Abu Dhabi's insurance sector to mature through regulatory reform and increased public awareness

In 2017 the UAE was home to the largest and fastest-growing insurance sector in the GCC. The industry has recorded strong compound annual growth rates (CAGRs) in both non-life and life segments during the last decade, while takaful (Islamic insurance) products have developed considerably since 2012. This robust performance across lines of business has come on the heels of an influx of expatriates, growth in the population of working-age nationals, investment in construction in the run up to Expo 2020 and several legal reforms, including the introduction of a nationwide vehicle policy and health coverage mandates in Abu Dhabi and Dubai. That said, the UAE – alongside the GCC as a whole – has long struggled with low rates of insurance penetration, a high proportion of liability cession to offshore reinsurers and supplier overcrowding, which has led to price undercutting and high loss ratios. However, the UAE Insurance Authority (IA) has recently taken steps to boost public awareness about the benefits of coverage and to propose reforms that would professionalise industry standards to meet those of more mature, foreign markets. While compliance adjustments are expected to strain near-term bottom lines, Alpen Capital, a prominent financial adviser based in Dubai, has projected a CAGR of 10.6% in the UAE’s gross written premium (GWP) between 2017 and 2021.

Legal Framework

Permitted activities are broadly outlined in Federal Law No. 6 of 2007 and its amendments. Among other functions, it defines the three categories of operation as life assurance and funds accumulation, properties, and liabilities insurance; allows foreign firms to sell coverage through branches; and appoints the IA to enforce the law in the onshore markets of all seven emirates. The IA counts among its duties the protection of the national economy through indemnification, sustainable savings development, the encouragement of fair competition and the Emiratisation of the workforce. More narrowly, the IA is charged with protecting beneficiaries’ rights, monitoring provider solvency and processing licence applications. Alongside the IA, the Emirates Insurance Association acts as an umbrella agency for firms and industry professionals across the UAE.

Several additional documents pertain specifically to Abu Dhabi. Law No. 23 of 2005 rendered health insurance compulsory for expatriates and founded the National Health Insurance Company – Daman as the executing body of Abu Dhabi’s health insurance scheme. More recently, Resolution No. 83 of 2007 charged the Health Authority – Abu Dhabi with launching that scheme, known as the Thiqa (“trust”) initiative, to administer health insurance to all UAE nationals through a network of third-party administrators (TPAs).

Most recently, a nationwide Cabinet resolution from May 2017 amended Resolution No. 42 of 2009 concerning minimum capital regulations, to lower the share of capital held in a company incorporated in the state that must be owned by “natural persons of the UAE or GCC nationals” from 75% to 51%. Even though the reduction preserves local investors’ majority stakes in public joint stock companies, the measure allows foreign investors to more deeply enter the market. While foreign providers remain permitted to establish local branches and agencies, the IA has not issued such a licence to a non-GCC firm since August 2008, making the prospect of a joint venture all the more appealing.

Market Structure

A recent IA report laid out the state of play in 2017. The total insurance market was split among 62 licensed providers, with 35 national firms controlling 62.8% of the market and 27 foreign branches accounting for 37.2%. Roughly 77.1% of the non-life segment, valued at Dh33.1bn ($9bn), fell to Emirati providers, while foreign firms covered the remainder. In the health segment, 26 TPAs managed Dh19.4bn ($5.3bn) in GWP, nearly three-quarters (74.2%) of which was earned by national firms. The shares were similar in the rest of the property and liability market, where 74.4% of the Dh15.7bn ($4.3bn) in GWP was sold by 15 national firms, while 17 foreign companies covered the other quarter. The distribution was reversed among personal insurance and fund accumulation operations: three domestic firms in this segment earned 21.4% of Dh11.7bn ($3.2bn) in GWP, whereas nine foreign branches hauled in 78.6% of that sum. All 12 sharia-compliant insurers were based in the UAE, and their GWP accounted for 8.6%, 11.1% and 9.4% of the sums in the health, property and liability, and personal coverage and fund accumulation segments, respectively.

