CI Ratings has highlighted the need to consolidate Iran’s insurance market and move toward a more risk-based supervisory system.
"Iran’s insurance regulation and supervision remain rather prescriptive and currently seems to be more focused on form over substance," CI's key report notes.
"For example, the tariffs are set by the regulator for about 70% of the sector’s premium volume, mainly for basic insurance products such as motor third-party liability."
According to the report, solvency requirements for Iranian insurers in CI’s view do not adequately reflect the inherent risks in insurers’ business and risk profile, or sufficiently address the quality of the capital in an insurer’s capital base, Financial Tribune reported.
Nevertheless, numerous insurers only just meet the minimum regulatory Level 1 solvency requirements and a relatively high number is below it.
CI warns that many insurers face legacy problems, especially with state-owned or related companies in the form of substantial uncollected premium receivables, amounting to 40% of gross written premiums on average, with negative consequences on insurers’ investment position and income.
Another challenge for the sector, as highlighted by CI's report, is the limited size and liquidity of Iran’s domestic capital market. Insurers’ invested assets primarily comprise bank deposits and higher risk assets such as listed and unlisted equities, as well as real estate, which results in potentially significant concentration and liquidity risks.
In CI’s view, regulation needs to move toward a more risk-based supervisory system. On the one hand, this would imply a liberalization of regulation and on the other hand, force the market to move toward a more value- and risk-based management, where transparency contributes to market discipline and an efficient insurance market.
"The aspired move towards a Solvency II-type of supervision would require an unprecedented sophistication and cultural change from both the regulator and insurers," it says.
" Such a transition can probably only be achieved through gradual longer term and dual path achievements since this process will require a substantial investment in know-how, IT, governance and risk management, which are available only to a limited extent in Iran."
Market Prospects
According to CI, insurers play a critical role in Iran’s economy and social welfare by providing consumers and businesses with protection against the financial consequences of negative events by facilitating capital formation and by investing in Iran’s corporates, financial institutions and sovereign entities.
Over the past two decades, the Iranian insurance industry has undergone significant structural changes and legal reforms. Since the passing of the ratified "Act of Establishment of Nongovernment Insurance Institutions’ (2001) and the law governing free trade zones (1999), the number of private insurers has increased substantially, while the fully or partially government-owned companies continue to dominate the market.
As for challenges hampering Iran's insurance growth, CI says there are several factors that have not yet let the Iranian insurance market benefit from the underlying growth potential.
Firstly, insurance business in developing markets generally only grows with a time lag compared with the overall economy. Secondly, the Iranian population is generally insurance averse and expects the government to step in if things go significantly wrong like in the case of natural catastrophes.
Additionally, high inflation and economic depression have weakened the net saving of most households between 2008 and 2013.
In CI’s view, it is not surprising that approximately 70% of the market’s premiums are obligatory (mostly motor third-party liability) and government controlled.
It believes that the Iranian insurance market, like the overall economy, is currently in a state of flux. Following the partial lifting of sanctions in January 2016, a gradual recovery and more stable conditions were hoped for, whereas the announced reimposition of US sanctions will in CI’s view create a climate of uncertainty.
In an interview with Financial Tribune this week, Wolfgang Rief, a co-author of the report and a senior credit analyst at CI, said the upcoming US sanctions for Iran's insurance industry will have little impact both because of the limited exposure of Iranian insurers to foreign business and the experience of previous sanctions that have made these firms more adept at managing the fallout from sanctions.
US President Donald Trump pulled out of the international nuclear deal with Iran on May 8 and said he would reimpose sanctions within 180 days, prompting several European companies to announce they would end business with Tehran before the Nov. 4 deadline.