Gaining ground: All segments hold potential for further expansion

The UAE is one of the largest insurance markets in the Gulf region, with Dubai taking an impressive share of the country’s total premiums. There is still plenty of room for growth in life and general, with the period ahead likely to see more of this potential realised. Dubai is moving towards compulsory health insurance (see analysis), while there are signs that the infrastructure and real estate project pipeline is coming back to life. Demographics are also playing their part, as the emirate’s population swells and awareness of insurance needs grows.

STRUCTURE: The legal framework for the insurance sector in Dubai – as with the rest of the UAE – is provided by the 2007 Insurance Law. This superseded the 1984 law and established the Insurance Authority (IA – sometimes referred to as the Insurance Commission), an independent regulator and supervisor for the industry. The IA held the first meeting of its board – which consists of 10 members chaired by the UAE minister of economy – in July the following year. The IA then issued a series of new laws, starting with the Executive Regulations of 2009, followed by the Rules of Professional Practice and Code of Ethics, issued in 2010.

The IA’s regulations and the Insurance Law hold sway everywhere in the UAE outside the free zones, meaning that insurers based in the Dubai International Financial Centre (DIFC) are instead subject to the insurance regulations of the Dubai Financial Services Authority (DFSA), the regulator for the DIFC. An insurer must also be licensed to operate by the IA.

The law, which also covers reinsurance, states that properties or possessions (or their resultant liabilities) existing within the UAE can only be insured by insurers registered with the IA, regardless if the insurance company is a branch of a foreign insurer or UAE-incorporated insurer. Insurers based in the DIFC are restricted from direct business outside the free zone. This means that the DIFC-based insurers tend to engage only in wholesale activity, rather than retail.

Reinsurance is currently fairly unrestricted – indeed, a UAE-based company may cede up to 100% of the risk. Locally based firms are subject to UAE ownership laws. Under these, if they are a UAE public joint stock company or an insurance agent, they are subject to Emiratisation laws – policies fixing the number of UAE nationals that have to be employed by each company.

If the firm is a branch of a foreign company, then other, additional regulations apply, with these set out in the 2009 Executive Regulations. Branches of foreign insurers have to demonstrate that they are providing a new product, or are offering coverage necessary to the UAE market. They also require a local sponsor. CHANGES AHEAD?: The ownership laws are undergoing some changes at present, with a long-awaited new Company Law pending Cabinet approval. In general, foreign ownership has so far been limited to 49% of any UAE-based company (although 100% foreign ownership is possible in the DIFC and other free zones), yet for insurers the limit is as low as 25%. The new Company Law is expected to allow some discretion to the UAE authorities in this matter, with implications for insurance companies, as foreign insurers may be more likely to enter the local market if they are able to have a larger or controlling stake in the local business.

The IA has also issued instructions to oblige composite insurance companies to split their life and non-life business by a deadline of August 2012. In May of that year, however, a new order was issued extending the deadline for compliance with this instruction by a further three years. The split is part of a series of moves to strengthen solvency and prudential regulation, bringing in a more risk-based approach to capital and solvency requirements. In common with other countries, the UAE is moving its insurers towards meeting Solvency II standards, although the future path this European legislation will take was a subject of some debate, with European insurers themselves pressing for a longer deadline for achieving this EU directive – the initial target date was January 1, 2014. Still, Solvency II will likely become an international best-practice benchmark in the years ahead, with UAE firms looking to meet it.

The UAE also has rules designed specifically for the takaful (Islamic insurance) segment of the sector (see Islamic Financial Services chapter), with this of growing importance in recent years. The industry has a UAE-wide professional body to represent its interests, the UAE Insurance Association. In this, Dubai’s insurers are well represented, along with those from other jurisdictions. Both this and the IA are based in Abu Dhabi.

BREAKDOWN: An IA sector report released in September 2012 stated that in 2011 the sector comprised 61 insurers, of which 34 were national (incorporated in the UAE) and 27 were foreign. Of these, 11 national and two foreign insurers were carrying out both life and general insurance activities, while two national and eight foreign firms carried out life assurance and fund formation activities only. In terms of insurance agents, there were 11 licensed, along with 170 insurance brokers, all but seven of whom were UAE-based.