As is the case across the GCC, provider crowding in has fragmented the sector and allowed a handful of firms to concentrate earnings. According to a report from Milliman, a MENA-wide actuarial consultant, the UAE’s five largest firms accrued 58.9% of total GWP in 2017, up from 56.1% in 2016. Meanwhile, smaller providers often try to expand their market shares by undercutting competitors on prices, and the downward pressure on premiums has kept the sector’s combined loss ratio – the ratio of claims and expenses incurred to premiums earned, with figures greater than 100% indicating losses – high. According to Standard & Poor’s (S&P), the 99% combined ratio in 2016 marked a return to profitability from the 105% figure registered in 2015, though that median belies the wider outcome distribution: 15 of the 29 firms then-listed on the UAE’s securities exchanges posted losses in 2016, and while the top-five providers posted an aggregate ratio of 90%, the rest of providers together had a ratio of 107%.

Non-Life

According to IA data, non-life GWP was Dh33.1bn ($9bn) in 2017 and made up 73.8% of total UAE GWP in 2017. That share has declined steadily from 85.5% in 2008 and is significantly lower than the 78.7% average from 2008 to 2016. Even so, the segment’s value has more than doubled since 2008, growing from Dh15.6bn ($4.2bn) at a CAGR of 8.7%. In Abu Dhabi the distribution of value across non-life lines differed marginally from that of the UAE at large in 2017. Of the Dh12.3bn ($3.3bn) in GWP brought in by firms operating in Abu Dhabi, 56.4% was earned by medical plans. The size of that market compared to the health segment’s 38.2% share in the other six emirates has been attributed to the health coverage mandate for expatriates, which was unique to Abu Dhabi until Dubai imposed the requirement in 2015. The three next largest non-life segments were motor and transportation, fire, and engineering, construction and energy, which brought in Dh1.9bn ($517m), Dh703m ($191m) and Dh671m ($183m) in GWP, respectively. Motor coverage, comprised of commercial motor, personal thirdparty liability and personal comprehensive insurance, grew by 16.5% in 2017, while the value of the complete, nationwide insurance market expanded by 11.2% over the same period. This relative surge has been chalked up to the nationwide introduction of the Unified Motor Policy in January 2017, which used actuarial values to set minimum premiums and raised prices by 30-40%. S&P found that, while small firms often continued to charge that minimum to boost market share and re-invest premiums, larger companies were moved by the change to begin using risk assessments in setting prices.

Life Services

Life segment GWP was valued at Dh11.7bn ($3.2bn) in 2017, up 15.8% from Dh10.1bn ($2.7bn) the year prior. While it made up only a little more than a quarter of all lines in 2017, that growth figure fits squarely with the segment’s 16% CAGR since 2008, when its GWP was worth Dh2.7bn ($735m). This robust development has been rooted in two factors. First, while generous public welfare, low product awareness and religious particularities are seen to depress local interest in life coverage, such products have been popular among expatriates who have emigrated from markets where life policies are more commonly understood as a risk-averse investment. This is further highlighted by the dominance of foreign underwriters in the segment. Second, the IA’s growing recognition of life policies as assets has motivated recent efforts to overhaul industry rules. In April 2017, in response to what the IA called “an alarming amount of complaints”, and following its November issuance of Circular No. 33 of 2016 and the completion of an industry stakeholder comment period, the IA published Circular No. 12 of 2017, which outlined draft reforms meant to align the UAE’s life insurance rules with those of more mature markets, such as the UK and Hong Kong, where the life segment tends to equal or exceed the value of non-life products. With a focus on increasing consumer protection, Circular No. 12 proposed changes that would set caps on premium commissions, limit indemnity commissions, require fully itemised fee disclosures and two investment projections, inaugurate a 30-day freelook period, mandate actuarial certification on issues of premium calculation, technical capacity, solvency margins and minimum benefit guarantees, and tighten intermediary licensing standards. While unfinalised as of yet, there is a broad expectation among industry observers that these reforms will be implemented in the near term. Moreover, in May 2018, the IA’s Board of Directors issued Decision No. 13 of 2018 which brought the budding market of bancassurance, or policy writing undertaken in partnership with bank branches, under the supervision of the IA and the country’s central bank. The measure is expected to narrow the access of foreign underwriters to the market by requiring that they incorporate in the UAE or obtain a licence to establish a branch or agency within the country.

