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Jan. 16, 2023

UAE Insurance Market: 2022 Roundup and 2023 Predictions

Q: So, let's kind of start with the high-level market performance. If you can give us a view of the market in 2022 in terms of the, you know, sort of overall performance coming from our, from your report.


So interestingly, the 2022 performance for the insurance industry in UAE has been very different from the prior years. And when I say prior years, I'm talking about 2021, 2020, and 2019. So just to give some perspective, Things started improving for the insurance market as a whole in 2017 when the Central Bank introduced a unified pricing policy, which sort of said the minimum premiums that motor insurance policies that we sold.Fast forward to 2020, Covid struck, and Central Bank essentially allowed a lot of insurance companies to give certain discounts to ease the burden of insurance payments. For the general policyholder, what that, in turn,led to is a downward spiral insurance premiums collected by insurance companies. The market competition has been fierce, and now that Covid is over, insurance companies are finding it difficult to increase those rates back up.


That is leading to sort of underwriting performance deteriorating for the market as a whole. Right. We've observed 2022 overall underwriting performance net profits for the companies to be dropping. In general, there's about a 30% or 35% drop in industry profits listed. Insurance companies have made lower profits, even though the top line or the premiums are broadly similar or even slightly higher.


Compared to last year. Right.


Q: Right. And, Navin, just to set the context, these are those 21 listed companies that you have collected data on. And what is the overall premium size GWP that we are talking about in terms of these 21 companies?


It's actually 28. 28.


Q: Okay. Overall GWP or actually the earned premiums that we are talking about.


On net, that's after reinsurance is somewhere about 2.5 billion per quarter. So it's about 10 billion hs per year.


Q: Okay. So 2.5 billion, 10 billion AED per year. Got it. Perfect. But on the Gross level, you mentioned it has gone up, isn't it?


On a gross level? It has gone up slightly. That's like a marginal increase of about.


Hundred or one 50 million. For this year, YTD. So for the three quarters, it's about one 50 million increase and premiums on Gross. The thing with Gross versus net is primarily that a lot of this Net premium is the actual picture that's painted for the industry because a lot of Gross premium gets inflated for two reasons.


One is driven by medical fronting arrangements that a few of the insurance companies have, which is like the likes of Aetna, and Cigna. These players are writing insurance within UAE, but they might not have registered insurance companies, which they're writing through a tie-up with a local insurance player who's then fronting this contract on their behalf of them in the local market.


But most of the risk, most of the premiums are then transferred back offshore. So it's not really a premium that's for the UAE insurance market or retained within the insurance market. And the second aspect that affects this top line or inflates this top line is a lot of the commercial risks. So large engineering contracts, large energy policies.


The UAE insurance market in itself is not large enough or diversified enough to retain these risks. So these risks, in turn, then get transferred to large reinsurers and international players. So the likes of Swiss Re, Hanover Re, and Munich Re would then take up portions of these policies and risks. And there'd be a very small portion.


In some cases as small as 1% of 0.5% of the entire risk would be retained within UAE and the rest of it would be transferred back out.  


Q: And so that's the whole sort of you know, the way the market functions. And, and we know that. And in terms of I know it's pretty early to drill into the future from there is, do you see that business model changing at all?  Do you see either Gross premiums increasing because you know, there's a recessionary talk? Do you see, you know, sales of vehicles fewer people coming to UAE for any reason that therefore health insurance sales go down? And do you see any net retained premium coming down as a result, if at all? I mean, I'm being pessimistic. Right.


So I see this two ways. There are contradictory factors affecting this and whichever factor wins out, we'll only find out with time. But with all the new measures, with respect to the visa changes, the ease of doing business improving, we do expect the population size to grow.


And to a certain extent, because of that, the insurance market would grow as we would see a lot more insurance options coming in for long-term visa holders. Some of these regulations do not have clarity at this point. So we do expect the insurance market overall to grow because of that.


But on the flip side, because of the premiums dropping we are seeing that the top line is slightly reducing, especially on a net basis. So risks that are retained, your motor insurance, health insurance, those are the premiums that are more sticky and more rate sensitive, and they're not increasing at the same rate at which your claims cost or claims inflation would be increasing.



