As new technologies and products emerge, Dubai is leading the drive to standardise Islamic financial services

Dubai has a growing and multi-tiered insurance sector, with options including a conventional market as well as an offshore segment that features specialists and reinsurers that cover the region. The sector is part of the larger UAE’s insurance industry, in which federal regulators and laws oversee providers that operate nationwide as well as those created to service specific emirates and market niches. Together, they comprised the largest insurance market on the Arabian Peninsula in 2016, with premiums valued at $216m.

Although retail insurance remain a small part of the UAE economy, the crowded and competitive nature of the segment indicates most players anticipate future growth. A number of developments are changing the sector’s landscape and generating opportunity over the short and medium term, such as an increased opening to foreign investors, regulatory reforms in the pipeline, the expansion of digital distribution channels and a number of large-scale infrastructure and real estate projects that will need provision.

Managing the Market

In the past incurring costs while waiting for a long-expected growth to drive expansion had been easier for insurers, because investment accounts could be relied upon to provide profits. Before the 2008 global financial crisis increases in the value of portfolios featuring real estate and equities, as well as other safe and liquid investments had enough size and reliability to allow for cash-flow underwriting and the pursuit of the largest possible market share.

However, returns have been less reliable in the decade since the economic crisis, and more insurers have pivoted to risk-based underwriting. While talk of consolidation has been constant over this period, actual acquisitions have been rare, and are still seen as a prospect for the future rather than the present.

“The regulator is trying to raise the bar and hoping that companies voluntarily consolidate, but that is easier said than done,” Emir Mujkic, lead insurance analyst at S&P Global Ratings Dubai office, told OBG.

Structure & Oversight

According to a 2017 report from Dubai-based investment advisory Alpen Capital, the UAE’s insurance market is the most valuable in region, worth about $10.2bn in 2016, of which 75% of gross written premiums (GWP) were made up of non-life insurance. However, the life segment has been growing faster in recent years – at a rate of 13.9% from 2011 to 2016, compared to around 8.3% for non-life. Medical, accident and liability insurance are the main products in demand in non-life, accounting for 60% of total coverage in the country.

Providers are permitted to focus on life, non-life or both lines of business, and are regulated by the UAE Insurance Authority (UAE IA), which is based in Abu Dhabi. In Dubai health coverage is mandatory and is overseen by the Dubai Health Authority. According to the annual report of the UAE IA, in 2017 the country had 160 brokers and 62 licensed insurers; made up of 35 domestic firms and 27 foreign entities, which accounted for around 63% and 37% of business, respectively. Takaful (Islamic insurance) is offered by 12 licensees, which are all UAE-based firms and accounted for around 15% of business by national insurers in 2017.

Main Players

Big companies dominate the onshore market, with the top five insurers – Orient Insurance, Oman Insurance, Emirates Insurance, Abu Dhabi National Insurance and Al Ain Ahlia Insurance – holding a collective market share of 59% in 2017, up from 56% a year earlier. In 2017 Orient Insurance, which saw GWP grow by 51%, took over the top spot from Oman Insurance, according to regional media.

Providers offering offshore coverage are regulated by the Dubai Financial Services Authority, the regulator overseeing companies in the Dubai International Financial Centre (DIFC), which is the emirate’s financial services free zone and houses offshore financial entities of all types. The DIFC has emerged as a reinsurance hub for the region, as well as a home to specialists in niche risks, captive services, Lloyd’s syndicates and other boutique services, with a total of 98 insurance-related businesses operating out of the special economic area.

Foreign firms hold a stronger share of the total in the offshore market, because it has attracted global leaders in the industry that compete to sell their advanced services to corporate clients in the region. Also, there are fewer restrictions on ownership: entities in the DIFC can be wholly owned and operated by a foreign entity, while onshore investments are made through local partners who must retain a majority stake.