The 2011 figures revealed a slight increase in the total number of brokers, which marked a move forward from 2009, which saw a 20% year-on-year decrease as several brokers were taken off the register for failing to comply with a 2006 regulation setting capital and guarantee requirements. This regulation had granted a three-year grace period, which had then run out. The willingness of the IA to then take action was broadly welcomed in the sector, as evidence of a firm regulator being at the helm. There were also 18 insurance consultants operating in the UAE, along with 69 loss adjusters and 25 actuaries.

Many of the insurers in the UAE’s market have pursued a rating in recent years, not least because this acts as a useful preliminary for Solvency II. In July 2012, 18 UAE-based insurers and reinsurers had received ratings from S&P Financial Strength Rating (FSR), AM Best FSR and AM Best Issuer Credit Rating – giving the UAE the largest number of rated insurers of any state in the Middle East and North Africa (MENA) region.

Of these 18, 11 were headquartered in Dubai, with two of these based in the DIFC, and five were Islamic insurers and reinsurers. The highest rated were the Arab Orient Insurance Company and Oman Insurance Company, which received A grades from AM Best ICR and AM Best FCR, while the former received an A from S&P FCR and the latter a BBB+. The quality was generally good, however, with Salama Islamic Arab Insurance Company receiving A- across the board, as did Alliance Insurance, although S&P had not given a rating. Other insurers included Dubai Insurance Company, Dubai Islamic Insurance and Reinsurance, International General Insurance Holdings, the National General Insurance Company, Noor Takaful Family and Noor Takaful General, and Takaful Re. Oman Insurance and Arab Orient also consistently feature in the top-three UAE insurers by market share. In 2010 Alpen Capital figures show these two, plus the Abu Dhabi National Insurance Company, accounted for 21% of the entire UAE market.

LISTING: All UAE insurers are required to be listed, either on the Abu Dhabi or Dubai markets, and Dubai-based insurers make up a strong contingent in the Insurance Sector index of the Dubai Financial Market (DFM), the main securities exchange for the emirate.

A total of 13 insurance companies are currently listed on the DFM, with insurance accounting for 2.3% of the exchange’s traded value in 2011, up from around 1% in 2010. The most recent figures from the DFM, for February 2012, showed this had risen to 4.58% by that month, indicating increasing interest in the sector. In terms of market capitalisation, the 13 insurers and reinsurers listed accounted for 4.41% of the DFM’s total market capitalisation, or around Dh8.8bn ($2.4bn).

Foreign companies are also well represented in Dubai, and in the UAE more generally. The DIFC is the address for most of these entities, which include Allianz, Chartis, AXA, Zurich, Tokio Marine Middle East, RSA, Swiss Re and Swiss Life. As of mid-July 2012, 51 insurance and reinsurance companies were registered at the DIFC, two of which were inactive and five of which had been dissolved, but were still registered.

SECTOR PERFORMANCE: The UAE insurance market is dominated by general insurance in terms of premiums, with IA figures for 2011 showing that while total underwriting premiums that year for life and fund accumulation amounted to around Dh4.8bn ($1.3m), up from Dh4bn ($1.1bn) a year earlier, for property and liability (non-life) the total was Dh19bn ($5.17m), up from Dh18bn ($4.5bn) in 2010.

Recent figures published by Swiss Re show total life premiums of some $1bn and non-life premiums of $5bn across the UAE for 2011. The global insurance company suggested that this equalled to increases of 12.9% and 9.7%, respectively.

Foreign companies dominate in the life market, with the IA figures for 2011 showing that they accounted for 70.2% of all premiums in that segment, but only 24.1% in the property and liability areas. In 2011 the non-life segment broke down further into 41.3% in the accidents and liability branch, 13.1% for fire, 12.1% in the land, sea and air transport branch, 29.4% in medical, and 4.1% in other risks.

