan’s IC points out to this very fact and claims that the country’s insurance market comprises too many smaller players that do not allow stronger companies to offer better services and products.

“The biggest challenge is the fragmentation of the country’s insurance market; too many smaller players have been hindering the emergence of stronger companies that can display better resilience in the face of economic fluctuations, offer new insurance products with added values and improve the level of their services.”

Tahboub goes on to stress the efforts of the IC to urge insurers to consider options of consolidating operations in order to constitute bigger and more liquid portfolios.

“The more solvent insurance entities, resulting from mergers and acquisitions, will also be in a better position to improve their services and expand into neighbouring markets. The IC utilises different platforms to acquaint the sector with the benefits of consolidations, while emphasising that this step ought to be taken by firms themselves.”

Speaking with Ali Karakuyu from Standard & Poor’s, one gets a similar point of view. “There are simply way too many companies for the level of premiums being shared and there is a small amount of bottom-line profit in the market.”

However, he adds that it is not just a matter of firms consolidating operations, as “there are too many of them in the market, but consolidation is not an explicit solution. Firms must ensure that they are pricing in a way that does not undermine their bottom-line profits for the sake of market shares”. Karakuyu also highlights the importance of regulators keeping a close eye on the market without micro-regulating.

Implementing the rhetoric 

Too often, regulatory frameworks serve as nothing more than a positive rhetoric that struggles to materialise into practice.

Regulatory institutions across the region have failed to strike the balance between expressing the importance of international best practices and, of course, actually putting in place the appropriate mechanisms to ensure that companies adhere by these rules. In this respect, however, Jordan stands out. Following the series of abrupt bankruptcies in 1999 of a number of key players in the market, the Ministry of Trade and Commerce took drastic decisions to enforce important changes in the insurance sector.

Most notable was the increase of capital requirements imposed on firms, which served as a tool to decrease the already large number of companies operating in the kingdom. Further to this was the establishment of the IC, which was founded in an attempt to harmonise the industry under one independent regulator. Moreover, between the years of 1999 and 2003, the IC worked very closely with the sector to develop and implement some of these much-needed reforms.

More recently, the IC has been collaborating with the industry to improve the social impact of insurance, just like the rest of the region, since awareness is low and penetration levels are lower. Tahboub tells POLICY about the IC’s plans to address this issue: “We have sought to expand insurance coverage to include all societal segments by introducing national insurance programmes and motivating the sector to develop new products, especially those with a social dimension.

“We were able to reach such a system by maintaining close ties with the insurance industry, and keeping an eye on the application of all of the regulations in the market so as to ascertain their effectiveness and introduce any necessary amendments.

“Also, our active memberships in esteemed international organisations have informed the processes of outlining our regulatory frameworks.”

Overall, it seems the IC has taken early steps to develop a favourable environment for companies operating in the kingdom. Too often, we wonder about the active and practical role that regulators play, but when looking at Jordan, it is clear that regulators are ahead of the flock in terms of asserting their position as a dominant player within the industry. Karakuyu also shares this standpoint and, from a ratings point of view, he advocates that the Jordanian regulatory system, along with Bahrain’s, is “highly respected”.

Nobody is perfect 

Indeed, nobody is perfect and the IC was reminded of this between 2011 and 2012, when its strict protectionist approach to the prices of TPL motor insurance caused huge losses across the industry. According to the Jordan Insurance Federation (JIF), only five companies in 2011 were able to make modest profits, while the others were on the verge of bankruptcy.

The dilemma of why the IC could not see the negative affects that price fixing was having on the industry, what some saw as an inability to act fast, soon ended with the entity liberalising prices for the sake of stopping the literal bleeding of many companies in the local market.

Tahboub offers his opinion about this period and whether the local market has, indeed, recovered from the losses incurred. “We had already introduced amendments to TPL in 2010, allowing insurers to increase premiums for vehicles that have caused accidents in the previous year. This proved useful in advocating better traffic awareness and decreasing the amount of claims paid.

“The total amount of claims paid in vehicle insurance – which is predominantly TPL insurance – dropped from JOD190.78 million in 2011 to JOD177.14m in 2012 and then to JOD161.2m in 2013.

“This, in turn, was positively reflected on the overall performance of the sector. For example, while gross premiums grew by 5.2 per cent in 2013, when compared with 2012, gross paid claims dropped by 5.5 per cent. We believe this trend will be further enhanced with tariff liberalisation.”

Another problem facing the Jordan’s insurance market is the lack of local reinsurance capacity. While Jordanian insurers are forced to reinsure their businesses elsewhere, the IC holds hopeful plans to ignite the industry in the kingdom. Tahboub says: “We are working on attracting foreign investments to Jordan and, through them, as an insurance hub of the Mena region. This regionwide quest is based on political stability and security, a strategic geographical location between other Gulf states, North Africa, Europe and Asia, investments in political and economic relationships, as well as state-led macroeconomic policies, on-going integration with the global economy and adherence to free market principles.”

Although Tahboub makes an extremely valid argument for Jordan becoming that regional reinsurance hub, it is vitally important to understand that local reinsurance capacity is extremely unlikely and as Karakuyu claims: “Local reinsurance has an upward battle of capacity and expertise.” The reality is that not only Jordan, but the region, as a whole, falls short when it comes to core technical expertise.

However, Karakuyu believes that reinsurance options are good for the Jordanian market and, if firms can take advantage of GCC-based reinsurers, it will be a good opportunity to spread their businesses.

Looking forward 

POLICY asks Tahboub and Karakuyu about emerging trends and both provide positive feedback, claiming that the future can only hold growth for the Jordanian market. Karakuya says that, whether firms like it or not, they will be forced to concentrate on their own markets, which, in turn, can improve bottom-line profits.

On the other hand, Tahboub talks about regulatory improvements that are on the horizon: “We have been working in co-operation with the World Bank on a new solvency system, aiming at setting better minimum requirements for capital adequacy, enhancing market discipline through improved disclosures and transparency, and furthering supervisory measures.” Solvency requirements will put the Jordanian market in a better position, to not only improve the bottom line, but also protect policyholders better and innovate to create new products for the market.

Having said that, there still remains a reality that is relevant for the entire region. Awareness is low and penetration levels are not what they should be, therefore, regardless of the capitalisation requirements and encouragements for consolidation, it is the combination of the sector being a small and overcrowded market that means that there is a lot of work that needs to be done before it is free from business failures, let alone improving underwriting profits.

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