Q: The next topic we onto is you had a very interesting slide up there Navin, which is, was premium trends based on, you know, the individual listed companies itself. Perhaps you could talk us through what has been their performance, maybe compared to the slightly better years in 2019 all the way to 2022.


 So with broadly what we observed was, the recent analysis that we did and presented on that was based on a period starting 19 q1 and it went up till 22 Q3. So that's covering data up till 30th September, 2022. What we observed was broadly quarter on quarter, the earned premiums again, net of reinsurance, have been fairly constant or stable for the industry as a whole.


The listed insurance companies, it's been around the 2.5 billion mark, give or take, like a hundred million. So, Ranging from 2.4 billion to 2.6 billion quarter on quarter. So market as a whole has not grown on a net basis over the period. But the interesting thing we observed when we dug deeper and to see what are the insurance companies performing.


Well, which are the insurance companies performing worse off? So we saw that there's, a drastic difference between where these companies lie. So the market clearly has three large players, who write about 1 billion of premium out of the 2.5 billion.   And then the rest of the players combined, which is about over 20 companies,write 1.5 billion in premiums every quarter. So what we saw over the same period is that after COVID hit, and with the downward spiral and premiums that we saw for motor insurance and everything that's happened over the last three years or so, we see that the size of the pie for these large three players, some of them have actually grown the premium that they are writing.


So for them, the premium volume has grown. But because the market premium has not grown as such, that essentially means that some of these smaller players that form a dense small portion of the market are now writing or struggling to compete for the same amount of premium. And they necessarily don't have the same amount of flex to sort of write or compete for the premiums, and they're writing a smaller amount of premium overall. But because of this heavy competition in the market, and especially these are the smaller players who have to sort of have that liquidity position that comes in, they need to have that cash flow coming in at a regular interval. They don't necessarily have a massive capital buffer.


So they tend to end compete a lot on prizes, and that affects that downward spiral of prizes that I was referring to earlier. ,


Q: No, this is fascinating. I think, so the top three players almost like have cornered the market incentive and is possibly because they have strong brands strong presence for a long time, and also a lot of captive distribution channels. And you know, , I think that's exactly what it leads to, is we are seeing some consolidation in the market. I think looking forward a lot more. Probably needed to reduce those, you know a clutch of companies playing in the smaller segment. And essentially all these companies that are doing are just competing for you know, bids on Google and on other social media platform where for the same customer  you are trying to get.


So the winner here is Google and the social media companies.   And you know, what happens when you have such a practice where we all know for years that it has too many players competing in the red ocean, you know when you have innovative propositions that want to come into the market, suddenly you are, you are not making it easy for them.


And, you know, we can see that from a regulatory point of view, maybe.  You know, the central bank don't want to dish out licenses, you know you know companies anymore that are forming, even if they. You know, bracket of insure takes and things like that, because overall they see there's a huge clutter.


But I actually, there is a clutter on some segment and there is a huge potential in many others. In fact a lot of segments actually. So it's kind of , it's, it's giving a skewed view of the market.


Q: So, you, do you guys see any changes in the next year in both this premium trend and number of companies?


So fortunately, from what we have observed or in our conversations with different insurance players within the market one of the things that has stood out and with which I don't necessarily agree, Is that people tend to say that the regulator needs to step in and they need to sort of increase the minimum rates that are allowed for motor insurance.


Now the regulator needs to step in to certain extent that it needs to ensure that the insurance companies operating within the market have enough capital or enough solvency to be able to pay the claims as and when they do. I don't necessarily agree with the idea that the regulators should be telling insurance companies that you need to increase the rates if you're burning your business, if you're writing loss-making business quarter on quarter every year and you're making losses, I think just as a prudent measure, if you're in the business, you should be aware of the fact that there's only so much bad business that you can take on.


 Just coming from the perspective we mentioned startups, so startups, a lot of startups work on the principle that initially they would be burning capital.  So if you have that capital base to burn through, go ahead, write the premiums that you want to without any restrictions.


But the fact of the matter is that if you do not have that capital buffer, you should not be writing business at those rates that are unsustainable.  The good thing is now that we actually see some improvement in rates, a lot of the players who have burnt on their capital or have burnt their hands facing losses or seeing say, break even performance when they saw profits historically, have now started to increase rates.


