Iran’s insurance industry is expected to achieve “strong single-digit growth” in the course of 2015, Business Monitor International predicts in its January report, though it revised down its expectation for the sector due to a weaker than expected economy and continued sanctions.
The Iranian insurance market is by regional standards developed. Non-life insurance will remain the driving force for growth in the insurance industry, given the relative size of the non-life insurance segment relative to its life insurance counterpart, according to BMI Insurance Report for the second quarter of 2015.
Compulsory motorists’ third party insurance and health insurance remain by far the dominant lines in non-life insurance. These two will be the greatest means behind the increase in premiums over 2015. Motor vehicle-related premiums should grow by 14.7 percent to $4.9 billion and health insurance premiums should increase by 13.7 percent to $1.93 billion, in 2015.
BMI report states that making forecasts about the insurance industry are impeded by the limited data provided by regulator Central Insurance of Iran (CII), and leading insurers like Iran Insurance Co.
However, recent information suggests that total premiums are growing strongly. Growth is largely due to the two basic lines of motor and health insurance, which together make up nearly 90 percent of non-life premiums. Non-life premiums are expected to increase by 14.1 percent to $8.14 billion in 2015.
The relatively small size of the life insurance sector and the overbearing market share of non-life insurance demonstrate that Iran’s insurance market is in many ways underdeveloped. Although life insurance premiums may grow by 17.1 percent in 2015, their total value will be dismissible at $880 million.
Inflation Casts Shadow
High inflation is likely to pose the greatest barrier to expansion in the life segment over 2015, by discouraging Iranians from utilizing life insurance products as a conduit for savings. Currently, Iranians are mostly putting their savings in banks, as high deposit rates and systematic risk make equities an unviable investment.
Structural inflation is likely to remain an issue in the near term, with the government monetizing its deficit rather than implement unpopular, sweeping subsidies cuts. Though inflation has fallen markedly from 34.7 percent last year, it remains high and is expected to fall below 20 percent for the fiscal year ending March 21.
Sanctions Hold Back Expansion
In addition, sustained western sanctions will continue to hurt macroeconomic performance.
Iran is under the most stringent sanctions regime set by the United States, the European Union and the United Nations in a bid to restrain Tehran’s nuclear energy program. It is currently negotiating with United States, Britain, France, Germany, Russia and China, known as the P5+1, to lift the sanctions by addressing their allegations.
The two sides have set themselves a March deadline to reach a political agreement ahead of a final nuclear deal by June 30. The agreement would be on limiting Iran’s nuclear program in exchange for lifting sanctions. Iran and the six have twice extended the negotiations after failing to meet previous deadlines for a deal.
Long-term challenges aside from western sanctions will also continue to curtail growth, ensuring that the market operates below capacity. In October 2014, western media reported that the European Union may seek to re-impose sanctions on Moallem Insurance, a major domestic maritime insurer, among other Iranian entities.
Structural Obstacles
As for long-term challenges, an opaque regulatory system, heavy government intervention and a lack of public awareness of the benefits of many insurance solutions show little signs of improving.
As such, it is likely that growth will mainly be driven by an increase in the number of policyholders for basic compulsory lines. It is also improbable that the market breakdown for each sub-sector in the insurance market will change greatly. The same can be said for the market’s competitive landscape, with Iran Insurance maintaining its dominant position, in part because the government views it as a strategic asset.
A lack of market consolidation or any meaningful change to the sector’s competitive structure will hinder the sector’s development. It will prevent many insurers acquiring scale, which would allow them to boost their profitability by absorbing some risk rather than seeking recourse to outwards reinsurance.
Thus, the market will continue to be characterized by its fragmented nature, made up of many “sub-scale” players. These insurers only operate across basic product lines and compete almost exclusively in terms of price. This in turn discourages product innovation or investment in non-compulsory lines.
“Despite downgrading our expectations for the market over 2015 and beyond, in the long-run there exists considerable upside potential in Iran’s insurance sector,” BMI writes in its report, “We think that total premiums will rise by 14.4 percent to $9.02billion in 2015.”
State-owned Iran Insurance “possesses significant scale” and is one of the largest insurers in the Middle East. It would benefit from greater access to international markets if sanctions are lifted. Furthermore, heavy handed state involvement has given it the substantial advantage of dominating the local reinsurance market. But this influence pushes up reinsurance premiums, due to a lack of competition.
