Balancing act: Managing growth in uncertain times

Local insurers have weathered a turbulent two years, during which they have been compelled to make the transition from an era of rapid economic expansion to one of more muted growth. Their performance over 2011 suggests that their efforts to date have been successful: bottom-line expansion has been achieved with modest top-line gains, and the sector has met the challenge of decreasing investment income while continuing to show healthy profit. These achievements account for the air of optimism that currently prevails within the emirate’s insurance community.

MARKET STRUCTURE: Abu Dhabi’s insurers are situated within a wider national market comprised of 61 insurance companies, 34 of which are domestic institutions. Local insurers compete freely for business with well-known brands, such as RSA and AXA, although they retain a minor advantage over the offshore players in that the current regulatory regime does not allow UAE property coverage to be written outside of the country. The large number of institutions serving a relatively small population of 8.2m people, according to the National Bureau of Statistics, makes for a fragmented market, although there is a discernible segmentation of business. Two foreign and 11 national companies work in life assurance, fund formation, operations insurance, and property and liability insurance according to a 2010 report from the Insurance Authority (the federal insurance regulator in terms of licensing) conduct of business and prudential supervision. Meanwhile, foreign firms tend to specialise in life insurance: eight of them operated exclusively in the life assurance and funds segment, compared to just two local firms in those areas.

The market is served by 11 insurance agents and 170 insurance brokers, of which 163 are national and seven are foreign. The introduction of new regulations on brokerage activity in the UAE resulted in a 20% decrease in brokers between 2008 and 2010, as those that did not comply with a new capital adequacy limit had their licences revoked. Rounding out the sector are 20 insurance consultants, 70 loss adjusters and 26 actuaries.

POSSIBLE CONSOLIDATION: The fragmented nature of the sector and the challenging business environment that has prevailed since the global economic crisis have led to speculation regarding possible consolidation in the market. While the anticipated mergers have yet to take place, a programme of regulatory reform is expected to encourage it in the medium term. “There is no sign of consolidation yet, but it is important that somebody encourage some companies to merge. Naturally, this is difficult, but when the new regulations regarding solvency kick in, it will happen automatically,” Fareed Lutfi, secretary-general of the Emirates Insurance Association, told OBG. Meanwhile, the Insurance Authority froze the issuances of new licences since 2009, although it has since made two exceptions for sharia-compliant, or takaful, companies that have launched in Abu Dhabi.

MARKET CHARACTERISTICS: The most salient market characteristic of the Abu Dhabi insurance industry, as well as that of the wider UAE, is a propensity to cede premium to reinsurers. In this, the market follows a Gulf trend that saw an aggregate of 40% of non-life premiums originating in the GCC directed to reinsurers in 2011, according to the Qatar Financial Centre’s 2012 “GCC Reinsurance Barometer”.

However, larger insurers in the region have displayed a greater appetite for retaining risk in recent years and have begun to raise their retention ratios accordingly. Abu Dhabi-based insurers are no exception, and an OBG assessment of the largest four local players’ premium showed that they ceded an aggregate 52.85% of their gross written premium (GWP) in 2011 compared to 56.9% in 2010 (see analysis). This trend will likely continue as technical ability grows and balance sheets strengthen due to the improving economic backdrop and regulatory reforms.

The UAE market is also relatively under-penetrated in relation to other emerging markets. According to “World Insurance 2011”, a report by Swiss reinsurer Swiss Re, premiums stood at 1.8% of GDP in 2011, compared to Jordan’s 2.2%, Bahrain’s 2.4% and Thailand’s 3.4%. This is partly explained by an historical reliance on non-life, particularly big-ticket business in general lines such as the maritime, property and accident segments, a phenomenon that reflects the status of Abu Dhabi and Dubai as transportation hubs with a steady pipeline of infrastructure development.