The effect that they have on their books because of this is obviously that some of these players have now seen a contraction of business volume because they're not willing to write at whatever rates are prevailing in the market.  


Q: I agree. I also wonder if maybe it's, I'm taking the opposite argument with the large number of players.Maybe it's good to have some small and medium healthy companies because, you know InsureTechs the innovative InsureTech would. Those hungry players to tie up with. You know, the big guys are not gonna be very happy to part with their customer data and, and everything with innovative, innovative companies.


So medium size companies probably are required to an extent to promote innovation. So it's a kind of a catch-22 situation but the, the operator word is healthy. Otherwise, you know, it goes on to pulling the, even the ensure take down if you are not healthy and you know  You don't deliver what you promised, so then it just goes downhill.


 And we have seen some companies switching partners very quickly.


Right, so it's a very chicken and egg situation, but I think next year, because now I. Part of Central Bank we are seeing a lot of, you know regulations coming through, but my hope is Central Bank should not see insurance in the same space as banking and, you know, benchmark in the same way.


I think the industry is slightly different. The requirements are slightly different, so hopefully the regulatory is, is cognizant of that, or I'm sure they are. 


Q:  Absolutely. So probably taking on the next one, and I think I'm going to combine some of these questions. So Navin, can you please talk us through a little bit of what you have observed in terms of underwriting profits versus, you know, non-underwriting investment profits, let's say, what is the trend from 2019 to 22?


Right. So it's interesting that you bring that. The first thing that I noticed when I started working in the UAE industry and it's very different from say, the developed markets your UK, Europe, and North American markets. They, and that interesting thing is that a lot of UAE insurers rely pure on investment profits, and when I say purely, you would see that a large portion of their overall profits, their comprehensive profit, Quarter on quarter comes from investments, and these are not necessarily life insurance players that are writing long-tail risk. So they have a lot of assets under management. These are not those players, these are general insurers primarily.


They're primarily writing motor and health business.  And yet a large chunk of their profitability is driven by investments and not by insurance risk per. So that was just like an interesting thing that I observed that are you an investment company that's underwriting insurance, or are you an insurance company that's doing investments?


Based on that, what we observed over the last three years or so, the review period that we considered was that there were brief periods where. Your investment income dropped drastically, and these were perfectly sort of correlated with the investment market performance that we observed globally.


So one was the crash that we observed right when Covid stuck and Lockdowns happened. That was in 2020 Q1 and then there was a more recent one in 2022. So what we see is, For the large extent, most of the insurance players made an underwriting profit or loss during that period, but they definitely made an investment loss booked for that particular quarter.


But in most cases, when we see investment loss in one particular quarter, provided, these insurance companies are not liquidating the positions in that particular quarter, and most of them haven't the next quarter sees a supernormal profit when the market's up, so that sort of nets it down.


So when you see Investment performance over a longer period instead of say one particular quarter, the investment performance tends to be more stable for insurance companies that we have observed. Coming onto underwriting and how that performs, that's completely different. So 2019 we saw a picture. We brought it down a graph. We saw that some insurance companies were making underwriting profits. Some of them were making a loss. About five companies, I think made an underwriting loss in 2019 Q1. And we did this analysis quarter on quarter for the last 13, 15 quarters.


And what we observed over quarters, what you would expect in a market that there would be certain quarters where some companies are making an underwriting loss due to sort of one of events, whereas certain quarters where some companies are making a profit, but by and large you would expect the market to be making underwriting profit because that's their primary source of business.


 Unfortunately that's not what we observed. What has happened over time in 2022 is when I compare 2022 q1 performance versus 2021 and 2020 Q1 performance for underwriting, it's much worse. For most companies in general and the market as a whole, the Q1 performance has been worse than the last two years.


The same thing I observed for Q2 as well as Q3. So the recent results that were published for 2022 Q3 are much worse for the industry as a whole versus what they were in 2021 and 2020. Okay. The interesting thing is that the number, the five companies that are referred to that were making a loss?


So not necessarily those same five, but now the number has increased and now about 14 companies have made an underwriting loss in the recent quarter.


Q: A quick question to just set the context again. If you look at motor and health, approximately what percentage? Do they contribute to the portfolio of these companies that we are talking about?