BY COMPARISON: In 2010, the UAE was the largest contributor of premium to the GCC total, accounting for some 43%. The nearest market by premium size was Saudi Arabia, which contributed 34%, according to data from Alpen Capital. The UAE also had the highest insurance density (average insurance spend per person) that year of any GCC country, at $1162.20. The GCC average in 2010 was just $336.10.

The UAE figure is still low compared to developed economies; Singapore and Australia, for example, recorded densities of around $3300 that year. According to Swiss Re in 2011 the insurance density was $1380 per person in 2011, or a penetration rate of 1.8%.

A World Bank report on the MENA insurance sector for 2010 also showed that as a percentage of GDP, non-life premiums constituted around 0.97%, while life premiums amounted to some 0.28%. Total assets of the sector equalled 3.1% of GDP. There is plenty of room for growth, in other words – a factor that continues to make the UAE an attractive market for those companies thinking longer term.

In the non-life segment, the Alpen report gives a breakdown of some 35% of premium coming from motor, 50% from property and miscellaneous accidents, and 15% from marine and aviation in 2010. This was a more diverse profile than most GCC countries, where motor generally accounted for over half all premiums. Motor insurance is mandatory in the UAE, under federal law, with third party the minimum requirement.

There are several other mandatory insurance requirements currently listed. The first is insurance broker’s professional liability, with a minimum of Dh1.5m ($408,300), followed by compulsory medical professional insurance, which includes dentists and pharmacists. Foreign legal consultants must also take out professional indemnity insurance (PII), with a recommended cover for a foreign law firm of Dh20m ($5.4m); foreign auditing companies, likewise, must take out PII.

In Abu Dhabi there is also a system of compulsory employee health insurance, with this now scheduled for Dubai in 2013 (see analysis). Currently, in the Jebel Ali Free Zone (JAFZA), employees’ insurance is compulsory for third-party liability and workmen’s compensation. Buildings in JAFZA must also be insured against both fire and perils. A similar system applies in the DIFC and other free zones, where buildings must be insured and employees’ health and disability cover provided.

VOX POPULI: The UAE’s population was 7.2m at the end of 2011, according to the Abu Dhabi Chamber of Commerce and Industry (ADCCI), with only some 11.5% of these native Emiratis. The rest are expatriates, with around 200 different nationalities present. The rate of population growth was estimated by the ADCCI at 5.6% that year, a huge amount, with global population growth at around 1.2%. The UAE stands out again because of the influx of expatriates, which is expected to keep surging as the country experience renewed economic growth. Growth, however, has been slowing recently, with the UAE economy minister predicting around 3% GDP growth for 2012 in June of that year, largely due to declining oil prices. Nonetheless, the rising population creates an opportunity for insurers to expand. “With the influx of expatriates increasing, this is good for insurers, with activity in the market therefore up,” Christos Adamantiadis, the managing director of the Middle East and North Africa for Chartis, told OBG.

This is backed up by the rising premiums of some of Dubai’s main insurers. Bloomberg reported that for 2011, Arab Orient Insurance had declared gross written premium of Dh1.27bn ($345.7m), up from Dh1.13bn ($307.6m) in 2010. Net profit from 2011 was Dh204m ($55.5m). Dubai Insurance Company reported its premiums growing from Dh210.01m ($57.2m) in 2010 to Dh271.13m ($73.8m) in 2011, while on the Islamic side, Salama Islamic Arab Insurance Company reported 2011 gross written contributions of Dh2.26bn ($615.2m), up from Dh1.84bn ($500.8m) in 2010. Oman Insurance’s annual report, however, showed gross premiums down slightly, from Dh2.4bn ($653.3m) to Dh2.3bn ($626.1m), although profits were up, from Dh94m ($25.6m) to Dh108m ($29.4m), over the same time period.

In general, the ratio of net premium to capital has been historically low in the UAE, even compared to the MENA average. The World Bank report declared an average 55% for this ratio for the UAE in 2010, while for the MENA region as a whole it was 78% – and for the OECD states, 310%. This low ratio is usually an indicator of an overcrowded market, a suggestion backed up by the World Bank report’s estimation of the gross premium per insurer ratio for the UAE standing at 0.2, while the figures for MENA and the OECD were 0.8 and 1.6, respectively. Indeed, many sector leaders in Dubai that OBG interviewed agreed there were too many players in the sector, with a wave of consolidation expected to take place in the years to come. At the same time, competition remains fierce.