“The industry should do a better job presenting the need and function of insurance by continually educating the market,” Oussama A Kaissi, the CEO of Watania, an Abu Dhabi-based takaful operator that was founded in 2011. “There are many opportunities for growth as per capita premiums in the UAE are still quite low compared to more mature markets.”

However, recent years have seen an expansion of the life business, driven initially by foreign firms and then by local players seeking to diversify their revenue streams. In 2006, according to Insurance Authority data, life assurance accounted for 23% of the total premium; by 2010 its take had risen to 34.2%.

“Life insurance is a key line of business that can give a needed boost to the entire industry,” Kaissi of Watania told OBG. “At the same time, it is difficult to grow this business given the demographics of the country; a high expatriate population means that people are more mobile and wish to transfer their policies to their home countries. This presents a challenge that the industry is trying to overcome.”

THE PLAYERS: The Abu Dhabi market is led by the nation’s second-largest insurer, the Abu Dhabi National Insurance Company (ADNIC), which in 2011 had assets of $3.7bn. The company, in which the Abu Dhabi government holds a 23.8% stake, has been a market leader since its inception in 1972. In 2011 it retained its preeminent position with a GWP of Dh2.1bn ($571.6m), around four times that of its nearest local competitor, while retaining the strong financial rating of “A” in 2010 and 2011 from both Standard & Poor’s (S&P) and AM Best ratings agencies. Although ADNIC has in the past focused on large hydrocarbons and construction projects, it has more recently emphasised consumer lines, such as travel and health insurance.

With total assets of Dh1.6bn ($435.5m), Al Ain Ahlia is the second-largest insurer in the emirate. Established in 1975, it has followed a similar trajectory to ADNIC in its diversification away from large commercial projects to a wider array of insurance, which now include motor, health, life and property, as well as its traditional offerings in marine, energy and aviation. Rated “A3” by Moody’s with a stable outlook, the company took in a GWP of Dh503.8m ($137.1m) in 2011. As of 2012, the government retains a 20% interest in the company.

The third-largest insurer operating out of Abu Dhabi, with total assets of Dh1.5bn ($408.3m), is the Emirates Insurance Company (EIC), a non-life firm in which the government retains a 12% stake. Just five years ago its footprint was limited to its offices in Abu Dhabi and Al Ain, as well as small operations in Dubai and Jebel Ali. However, over the intervening period the firm has expanded into the Northern Emirates, adding two branches in Dubai and one in Sharjah, as well as smaller outlets in Umm Al Quwain and in Abu Dhabi. More outlets are planned for the Al Gharbia region in 2012. In 2011 EIC had a GWP of Dh643.1m ($175.1m) and retained its “gcAA” rating from S&P’s regional accreditation system. In late 2011 AM Best rewarded its history of technical profitability with an “A-” rating.

Of insurers in which the government does not hold a share, the largest is the Al Khazna Insurance Company, which posted total assets of Dh1.1bn ($299.4m) at the close of 2011. Together with Al Wathba National Insurance Company, which had assets of Dh890.6m ($242.4m), and Al Dhafra Insurance Company, with assets of Dh704.2m ($191.7m), Al Khazna forms a group of insurance firms that entered the market between 1979 and the mid-1990s, all of which have since grown steadily on the back of Abu Dhabi’s expansion.

In addition to the conventional insurance market, Abu Dhabi is also home to four sharia-compliant insurers that together form a rapidly expanding takaful sector (see Islamic Financial Services chapter). Abu Dhabi National Takaful Company was the first to enter the market in 2003 and has since been joined by Methaq Takaful (2008), Al Hilal Takaful (2008), Insurance House (2011) and Wataniya (2011). “The relationship between the national and multinational companies in the local insurance sector is quite healthy,” managing director of Methaq Takaful, Mohammed bin Hazzam Al Dhaheri, told OBG. “The growth in local companies is not stifled by the presence of internationals, and it creates an efficient, competitive atmosphere at the local level.”