So for these companies, I would say on a net basis, the motor would be roughly about 45%, 50%. Okay. And another 45% 50, broadly 45, 50% coming from health.


Okay. And then the balance, five to 10%, depending on which company you're looking at, would be from all the commercial and. Combined on a net basis, because most of those risks are, as I said, property risks that are seeded out completely to the insurers and companies are not retaining those risks with them.


Q: So essentially wherever health and motor moves, that's where the market moves, is what you're saying, right? Just to understand what would be the drivers that it is dipping down even further, you know, come this year and current quarter, what, what's causing this sort of dip?


So it's actually twofold. Initially it was driven by tariffs or rates for motor insurance, which had dropped during Covid, but then they did not pick up just driven by competition. So every month or every quarter, there'd be a couple of insurance companies that are in a liquidity crunch and they're willing to write whatever rates they can to get the business in order to get the cash.


You mentioned?  And it's a very price-sensitive market, so all the business does tend to go over there and that competition sort of keeps the rates where they are right now. That's one. The second aspect is what we are now seeing globally with respect to claims inflation. So the inflation that affected motor insurance initially was with respect to the shortage of repair.


So the supply chain being affected globally due to Covid repair parts shot up in prices. So the cost of repair increased in some cases, especially with agency repair vehicles in motor insurance. We saw that because, probably because again, this is conjecture that probably because motor vehicles sales had dropped, a lot of these agencies were also relying on repairs that were bringing in the cash.


So the cost of repair went up slightly because of that as well. , that led to increase in severity of claims that insurance companies are paying. And the other aspect is with respect to frequency itself. So during Covid there, there were lockdowns, not enough people on roads. You, you needed to take specific permissions to step out.


So not a lot of accidents happening not a lot of claims. But now with expo that happened last year and since then the way being one of the first places to sort of open up to the world tourism footfall, increasing a lot of traffic on the roads that just sort of increases the frequency.


Back to sort of pre Covid levels. So more frequency of claims coming in.  While severity or the claims inflation has not really gone down.  


That's a, that's a very good point. And just going to the investment profits scenario is it fair to assume that. You know, obviously it's a high inflation, high interest rate regime.




Q: So therefore, a lot of the asset prices have taken a beating from, ranging from stocks, real estate to bonds, everything secular. Let's not even talk about crypto. So is it fair to assume that the exposure to equity markets is what's basically driving the investment income lower? Or what would you say?


So, so, so the couple of quarters where we saw investment income drop drastically, that was primarily driven by equity market. Performance,  But the thing with equity market performance is that it's usually, it's volatile, but it comes back up fairly quickly.


 That's what we observed even after major recessions across the globe. And to be honest, a lot of the investments that insurance companies hold over. For the market as a whole are fairly diversified. Okay. Specific insurance companies do not have diversified portfolios necessarily. You'd see companies that are very heavily invested in real estate, real estate, or companies that are investing in only bonds and not diversifying at all into, say, equity or real estate.


So within companies, there's that lack of diversification, but for the market as a. I would say it's fairly diversified. There's a lot of real estate exposure, there's a lot of equity exposure, and they have a significant chunk of bonds. So from that perspective, I think that's the reason that we see that over a longer term.


When you say take a rolling quarter performance, the performance for investments is not that bad. No, but at this moment, because everything is secularly down.  That has hit.


Q: So looking into the crystal ball guys on this topic, underwriting profit, and the investment profits, what do you see?  


So underwriting profits I, I think that pretty much Q3 has been worse than Q2 this year. And Q2 was interned to begin with. Worse off than q1. And I'm not comparing against last year because last year was better than this year.  But what the trend has been last couple of years is that Q4 performance has been worse than Q3.


So that's indication you would expect a lot more losses to creep in at Q4? I'm hoping that's not the case. I'm hoping that companies have booked all the losses in advance. They've set up the right amount of reserves. But in my experience most companies in the market tend to push the setting up of reserves as much as they.


And that's the reason that you see these losses creeping up with time and not at the get go. When you started writing the bad business.  


I know from my perspective, when I look at this whole heaviness on motor and health, and I think it's ripe for companies who really think about, you know, product diversification, proposition, diversification, to really get away from, you know, this heaviness on something that's really not yielding them, that in know results itself.