“Most insurance companies rely on products that are compulsory. If you limit yourself to these lines, then you are exposing to the most competitive market of the industry where products have been largely commoditised and offer slim margins,” Patrick Choffel, the CEO of Oman Insurance, told OBG. “The challenge for the industry is in the creation of innovative and intelligent products that reach potential clients beyond simple motor and health insurance. There is also a need to further utilise more sophisticated distribution channels as a means to attain a broader client base and thus improve penetration levels,” he added.

LIFE HOPES: In the life segment, while the overall numbers are still relatively low, growth continues to be robust. One of the reasons for this has been the volatility in other areas of investment over the past few years, as Dubai – and the global economy – have dealt with the repercussions of boom and bust.

“Before 2008, there were a lot more opportunities for investment,” Alok Kumar, the resident country manager in Dubai for Life Insurance Corporation ( International), told OBG. “Now people are investing in more conservative options, like life insurance.”

In this, the segment has had to battle hard in some instances against the view held by some Muslims that life insurance is haram(forbidden). This has not impacted the UAE as much as some other markets, however, with the large non-Muslim expatriate population providing a significant market in itself. Some sections of this foreign population are also more familiar with life insurance products and do not require the degree of persuasion those more unfamiliar may need. Islamic insurers have also developed takaful (sharia-compliant products) for general and life, or so-called “family” insurance (see Islamic Financial Services chapter).

The trend has been upwards in recent years, although official figures for the past three years are unavailable. In 2012 Swiss Re reported that the UAE life insurance market expanded 1.29% in 2011, although this was down from 20% growth in 2010.

The segment faces some significant challenges, however. Life insurance is more popular among expatriates, who typically reside for just a few years in the UAE before heading home. They thus require a policy that can also travel with them, favouring companies with strong links to countries of origin, particularly in Europe, the US and South Asia. Many of these expatriates are low-paid construction and services workers too, who typically send any surplus back home to their families. As wages rise, however, this may be a more buoyant segment, while there are also schemes currently being entertained to supply micro-life insurance products with low monthly premiums to blue-collar workers, and the proposed mandatory medical coverage scheme is also largely aimed at these low-paid workers.

HEAD FOR THE BANK: The likely channel for expanding distribution in the future, as is increasingly the case with general insurance products, is bancassurance and bancatakaful. This has received encouragement in recent times, with a draft resolution issued in 2011 by the IA setting out a legal and regulatory framework for this practice. Bancassurance had been an active market before – indeed, according to press reports, in 2010 bancassurance sales contributed around 40% of total premiums – but within a rather vague legal context.

In 2011 there were deals in this area between insurers and banks, particularly in neighbouring Abu Dhabi: Abu Dhabi National Insurance Company (ADNIC) signed an arrangement with Abu Dhabi Commercial Bank, and the takaful company Watania bought a National Bank of Abu Dhabi subsidiary, also together with ADNIC. These moves are likely to increase as banks and insurers try to get ahead of prospective legislative changes.

OUTLOOK: The insurance sector is likely to see continued growth in the year ahead, with both life and non-life (which will continue to dominate) making steady progress. The awaited legislative changes – particularly over health – will have a major impact, however, when they are finally implemented, with some fierce future competition for the health segment likely.

At the same time, Dubai’s insurers – and those of the UAE – face some of the same challenges as other financial sector outfits. One of these is in retaining business within the emirate. Reinsurance ceding is currently high – in 2011, for example, Arab Orient ceded 70% of its premiums to reinsurers, according to ratings agency AM Best, with foreign companies dominant in this business. Many would also argue that there are too many insurers in the market, with a need to consolidate ahead.

The future, however, looks to be highly promising, as the emirate continues to expand, both in terms of its population and its GDP, with low insurance penetration meaning that the potential market growth is enormous. Managing margins and boosting service, while moving with an eye towards long-term growth, look likely to be the ways forward for many of the emirate’s insurers.