Regulatory Support

Onshore restrictions were eased in 2017, cutting the required minimum share of a local partner from 75% to 51%. Foreign ownership rules could be further relaxed with long-expected legislation that would allow full foreign ownership of companies outside of free zones. In May 2018 Sheikh Mohammed bin Rashid Al Maktoum, the UAE’s vice-president and prime minister, and ruler of Dubai, announced the decision to allow 100% ownership to foreign firms, along with a 10-year visa for individuals in certain professions, as part of an effort to boost key sectors and draw in foreign direct investment to the country. However, further updates to this change have not been made public as of early 2019. The UAE IA has been on a reform drive, introducing new regulations and stepping up enforcement. Mujkic told OBG that a policy to establish minimum rates for motor coverage has been credited with stimulating growth in 2017. “This has helped the market to really adopt more discipline when it comes to pricing and generating profits,” he said. Future plans include adopting some of the EU’s Solvency II regime, tighter oversight of distribution channels, such as bancassurance, brokerage fees and reinsurance rules that will encourage greater domestic risk retention. In 2017 Ibrahim Obaid Al Zaabi, the UAE IA’s director-general, stated that another 13 regulations were in the pipeline for 2020. The process of creating laws and regulations in the UAE is often includes several years of preparation.

The UAE IA has made it a priority since the 2008 global financial crisis to help insurers reduce their exposure to real estate assets. Earlier in the decade the government body announced a cap of 30% for this asset class within insurers’ investment accounts, and in 2014 provided a grace period in the hopes of creating a gradual and orderly liquidation of these assets. That period will be extended in 2018 for insurers who meet all of the UAE IA’s solvency indicators. For others it can only be extended on a case-by-case basis.

Penetration

In 2016 insurance penetration in the UAE reached 2.9%, made up of non-life and life rates of 2.2% and 0.7%, respectively, according to Alpen Capital. This was above average for the region but below global performance: in 2016 the rate was 1.9% in the GCC, while it reached 3.2% in emerging markets and 6.3% globally. However, in the UAE and the GCC region, the sector has grown considerably from respective penetrations of 1.8% and 1% in 2011; with the UAE’s penetration expected to grow to reach 2.5% by 2021.

Performance

According to UAE IA data, the total market for all insurers was valued at Dh44.8bn ($12.2bn) in 2017, up 12% from Dh40bn ($10.9bn) a year earlier, amounting to net gross profits of Dh2.2bn ($598.9m) in 2017, which was an increase of around 22% from Dh1.8bn ($490m) in 2016.

Only half, or 31, of the UAE’s insurance firms are publicly traded on local stock markets, and 21 of these showed profit growth in 2017 over 2016. The Dubai Financial Market hosts 14 of the firms, which accounted for aggregate profits of Dh715m ($194.6m), while the 17 listed on the Abu Dhabi exchange recorded Dh765m ($208.2m). Dividends to shareholders of all listed firms also climbed by about 15% to Dh655m ($178.3m). Increases in performance were driven by continued compliance with new mandatory medical coverage in Dubai and by the establishment of a minimum price for motor insurance.

In 2017 investment accounts had an aggregate value of Dh60.7bn ($16.5bn), of which 37% was invested in equities and bonds, 26% in deposits and 9% in real estate, which has historically been a major investment area for Dubai insurance companies. The positive trends continued into 2018, with second-quarter profits up 40% in comparison to 2017, with the total climbing to Dh994m ($270.6m) from Dh712m ($193.8m) year-on-year. Investment income also rose 11% to Dh450m ($122.5m) from Dh405m ($110.2m), driven by a 77% increase in technical profit. While full-year 2018 statistics were yet to be made available as of January 2019, early reports by local media cite expectations that GWP were in excess of Dh50bn ($13.6bn) for the year, which would represent 11.6% growth on 2017.

The full-year outlook may be tempered by a factor external to company operations, as 2018 is the first reporting period in which a value-added tax (VAT) was collected. It applies to all non-life insurance policies at the time of sale, and in 2017 it was decided by the authorities that policies underwritten in 2017 that cover parts of 2018 would still be taxable on a prorated basis. However, some policies were sold before this decision, leaving insurers in the position of having to either go back to their customers and request payment or to cover the costs themselves.