Q: And like Navin mentioned, are we an investment company doing insurance or insurance company doing investment? But there is something in. For the, the smaller companies to maybe not just burn all your cash in Google, but look at maybe one, you know, one resource who, who's is prudent in investment and that's just how you, you know, build your operating model.


Maybe there is something in, in it as well. In terms of prediction. I think we can expect a lot more product diversification from what we've spoken to Renjit. I think with the different startups and you know, so on and so forth, we know that some of the things are coming up so hopefully that it's, it's time to change this.


You know, people have understood that it's been a huge bottleneck. I'm going to be controversial here and here, you know, at the end of next year, you can see whether it's right or wrong. Mostly these predictions are wrong that I make, so, but you go, I'm gonna say that there's at least going to be one or two more consolidations driven by this lack of profits.


And I see that investment income is going to be sustained lower next year as well because the Fed is not done raising rates, and people are talking in terms of. A Q4, Q3 is bottoming out next year. So if that's to be believed, investment income is not gonna look up. And Underwriting profits- now it's in the hands of the companies. As you both said, if they start, you know, doing targeted rate increases in these portfolios that are burning, you know, then perhaps there is a chance. But you know, knowing the number of players in the market, I find that very difficult to push through in this market.


I think it's going to be quite a troubled time for the insurance industry next year.


One surprise element that can come in is, I know I said that I don't think companies should wait for Central Bank to step in to increase the rates, but one surprise element, if and when that happens, could be that if, say for example, tomorrow Central Bank comes and says that this is the minimum premium that you're supposed to charge and you cannot charge below this. , that can drastically improve the underwriting performance for the companies, and it can be like a surprise move or a surprise fortunate move for the market.



Q: So, just jumping into our next topic, the reserving trend, a Navin, you had some fascinating facts that you showed us before the call. So can you talk us through what has been the whole reserving trend from perhaps from 2019 Q1 to all the way to 2023 or 2022 Q1?


 So broadly, what we would expect from insurance companies, in general, is they would have more or less consistent reserving patterns. When I say consistent reserving patterns, it is that if you're writing the same sort of business mix every quarter, Then you would expect your reserves to increase and decrease in line with your premiums.


So the more business you write, the more reserves you keep. Or, as a proportion you keep some additional reserves. And if you're writing lesser business, there'd be some reserve releases over time what we observed during Covid drastically. Change in or shift in this methodology of reserving. And that was primarily driven during the Covid quarters.


So during 2020 Q1 when the first financials were published, that was like Covid was fresh. People did not know what's going to happen. What they did know was that this last 10 days of reporting has not taken. So what I'm going to do is I'm going to assume that this 10 days of reporting will come in next quarter.


Hopefully things will be fine next quarter. How naive we were back then. So that's, that's why companies sort of beefed up the reserves in 2020 q1 because things were not normal in Q2 either. This reserve that was beefed up was continued. So the trend continued in 2020 Q1. Your reserves were a higher proportion of your premiums because you're now keeping that buffer as aside because you're not aware of what's going to happen.


Going forward, whether these claims that are right now not creeping in, will they come in in the future? We don't know if some of these Covid losses or people who have had Covid and recovered, will they have any other symptoms that will need treatment and will not be covered by the government, so we'll have, we'll end up paying for them.


So companies did create that buffer of reserves. But we saw that gradually when this reserving trend changed during Covid, they saw an increase in reserves compared to premiums. This was then released over time in the subsequent quarters. So when in 2021 you started seeing losses, which are back to normal because traffic's back on the roads markets are open, so people are getting the same amount of disease, visiting doctors, everything's fine. From that perspective you are getting normal losses or in some cases higher losses. So those underwriting quarters were actually cushioned by the release and reserves that happened because of the buffer that was created. So you would have seen the same amount of adverse performance that we are seeing now in 2022.


In 2021 as well. If you did not have that cushion of reserves that you were. But what we saw was in 2021, this question was more or less completely released by the end of 2021. Therefore, 2022 performance was much worse because you did not have any question of reserves that you can release to sort of mellow down the blow of underwriting performance.