Finally, standing somewhat apart from both the conventional and sharia-compliant insurers is the government-owned Daman. Formed in 2005 to ensure that the insurance industry had sufficient organisational capacity to accommodate a new mandatory health insurance scheme for expatriates, it is the first specialised national health insurance company in the UAE. Global insurance and reinsurance firm Munich Re, which maintains a 20% stake in the company, was appointed as its strategic partner and has since helped add around 2.1m clients to its books as of mid-2012. The firm continues to provide mandatory, government-subsidised health coverage, as well as enhanced package prices at market rates. It also administrates the Thiqa programme, a government-funded health insurance scheme for nationals (see analysis).

PERFORMANCE: Abu Dhabi’s insurance sector has benefitted from the rapid expansion of the local economy, as well as that of the wider UAE. Insurance Authority data show that the premiums written by insurers in the UAE grew by 170.8% between 2005 and 2010 and that local firms accounted for around 77% of the total during this period. The slowdown in the wake of the global economic crisis resulted in slower growth for the industry and individual losses, but the improving economic environment has since led to renewed optimism regarding future expansion.

According to the National Bureau of Statistics, real national GDP growth reached an estimated 4.9% in 2011, boosted by rising oil prices and production volumes in response to disruptions in Libya. This has been reflected in the balance sheets of the nation’s insurance companies. Although the Insurance Authority has yet to publish its data for 2011, in 2012 Fatima Mohammed Ishaq Al Awadi, the Insurance Authority’s deputy director-general, announced preliminary figures showing that national GWP grew by more than 11% in 2011 to reach Dh24bn ($6.5bn).

While some in the insurance community have pointed out that premium growth was achieved at the expense of net technical returns, Abu Dhabi’s largest insurers demonstrated their commitment to bottom-line (or technical) growth and managed to achieve it with little or no erosion of the top line. An OBG analysis of the 2011 financial results for the largest five insurers based in Abu Dhabi showed that aggregate net underwriting income grew by 27.8% year-on-year ( yo-y), while GWP grew by an aggregate 4.62%. The largest top-line gains were recorded by ADNIC, which expanded its GWP by 18.6% y-o-y, while still recording an impressive 23.9% growth in net underwriting income. The highest gainer on the bottom line was Al Khazna, which recorded a 114% expansion to turn around a net underwriting loss suffered in 2010. These strong performances were reflected in the aggregate net profit of Abu Dhabi’s five largest players, which rose by 57.39% y-o-y to reach Dh346.1m ($94.2m) in 2011, although this figure is upwardly distorted by the turnaround staged by Al Khazna, which recovered from a loss of Dh106.1m ($28.9m) in 2010 to post a profit of Dh11.8m ($3.2m). Of the remaining firms, all showed positive growth over 2010 and 2011, with Al Ain Ahlia taking the lead with a gain of 13.8% y-o-y.

INVESTMENT: The uptick in both top-line and bottom-line growth recorded by Abu Dhabi’s insurers is especially welcome since it comes at a time when deriving income from investments is quite challenging. Data from the Insurance Authority shows that shares and bonds account for the bulk of investment activity from UAE insurers, followed by deposits, land and real estate, and loans (see graph). Since the global economic crisis hit in 2008, the UAE’s two major exchanges have followed a regional trend of muted performances. In 2011 the General Index of the Abu Dhabi Securities Exchange (ADX), in which many local players’ investment capital is directed, posted a y-o-y decline of 11.7%, and this is reflected in the investment results of the emirate’s insurers. All five firms in the OBG analyses showed declining net investment income for 2011, with an average drop of 29.6%. Al Wathba posted the largest decline for the year, at 52.4%, while EIC recorded the smallest retrenchment at 5%. While some within the industry point out that the more challenging investment environment has compelled insurers in the region to focus their attention on technical results, and that this has been beneficial, Abu Dhabi’s insurers will welcome the return of an environment that enables them to revive investment-derived revenue streams.