Non-life

In 2017 non-life lines of business, excluding health coverage, accounted for 34.8% of GWP, reaching Dh15.6bn ($4.2bn), up from Dh14.2bn ($3.9bn) a year earlier. Motor coverage, which is a legally mandated purchase for drivers, dominates the segment and accounted for Dh7.5bn ($2bn) in 2017. Domestic companies accounted for 74.4% of total non-life premiums, while foreign firms held the remaining 25.6%.

In non-retail markets for property and liability coverage, insurable risks in the UAE include Dubai’s growing stock of real estate assets and the energy sector. General business may also be boosted by largescale projects, as Dubai gears up to host Expo 2020. Total investment for the event has been estimated to be in excess of $33bn for infrastructure and related projects, such as pavilions, hotels and other facilities, which will create liabilities that mandate insurance coverage. Speaking of the event, Mustafa Vazayil, managing director of the brokerage Gargash Insurance Services, told OBG, “We are optimistic that it will give a new impetus to the economy and the activity here.”

While life coverage lines have been growing at a faster annual rate over the past decade, non-life growth was helped by the mandatory minimum pricing on motor coverage in 2017, which boosted premiums between 15% and 20% on the year, according to research from S&P. However, in early 2019 the Emirates Insurance Association (EIA) – an entity representing companies operating in the sector – announced that comprehensive and third-party liability motor premiums for 2018 had fallen 15-18% from the previous year’s figure, attributing the drop to increased competition in the second year of the standard policy system being in effect. The EIA added that despite the relatively lower performance, cost levels remained sufficient to maintain good margins in the industry.

Profits in this area could be hurt in the future by several trends suggesting lower growth in the value of the emirate’s vehicle stock. Demand is not keeping up with population growth as it has in the past. In July 2018 Ambareen Musa, CEO of Souqalmal.com, a consumer pricing-comparison service operating in the Middle East, told regional media that consumers in Dubai are increasingly sensitive to costs and tending to decline options in policies such as personal accident coverage. Additionally, the average value of insured vehicles using the platform had declined by 15% over that year.

Property coverage remains an area of low performance in the country: the penetration rate for home insurance is approximately 11%, compared to around 70% in Europe, according to a May 2018 report from regional media. Media coverage of large fires in residential high rises in Dubai’s Marina district, which occurred in 2015, 2017 and 2018, did lead to spikes in enquiries for coverage; however, they have yet to have a lasting impact on the segment.

Life

Life insurers sold Dh9.8bn ($2.7bn) in coverage in 2017, accounting for 21.9% of total GWP. Unlike in the general and health insurance segments, foreign companies dominate this space, having sold Dh7.7bn ($2.1bn), or 78.6% of the total.

According to data from a 2017 survey by HSBC, some 78% of respondents aged 25 and older in the nation said they did not have a policy that would issue a lump sum to their family in the event of death, while 79% added that they do not have any protection in the event of illness or an accident that would leave them unable to work. One challenge to growing the segment is the nature of the market, which is made up of a population that was 91.8% expatriate in 2017, according to the Dubai Statistics Centre. Generally, foreigners are members of the workforce, which has a transient nature, and are short-term residents that may have life coverage in their home country.

About 90% of life premiums are sold through a banker, broker or other intermediary, and this process may soon see more oversight. In April 2017 the second draft of regulations for takaful and life insurance were issued by the UAE IA, which targeted such things as setting a cap on commissions, providing clarity on indemnity commission, outlining disclosure requirements and other important changes to the segment that would provide consumers protection against high or unknown fees. According to local media, the final legislative changes were expected to be issued in 2018; however, no updates were available as of early 2019.

For Emiratis, the current “pay-as-you-go” pension system features 5% contribution from employees and 15% from employers, and a full pension after 25 years of service for people aged 49 or older. Recent calls for reform to the existing pension law include advocating for hikes in payouts to public sector workers to compensate for the rising costs of living thanks to inflation and the VAT, as well as an extension of these benefits to private sector workers. That could help incentivise Emiratis to reduce their reliance on public sector jobs.

Health

The mandatory health segment of the market saw high levels of growth in 2016 and 2017, as employers purchased new coverage for their workers to comply with new rules implemented in 2014. Health is now the largest branch in the sector, after life and non-life, accounting for Dh19.4bn ($5.3bn) in GWP in 2017, or 43% of the total, of which 74.2% was underwritten by domestic companies. The UAE IA has licensed 26 health insurance third-party administrators.