The difference that we observed between the top three players that I was referring to versus the rest of the market was that the top three players in most of these cases have now built back up the pre Covid levels of reserving, whereas that might not be the case for all of the market as a whole.


Q: I think reserving and releasing reserves always has been a dark art., you know, that CEOs have relied on a, you know, whenever you, you need to hit your profit numbers or your bonus numbers, you start releasing your reserves. Unfortunately that's not, that's not the ideal way to manage a portfolio, but I suppose that is, that's, that's what's happening. I see, you know, combining it with what you observed on the profit. And if you say industry was profitable and reserves are low, I, I kind of understand it, but if you tell me  reserves are low, profits are low, it's not a happy story for me, interestingly while that's true unfortunately that's where we are at.   


I mean it feels a bit like a grim story, but you know, something to look at those top three guys again you know, strong capital, therefore do they have the ability and then you have the, the weaker ones and therefore the inability.


As, as a fundamental reserving you know, insurance company's philosophy is to be able to reserve that use is to have best practices in place no matter what. And I think it's, it's important that, you know, companies that are struggling go back to that basic principle and, and follow a certain pattern, which only helps them in the long term to have that, like you said, Renjit, to have that short-term view to just sort of, you know, keep your stakeholders happy or do a, you know, short-term activity has a real long-term impact.


It's time that insurance companies really learn from that and, you know, have better practices. And for a risk averse industry, it's interesting that there is this element where we are okay to take risk. So , you know, it's an, it's an interesting pattern.


Q: I mean it's, it's like what Charlie Munger said, right?  “Show me the incentives and I will show you the behaviors, right?’” So the behaviors and the incentives are so aligned. Anyway, so moving on to the next piece, which I think is a bit you know, a bit scary that you shared with us in a, is about. , the whole point of receivables. Right? And, and collections piece.


Q: Right. So if you could tell us a little bit about how you've seen that progressing from 2019 to 2022, and then we'll get into the discussion.   


So what we observed for receivables was. That there's usually a trend in receivables when you look at the industry as a whole. Looking at the industry as a whole is a, has a calming effect because the numbers tend to stabilize. Some smaller companies can be volatile, but because there are, there's a mix of like medium size and large companies over there as well. And it becomes like a weighted average. The numbers tend to show a more stable pattern.   And the stable pattern that we were observing for 2019, 2020, 2021 was that there's a jump in receivables for the industry insurance receivables to about 8 billion  AED level. Somewhere in that. And then that sort of trickles down by the time you reach Q4. And that's primarily driven by the fact that a lot of larger contracts be it motor insurance contracts that are fully sort of reinsured, be it commercial risks or even fleet policies for motor.


All of these tend to be written in q1 for most insurance companies. So it's usually January heavy when in Q1. And that's the reason that you've written all of these risks, but you might not have necessarily collected on the premiums. The premiums for from businesses usually tend to come with a.


That's in contrast to buying individual policies. So because of that, there was a spike in receivables in Q1 in each of these years. And then this sort of trickled down as those receivables were collected upon, and they dropped to about 6 billion level by the time you reached Q4.



Q: These are Dirhams?


Yes. These are Dirhams 8 billion Dirhams to about 8.5 billion Dirhams in Q1 and dropping to about 6 billion to 6.5 billions in Q4. We saw same trend in 2019. Same trend in 2020. Same trend in 2021. Things changed in 2022, so 2022. Just to recap, is the period where we are seeing. Underwriting performance for most companies.


And that is driven by the release and reserves that I was talking about. So all buffer of reserves have been released and now in 2022, what we are observing for receivables for the market as a whole is that they have stabilized at 8.1 billions in q1, in Q2, and in Q1. So the downward trend that we were observing for the last three years that Q2 receivables for the industry dropped, then Q3 was lower because you are collecting on premiums that's no longer happening in Q2 and Q3, right?


So it's now a flat line instead of a downward trending line in Q2 and Q3. And that means that if it stays stable at Q4 then the industry receivable, so to. Are at 8 billion versus the 6 billion that we would've expected. . And just to put that in perspective, as I discussed earlier, we are not writing more premiums.


