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Insurers cut premiums in UAE for EOY
Posted on Nov 23, 2017 by Rob McBroom
We came across an interesting article on various insurance websites the other day, including the Middle East Insurance Review. This article noted that some insurers in the UAE have been cutting premiums at the end of the year in order to boost their gross yearly revenue. Here, we discuss both the pros and cons of this tactic and why it might not be the most advantageous business decision for clients.
Why cut premiums in Q4?
In many industries, it is common for some companies, especially those that are not meeting their sales goals, to cut the prices they charge for their products or services towards the end of their operating year. This is done usually as a way to boost gross revenue in the short-term and ideally set the company up in a positive financial situation for the coming year.
While this tactic is pretty much a standard operating procedure in some industries, especially those in the consumer goods sector, it is not an overly common occurrence in the insurance industry.
In our experience, when insurers do follow this tactic they are doing so for one of two reasons. First, this is done to boost their market share. With a larger share of the market, the insurer will usually see higher profits in the short-term.
This is obviously a great thing for companies in the short-term! But, as we discuss below, cutting prices to boost top-line revenue usually hurts the consumer in the long-run.
The second reason some insurers will slash their premiums closer to the end of the year is so that they can boost liquidity. With more liquidity insurers are better able to meet their financial obligations.
We usually see this strategy employed when there has been a natural disaster or event that has resulted in a high number of claims. If the claims are more than the premiums the insurer took in that year, there could be liquidity concerns as the insurer might not have enough capital available.
Yes, there are reinsurance plans usually in place to cover events such as these, but if they are not enough, you will see insurers start looking for alternative options. Usually, the quickest option is to cut premium rates to try to get more people to secure plans and pay premiums. These can, in turn, be used to prop up the increased claims.
Can I benefit from these price cuts?
At first glance, the answer is of course, yes! A lowered premium means you pay less for cover, which to many is a great thing. As this article from the Middle East Insurance Review points out, dropping prices could result in a price war, with other insurers competing by lowering their prices.
In the short term, this has a positive benefit for clients who are looking for insurance coverage. But there is one major drawback that could actually result in any savings you might realize from these lower premiums being utterly wiped out.
What is the major drawback to cutting premiums in Q4?
The biggest drawback with a tactic such as this lies in the fact that this strategy only brings short-term benefits. Yes, you will pay a lower premium when you first purchase the plan but in our experience, insurers that have employed this tactic have actually seen larger premium increases the following year.
If this were to happen, you will pay more when it comes time to renew your plan. In many cases, the increase we have seen the year after an insurer decreases premiums is higher than the percentage they reduced their plans by. In other situations, the insurer has turned around and changed or reduced benefits within a few years, ultimately reducing the overall value of the plan.
In other words, you save money this year but pay more next year or in the near future. Or, in other cases, you will see a reduction in benefits covered which might not be ideal for many. This can be a particular worry for some, especially when it comes to health insurance.
For example, if you develop an ongoing medical condition and the insurer raises rates beyond your budget threshold, your coverage options will be limited when you go to look for another plan as your medical condition will become a pre-existing condition. While in Emirates like Dubai and Abu Dhabi you will still have to be covered, those in other locations will likely see other insurers exclude their pre-existing conditions.
This is not an overly sustainable practice and is indeed one that people should carefully consider when they are looking for insurance coverage of any kind.
How do I best avoid this?
Ideally, securing a sustainable plan should be as important as finding a plan that meets both your budget and coverage needs. The insurance advisors at UAE Medical Insurance can help you with this. We take the time to learn the market, and have founded robust relationships with insurers.
Should one offer a discount on premiums, we will be able to tell you whether this discount is something worth pursuing or whether there are other similar coverage options out there that will be more suitable.
If you are looking to secure coverage, why not contact us today? We might be able to find you better coverage or even negotiate a deal with your insurer.