Islamic Option

Takaful is a mutual fund that complies with sharia law by pooling its members’ money contributions to reciprocally guarantee against losses and damages. In its “Global Takaful Report 2017”, Milliman estimated that GWP, inclusive of both general (property and liability) and family (personal coverage and fund accumulation) services, had grown at a CAGR of 13% since 2012 to reach $14.9bn worldwide in 2015. The GCC market, valued at $11.5bn in 2015, comprised 77.2% of that sum, with Saudi Arabia accounting for $9.7bn, or 65.1% of the global total.

Between 2012 and 2017 sharia-compliant insurers in the UAE grew at a CAGR of 13.1%, from Dh2.3bn ($626m) to Dh4.3bn ($1.2bn), while the GWP of all conventional products sold by Emirati firms grew from Dh14.3bn ($3.9bn) to Dh23.9bn ($6.4bn), at a CAGR of 10.9%. Some have attributed this relative surge to Dubai’s introduction of its mandate to hold health insurance – which may be classified as either general or family – in 2015, suggesting that the segment’s recent CAGR is inflated. However, several factors give good reason to believe that such growth may continue. In the first place, the segment’s low penetration rate relative to the market as a whole – 0.23% against 2.9% – and growing public awareness of the availability of such products hint at a growing pool of potential consumers. Moreover, per Alpen Capital, the inclusion of takaful providers under the rules of Circular No. 12 of 2017 demonstrates the IA’s commitment to maturing the segment by “standardising processes, developing corporate governance, strengthening technical provisions and protecting the interest of policyholders”.

Reinsurance

UAE providers ceded 46% of non-life GWP to reinsurers in 2015, the highest proportion in the GCC and equal to Dh15.2bn ($4.1bn). While scant data is publicly available regarding the liability-assuming firms, the industry consensus is that most reinsurance activities take place in the country’s offshore financial markets, namely the Abu Dhabi Global Market and the Dubai International Financial Centre. These free zones offer foreign firms a slate of incentives, including tax exemptions, free funds transfers and revenue repatriation, and the possibility of 100% foreign ownership.

The IA published a set of draft reforms in November 2017 that first recognised reinsurance as a distinct line of business and proposed licensing requirements for new domestic agencies and foreign branches, as well as for existing providers looking to expand operations to include reinsurance. Among those prerequisites are paid-up capital of Dh250m ($68m), a five-year feasibility study, details of retrocession coverage, actuarial certification of technical and solvency compliance, and the maintenance of minimum credit assessments from one of several designated ratings agencies. The draft further prohibits reinsurance value from exceeding 49% of GWP and mandates that all reinsurance occurs in lines where providers are licensed to write directly. These measures are widely seen as the IA’s effort to develop local reinsurance capacity, extend its supervision over activities currently beyond its purview and retain a greater share of revenues within the domestic market.

Outlook

While the UAE’s underwriters must navigate a formidable set of structural developments to sustain healthy growth, the IA has made clear in recent years that it is a willing partner and guide in such an undertaking. Enacted and proposed reforms alike should help to consolidate coverage supply, integrate offshore activities and offer incentives, ranging from benefit guarantees to civil fines, for untapped groups to become first-time consumers. Taken together with favourable demographic growth, rising incomes and increasing familiarity with insurance’s myriad benefits, these reforms should bear positive dividends across lines of business, especially among life and takaful products, in Abu Dhabi and nationwide in the coming years.