With an exception of 2015, Iran’s insurance sector is forecast to grow in future, as the economy is expected to improve, but the growth will operate below the sector’s capacity, a report says.
Business Monitor International anticipated in its latest report that the Iranian insurance sector will contract by nearly 15% in 2015 but grow later when sanctions against Iran are lifted.
“Growth is likely to be largely driven by basic, compulsory lines, including motor and health,” it added.
As with many regional markets, the non-life segment is relatively large compared to its life counterpart; it will remain the key source of growth for the sector. Compulsory motorists’ third-party insurance and health insurance remain by far the dominant lines.
These will constitute the biggest driving forces behind the increase in premiums over 2015. Motor insurance will be driven by high demand for automobiles, which BMI anticipates to remain strong given the lack of investment in public transport and low oil prices.
In addition, health insurance should remain a dominant line as the state looks to offset the high costs of public healthcare by encouraging citizens to seek private health solutions.
Moreover, a combination of an increase in the number of over 65s and a rise in the collective wealth of the middle class may give the sub-sector an additional source of growth.
As inflation is still high, hovering at 15%, life lines have become less attractive to savers. In addition, sanctions have limited local insurers’ access to global reinsurance markets. As a result, insurers are forced to use the domestic reinsurance market, which is uncompetitive and dominated by the large state reinsurer. This problem has been made worse by the government’s protection of the state reinsurer, which it regards as a strategic asset, inflating reinsurance premiums, according to the report.
Since many local insurers lack the scale to internally absorb risk, they are forced to seek out these high reinsurance premiums. In turn, this adversely affects their retention ratios and profitability levels.
Looking ahead, the final agreement between Iran and international powers over its nuclear program could give the insurance sector a significant boost. Removing international sanctions would help reduce inflation.
Moreover, a reduction in the barriers to Iranian companies’ access to financial markets would also contribute to an improved forecast for growth in premiums.
In addition, access to global shipping reinsurance would allow Iran to export significantly larger quantities of oil, providing the economy with a welcome boost. This greater macroeconomic stability should help mitigate fluctuations of the rial, which historically has prevented accurate readings of the insurance sector in terms of local currency. Over the long run, there exists considerable upside potential in Iran’s insurance sector.
Good Standards
The market is relatively well developed by regional standards. Niche markets are more entrenched and there is a more diverse product portfolio in most sub-sectors.
Bimeh Iran, the large state-owned company, possesses significant scale. As one of the largest insurers in the Middle East, it would rank as medium-large in most countries. Access to global markets would provide a substantial boost to its operations. However, as mentioned above, it will continue to be regarded as a strategic asset by the Iranian government, who will remain active in the insurance market.
Despite the outcome of Iran’s rapprochement with international powers, long-term challenges will continue to curtail growth, ensuring that the market operates below its capacity.
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 over the forecast period. As such, BMI believes that growth will mainly be driven by an increase in the volume of policyholders for basic compulsory lines.
It is unlikely that the market breakdown for each sub-sector will change greatly. The same can be said for the market’s competitive landscape, with Bimeh Iran likely to maintain its dominant position, in part because the government views it as a strategic asset.
Problems related to lack of market consolidation or any meaningful change to the sector’s competitive structure will hinder the sector’s development.
BMI anticipated that these issues are likely to continue to undermine growth over the coming years and will prevent many insurers acquiring scale. This will prevent insurers from boosting their collective profitability and mean that they continue to rely on outward reinsurance.