 It's not that there's a lot more business. That's why your receivables are also increasing as a proportion of that.  You're writing the same premiums that you were last year. Correct. But now you have 2.1 billion of more receivables to collect. As an industry that you did not last year. So it's gone up by 30% roughly, yes that's the expectation for Q4.


Q: And if you break down these receivables, what do they constitute? You mentioned some of the premium aspects,


What else is there? So, some of these receivables would be claim related that you must collect upon from reinsurers that you have to collect upon from insurance companies.


The thing with receivables within the market, and it's an accounting issue that largely the market faces, not necessarily all companies  Is that the way companies book receivables is on a net position. What that means is, If you are a person or a business that's buying an insurance policy from me and you owe me two millions in premium for that large insurance contract, you not necessarily pay me that receivable.


You not necessarily pay me that premium amount, so I'll have to put it as a receivable and you will agree to me that you pay these receivables that are due from you in some amount of. But usually you'll net it off. So say you make a claim of 500,000 next quarter, for whatever reason, you say that, okay, this quarter I was supposed to pay you the premium.


I'm not going to pay you because you were supposed to pay me the claims. So you'll just assume that all things iron out or even out with each other and you not actually pay. So there's no cash actually exchanging hands in that sense.  The other risk associated with. Is on SNS Recoverables (subrogation Recoverables). That's okay. Largely motor insurance driven. That's when you have like a third party liability insurance.   For your motor vehicle. You have an accident and you are not at fault. The the other driver is at fault. So what happens is you would still go to your insurance company and make that claim.


Your insurance company will end up paying the claim to you even though you are not at fault. So your car gets repaired, and then that insurance company goes to the insurer of the driver that was at fault and says that you need to pay me this X amount because your driver was at fault. Hmm. So this is what basically subrogation refers to.


So your insurance company essentially wants to recover all the amount that it has paid to you. Now, the issue in the market is that companies are putting this amount as a recoverable, salvage, and subrogation recoverable. So the hundred thousands that they might have paid you is now a SNS recoverable on my book as your.


But not necessarily as a payable in the at fault driver's insurance company. So there's an overstatement in receivables that we observed. So we observed how much of the receivables are being booked by companies against their counterparts within the market. And then we checked the financials filled by those counterparts.


And what are the payables booked by those counterparts for this insurance company? And when we did this analysis for about eight or nine companies, we saw that there's an overstatement in receivables by about 75 to 80%. Right.


Q: And the size of the problem is not small. I mean, just thinking of a banking example, we had the whole principle of bad debts and, you know, we used to write off after 180 days past due. I'm not sure. What are the write-off norms being followed here? In this scenario, are these debts being carried on for many years or what are the.


 So a lot of these debts some of these debts are being written off, okay? But the thing with writing off these debts is the accounting department would do as their auditor agrees upon, recommends, and the auditor would recommend based on standard accounting procedure.


They don't necessarily recommend basis. The fact that whether your counterparty has actually booked that as a payable to you, and that's where the gap is more often than not the auditor would recommend based on how old this receivable is or what's the credit rating of the counterparty. They will not necessarily go to the counterparty and check that, whether they acknowledge it as a payable or not.


Q: I mean, this, it feels to me that, you know almost there is an opportunity now, the size of the receivable is 8 billion s it's almost an opportunity for some independent task force or maybe a smart InsureTech to say, hey, I will do your you know, receivables, collections. Simple, straightforward stuff. Right. You know,  and, you know, I'll charge you a little bit of a fee But I, I'll, I'll get as much of the debt recovered as possible.  So if any insurer takes are listening to this, you know, this is a business idea.  


If I recollect correctly, where, you know, the guys would go ask for receivables and stuff, but the smarter way to do it is more tech-based and I think that's what I think we spoke about it as well, like the likes of addenda was trying to do.  Which is use of blockchain. So it is registered. There is just no way to go back to it.


And, you know, from a regulatory point of view as well, they can see if it's stalling and then, then the right measures are taken or at a, a regulator level as well.



Q: No, and I think for that, I think you, you're right an Addenda, like a solution with a blockchain where it must come down from the UAE regulator saying that, hey, now I've seen the size of the problem. Please use this blockchain. Everybody has to be part of this consortium. It cannot be by choice. You know, that's when a blockchain solution really works, isn't it?


