Credit shortage hinders UAE insurance sector
A serious credit crunch has been developing in the UAE’s insurance sector over the first half of the year and, if left unchecked, it could hinder corporate profits.
Credit delays have moved well beyond the industry standard of 90 days and in some cases, have been extended to 6-9 months. Part of the reason for the current trend is due to insurance brokers far exceeding the credit period, which has subsequently affected insurers’ cash flow and created a vicious cycle.
According to Gulf News, the UAE insurance market includes more than 100 registered brokers and many more operating illegally, a figure far too high for a market of this size. Due to the intense competition for business, some brokers are selling policies by offering extended credit periods, which is technically illegal.
1999 was a difficult year for the local insurance sector. Gross premium income remained at Dh 2.5 billion (the same figure as in 1998) but profitability dropped between 5-7 percent.
Many local brokers are working on increasing their capital base as mandated by Ministerial Decree No. 11 of 2000 for Organizing the Practice of Insurance Brokers. According to this ruling, for each branch operated by a broker, there must be an additional bank guarantee of at least Dh 150,000. Many industry sources feel this new decree is not strict enough; financial consultants have a minimum capital requirement of Dh 1 million, while brokers only require Dh 300,000. –(Albawaba-MEBG)