One of the next steps for the young segment is compliance. Most UAE residents are expatriates that have been typically granted two-year visas stipulating that health coverage must be provided by their employer as a condition of issuance. However, after policies expire after one year, employers often fail to renew coverage for the remainder of the worker’s visa period, with the rate of non-compliance exceeding 50% over the first half of 2018, according to regional media reports.

For the medium term, the market could see additional growth if more of the UAE’s seven emirates opt to make health coverage mandatory. At present Dubai and Abu Dhabi, which offer the largest populations to insure, are the only two emirates that have.

Takaful

Sharia-compliant policies have expanded in the sector in recent years. In 2017 GWP underwritten by the 11 providers operating in the emirates offering takaful coverage reached Dh4.2bn ($1.1bn), representing growth of 13.5% over the previous year. The segment is one in which consolidation activity made headlines in December 2017, when Takaful Emarat purchased the takaful unit of Abu Dhabi’s Al Hilal Bank, creating the largest provider of sharia-compliant insurance in the country.

Distribution Channels

Competition for product delivery is intensifying in Dubai, forcing brokers to fend off new options while at the same time complying with potentially increased oversight from the UAE IA.

In May 2018 the regulator introduced a stricter framework for bancassurance, which included a requirement for annual approval of such products from the central bank and the UAE IA, a stipulation that all providers are established in the UAE with a branch and licence, and disclosure guidelines regarding commissions fees and the handling of premiums.

At the same time, the market is seeing the arrival of more players in the form of online providers. Digital distribution channels, such as price aggregation sites, accounted for a market share of between 3% and 4% in early 2018, but could rise to as much as 50% over the medium term. Online car insurance sales jumped from 1% of the market in 2016 to 10% as of mid-2018. Aggregation sites, which dominates sales in developed markets, are expected to quickly gain popularity in the UAE. The model is generally based on aggressive advertising, online price comparison tools and a willingness to cope with slim profit markings, with market leaders including yallacompare.com, insurancemarket.ae and souqalmal.com. Given the competitiveness of this market, as well as the fact that the companies involved are under no obligation to report their financials publicly, many question the sustainability.

“Aggregators are not an economically sustainable model,” Gargash’s Vazayil told OBG. “We don’t know their margins yet and how much they spend on this aggressive marketing.” However, Vazayil expects the brokerage sector to experience consolidation regardless of the long-term sustainability of this particular new challenge. “Brokers consolidation is inevitable,” he told OBG. “Margins are getting smaller. Some of them are unable to invest in technology platforms.”

In contrast, start-ups are finding success, while more established players are seeking to invest in technology. For instance, Souqalmal.com raised $10m in funding in 2017, and a record $724m in insurance-technology investments were made in the first quarter of 2018 across the industry, representing a 155% surge from the same period in 2017, according to London-based insurance consultancy Willis Towers Watson.

Offshore

In the DIFC there is a different disruption under way, as the focus of companies is shifting demand for complex risk-mitigation instruments in the Middle East-North Africa region from the UK to Dubai. The majority of underwriting at this level takes place in London, but figures from Lloyd’s indicates the steady taking up of DIFC-based options. The value of premiums generated by DIFC firms from MENA-region customers reached $115m in 2018, up from $95m in 2017 and $80m in 2016. MENA-sourced business serviced at the three Lloyd’s hubs servicing the region – London, Dubai and Singapore – totalled $650m in 2016.

Outlook

Short-term factors such as the VAT adjustment and regulatory restrictions for life and takaful may be putting insurers in a period of adjustment over the short term; however, with prospects for new business brightening in the modernisation of the industry along with Expo 2020, Dubai’s insurers are increasingly optimistic in their medium-term outlooks, and will become even more so, if more of the UAE’s seven emirates chose to emulate Dubai and Abu Dhabi by mandating health coverage for workers. The forecast for the sector is positive, with the market projected to reach $18.1bn in 2021 at a CAGR 12.1%, compared to around 10.9% for the GCC region as a whole, from 2016 to 2021, according to data from Alpen Capital.