It works.   Absolutely. And the reason why it did not work or worked in part is that obviously many of them don't want to pay.


There's a cash crunch and they don't want acknowledge it. And you know, that's why there was a lot of pushback on some of the products. Like it in what it in itself came out there.


Q: And, and another thing we, we did that recent episode on open insurance. I, it feels like this is a great opportunity where open insurance can really add some value, right? I mean, if you can exchange claims receivables data on a common platform and it has to be probably regulator led, otherwise nobody's gonna do it. But this can really clear up the mess and shore up the finances of many of these insurance companies.  


Absolutely. And also, you know, like Navin mentioned, there is just not, not just the claims piece that goes into the receivables, it's also the premium side.


Q: Let's make some more, you know, predictions and make sure that we, our neck, is on the line for next year. So, any closing predictions guys? What would you wanna say? Having heard all this?  So I'll take this up. First thing, the closing prediction that I'd like to make is that couple of things will change in the coming year.


So it's not really, I'm an actuary, so it's has to be a database prediction. So occupational has,  . So one of the things that is happening is IFRS 17, which is a new accounting standard that's going live from January.  And one prerequisite of the standard is that it's more of a cash-based accounting standard than an actual based standard.


So a lot of these receivable issues will need to clean up in the next 12 to 18 months because if you're not collecting cash, then it's not hitting your top line anymore. So that's one. So that's going to hit a lot of the companies drastically. Right now they're just struggling with implementation, the new accounting systems and all of that.


They're not necessarily allowing for the fact that just the way business is done is going to change because of this.  Because of how you're reporting that business. The second thing that I. Is the Central bank is probably going to tighten the noose one way or the other? They might not do it at both ends.


When I say both ends, it's one with respect to your pricing, and whether your writing rates that are sustainable. And the other end is your solvency, whether you have the capital to write the business at, the rates that you're. So my prediction is that Central Bank is going to tighten the noose at one of these ends.


I'm not sure which one, but one of them will be done because what obviously they don't want is the failure of one insurance company.  Because that creates then systemic risk because of these receivables that other insurance companies might have against them. 



Q: Vidya, any points you had to add on or dive deeper into?  So no, for, I think from my end I, I, I think of M&Aas an opportunity for next year. And I think we pointed that out earlier in the podcast as well, so because there's so many of those smaller players there and, you know, and we've seen many activities happen this.


Q: This year, in any case, from an M&A perspective, I think we can expect a lot of that. And I also feel generally as the market, there is a lot more energy around innovation. We are talking a lot about new concepts and, you know, having spoken to many of you know, or some of those startup founders over the year or year and a half. I feel like next year, we could see a lot of innovation coming through. I really hope for that. You know, which is not motor heavy or even within if it's motor.  Let there be a little more innovation around that. Let not be the plane; let me go get that customer and, you know, spend that dollar value on Google. So I think there has to be a lot more innovation around those aspects. And I feel like those two might set a tone, but also at, at the base of let there be regulatory movement on. Bringing in some of those best practices. And I think we've seen some coming through from Central Bank already on, you know, the, just the whole KYC details that are expected from customers and so on, so forth.


So I think we are seeing a lot of movement coming through from Central Bank. So, these three would be my take.


Although this is a story that we have been holding onto long for a long period and I think also some draft regulations on open insurance are in the works. Possibly we might see the regulation coming in.


Q: And I, and to your point on innovative insurance, I think probably next year is the year of embedded insurance, in UAE that possibly could increase the size of the pie because no longer is it do you want to buy insurance, or you go out and search for insurance. Insurance is part of the purchase and it's served in a seamless manner. And that's probably a way to go for these mid-size companies, you know, so I would say tie up with those innovative in short companies, get some embedded solutions out in the market.


Increase the size of the pie, absolutely. The pie is quite there. It's just for us to be a lot more innovative to get there because if you see the other metrics of, you know, other industries, they're doing fairly well. It's in the market and is coming back. It's for us to, you know, get innovative.   You're right. The pie is quite there because it's, look at the under insurance, I mean, in terms of insurance premiums to GDP still. Pretty dismal. So there is a lot of opportunity out there, Absolutely.


So very good. I think that's a  good positive note to end on. Good, good to have you Navin and great to, you know, hear your thoughts.