REGULATION: As Abu Dhabi’s insurance market grows in size and complexity, the need for effective regulation becomes greater. Before 2007, a regulatory body dedicated to the industry did not exist, but this changed with the promulgation of UAE Federal Law No. 6 of 2007 (better known as the Insurance Law), which replaced legislation dating back to the 1980s and established the Insurance Authority as the sector regulator in terms of licensing, conduct of business and prudential supervision. The new body quickly made its presence felt on the market, issuing executive regulations in 2009 and a code of practice in 2010 aimed at bringing greater clarity concerning how insurers, reinsurers, brokers, agents and advisers should remain in compliance with the law. It has also shown its willingness to act against entities it deems in breach of its regulations: in 2009 it rescinded the licences of 74 brokerage firms that had not met the capital adequacy requirements within the grace period allowed.

Among the key features introduced to the regulatory environment by the new law and the Insurance Authority are: a prohibition on simultaneously pursuing life/capital business and property/liability custom, to be observed by August 2015; and a restriction on insuring UAE risk, to the effect that “properties or possessions in existence inside the state or liabilities resultant thereof” must be insured within the UAE. In 2010, the Authority passed Resolution No 4 of that year, which brought greater oversight to takaful companies. The Insurance Law, executive regulations (including the takaful regulation) and code of ethics represent a broad-based regulatory platform that is a step-change to that which existed just half a decade ago. “The regulations that govern the sector are still under development, but improvements are already being made,” said Fawaz Moukayed, the CEO of Guardian Insurance Brokers. “The Insurance Authority is running campaigns to educate the population about the importance of insurance, and have also developed a consultative dialogue with sector players to develop regulation.”

REFORM: In 2011 the Federal National Council sanctioned a draft amendment to Article 9 of the Insurance Law, aimed at protecting policyholders by addressing the issue of conflicts of interest among company board members. The Insurance Authority, meanwhile, extended the deadline by which composite insurers have to separate their life/capital from property/liability businesses from August 2012 to August 2015. Following the decision, Sultan bin Saeed Al Mansouri, minister of economy and chairman of the Insurance Authority, told local press that the extension was granted to allow composite companies further opportunity to adjust their situation to foster a competitive environment in the UAE. The news has been welcomed by the 11 national and two foreign composite insurers in the market, which had been faced with meeting the increased operational costs of running separate undertakings, as well as the heightened solvency requirements that two separately capitalised entities would entail.

The issue of solvency promises to dominate the regulatory sphere for some time. While the current regime establishes a fixed capital requirement of Dh100m ($27.2m), a security deposit, a solvency margin and a minimum guarantee fund, and defines a technical provisions scheme, the Insurance Authority provides little other guidance. This is set to change, however, if three provisions are ratified: instructions pertinent to the solvency margin and minimum guarantee fund; those pertinent to the basis of calculating the technical provisions; and directions pertinent to the basis of investing the rights of the policyholders. The instructions represent a move toward a more sophisticated and risk-based approach to determining capital and solvency requirements, and one more in line with an international trend led by Europe’s Solvency II Directive. While their adoption promises to enhance the industry, they will pose a considerable challenge to smaller players, which may find that consolidation is necessary in order to meet the new requirements.

OUTLOOK: A growing population, a relatively low penetration rate and a healthy pipeline of infrastructure development by virtue of the Plan Abu Dhabi 2030 and the Abu Dhabi Economic Vision 2030 form the basis of the future growth of the emirate’s insurers. Many have predicted a double-digit compound annual growth rate for the UAE insurance sector until 2015 – in this case at 19% to reach $18.3bn. Closer to home, and looking at the shorter term, Al Awadi stated in early 2012 that she expected GWP to reach Dh27bn ($7.3bn) that year, for an expected rise of 12.5%. While Abu Dhabi’s insurers face a number of challenges, chief among them a difficult investment climate and a wave of regulation that promises to fundamentally alter the way in which they assess their business, the drivers for growth within the domestic market make for a sanguine outlook.