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Bumpy Road to Insurance Growth

Bumpy Road to Insurance GrowthBumpy Road to Insurance Growth

The insurance industry is poised for steady, double digit growth in the near future, analysts predict. The driver of this growth will be an increase in the number of policyholders, most of whom will be buying basic insurance policies.

The expansion of the insurance industry should be driven by an expansion in Iran’s economy, which seems to be exiting a two-year recession. The resumption of economic growth will require both a domestic reform and an alleviation of western sanctions. In its October report, Business Monitor International states it is “cautiously optimistic” that the Iranian government will move forward both in its economic reforms and in its dealings with the P5+1 group – the US, Britain, France, China, Russia and Germany – over the lifting of sanctions placed over Tehran’s nuclear energy program “albeit tentatively.”

In spite of this, the insurance market will continue to record “sub-optimal” growth, as it will be hampered by many systemic flaws, BMI says.

 Downside

The Iranian insurance sector is large and quite developed by Middle East standards. Due to the relatively large size of the non-life segment compared to its life counterpart, the non-life insurance sector will remain the key source of growth for the entire industry. Within non-life segment, Compulsory Motorists’ Third Party Insurance (CMPTL) and health insurance are by far the most dominant lines of business. Thus, much of the driving force behind Iran’s insurance market in 2015 and beyond will lie with these sub-sectors, BMI forecasts.

A lack of up-to-date data from the regulator, Bimeh Markazi or the Central Insurance Company, poses a challenge in providing an accurate market analysis. However, the latest full year reports, from the Iranian year 1390 (ending March 2012) and the half year ending August 2012 show a strong growth in total premiums. The primary drivers of this growth are CMPTL and health insurance. These two insurance lines will account for roughly 87 percent of the non-life segment’s premiums in 2015, which in turn comprises around 90 percent of total premiums.

The fact that growth is largely limited to two basic insurance lines demonstrates that the market is in many ways underdeveloped. However, it also suggests that there is some scope for growth in smaller subsectors over the long-term, albeit off a low base.

In the past few years, inflation has severely hindered the sales of life insurance products, which are in an embryonic stage of development, by discouraging Iranians from utilizing life products as a means of savings. The life insurance segment has the ability to post high growth, admittedly coming off a very low base, if inflation levels can fall.

“Structural inflation is likely to remain an issue over the [next few years], with the government monetizing its deficit rather than implement unpopular, sweeping subsidies cuts,” BMI predicts, while the Rouhani administration insists that it will handle the recent sharp decline in oil prices among other factors that could lead to a deficit in the foreseeable future.

 Upside

Iran’s insurers have a number of strengths. Thus, there exists considerable upside potential in the industry in the long run.

Bimeh Iran, the largest state-owned insurance company, has considerable scale. It is one of the largest insures in the Middle East and would be ranked as medium-large in most countries.

Moreover, the insurance market as a whole has shown resilience to western sanctions.

“Heavy-handed state involvement” has given Bimeh Iran the substantial advantage of dominating the local reinsurance market, which in turn has pushed up reinsurance premiums due to a lack of competition. As a result, companies are forgoing large portions of their gross premiums, suppressing their profitability.

Greater access to international markets, through mitigation of sanctions, would greatly improve the insurance industry. First off, it would help boost local insurers’ profitability by offering greater competition to large state-owned entities, such as Bimeh Iran. Secondly, increased access to global capital markets as well as foreign investment would help increase innovation. Finally, foreign reinsurers would also offer competition in reinsurance to Bimeh Iran, which is currently Iran’s sole reinsurer.

The prospect of increased globalization for Iran’s insurance industry has slowed in recent months as the country’s “tentative rapprochement” with the West has “stalled”, according to BMI.

Furthermore, other long term domestic challenges will also continue to curtail growth, ensuring that the market operates below its capacity. An obscure regulatory system, intense government intervention and a lack of public awareness of the benefits of many insurance solutions show little signs of improving in the near future.

Altogether, growth in the insurance industry will mainly come from an increase in the volume of policyholders. It is also unlikely that the market breakdown for each sub-sector will change considerably. The same can be said about the market’s competitive landscape and in all likeliness, Bimeh Iran will keep its dominance in the insurance industry, in part because it is viewed as a “strategic asset” by the government.

Financialtribune.com