Robust framework supports net profit increase in Dubai's insurance sector

The UAE’s insurance market is the largest in the GCC, and Dubai-based institutions, whether catering to the domestic sphere or serving the region from the emirate’s renowned financial free zone, play a central role in it. Dubai has a growing and multi-tiered insurance sector, with a conventional market as well as an offshore segment that features specialists and reinsurers that cover other markets in the region.

A challenging economic environment sparked by low international oil prices and an ongoing process of regulatory reform have slowed premium growth over the past year, but an increasingly efficient sector has succeeded in maintaining aggregate profitability levels. Both regulatory reform and market volatility remain factors that will significantly affect growth prospects in 2020, but new technologies and innovations in distribution are helping to mitigate downward pressure on premium growth.

Market Structure

The sector consists of an onshore segment, populated by firms with a primary focus on the domestic market, and an offshore segment, based in the Dubai International Financial Centre (DIFC), the emirate’s financial services free zone. Dubai’s onshore insurers operate within a wider UAE market that is one of the most crowded in the region. More than 60 insurance companies compete for business in the country, according to the latest data published by the UAE’s Insurance Authority (IA) in 2018. Just over half of the licensed insurers in the UAE are national firms, the five largest by gross written premium (GWP) are Orient Insurance, which commenced operations in 1982 as part of Dubai’s Al Futtaim Group; Oman Insurance Company, established in 1975 and headquartered in Dubai; Abu Dhabi National Insurance, Abu Dhabi’s flagship insurance company founded in 1972; Al Ain Ahlia Insurance, headquartered in the UAE’s capital; and Islamic Arab Insurance Company, headquartered in Dubai and better known as Salama. The approximately 30 foreign insurers with licensed onshore operations in the country include representatives from the world’s biggest insurance markets, such as US-based United Fidelity Insurance Company, American Life, Zurich Life, Japan’s Tokio Marine and Nichido Fire Insurance Company, the New India Assurance Company, and Italian firm Assicurazioni Generali. The offshore operators in the DIFC, meanwhile, form a regional insurance and reinsurance centre, as well as a repository of specialist offerings including captive services, Lloyd’s syndicates, niche risks and boutique services. In total, around 100 insurance-related businesses operate from the special economic area, including Berkshire Hathaway Specialty Insurance Company, and Royal & Sun Alliance Insurance.

The majority of insurance activity in Dubai is carried out along conventional lines, but a vibrant takaful, or sharia-compliant insurance segment, is gradually emerging. Takaful operators claimed around 17% of national GWP in 2018, according to ratings agency AM Best, and over the past year the UAE’s sharia-compliant insurers grew faster than their conventional counterparts (see Islamic Financial Services chapter). Much of this momentum originated in Dubai: Salama is the world’s largest and oldest takaful firm, and is listed on the Dubai Financial Market with paid-up capital of Dh1.2bn ($326.6m). Its pioneering of takaful in general, family and health cover has done much to underpin the emirate’s reputation as a leader in insurance.

Retention & Reinsurance

Establishing insurance sectors that have the capacity to retain more of their premium is a priority for most regulators in wider GCC market, which is characterised by high cession rates to global reinsurers. In the UAE the retention trend is moving in the desired direction: according to actuarial firm Millman, retention ratios (net written premium divided by GWP) decreased to an average of 42% in 2018, from 44% the previous year. Looking to domestic reinsurance capacity, there is no national reinsurer in the UAE and only one reinsurance company operating in the onshore segment. The reinsurers based in the country are concentrated in the DIFC and include AXIS Reinsurance, Qatar Reinsurance, Korean Reinsurance and ACWA Power, as well as a range of brokers offering reinsurance. Together, they make up one of the most important reinsurance markets in the region.

Why Dubai

Dubai’s status as a regional financial centre, which it has enjoyed since the formation of the DIFC in 2004, making it a popular destination for insurance companies serving the Middle East, Africa and South Asia. Dubai-headquartered insurers enjoy a stable business landscape, a sound regulatory framework, a relatively deep labour market, and a comfortable, low-tax lifestyle that is useful in employee recruitment and retention.

However, the emirate’s ability to grow its insurance industry has recently been challenged by a number of compounding factors. A combination of slow economic growth and increasing global competition has struck the reinsurance segment particularly hard, and a number of insurance firms have exited from the DIFC, including Apex, Arig, Henner Sovereign Risk and Aspen Re. While these departures have been somewhat offset by a smaller number of recent high-profile entrants, including one of the world’s most prominent reinsurer companies – Berkshire Hathaway Speciality Insurance – the trend somewhat undermines the DIFC’s status as a regional insurance centre. One possible factor in the current scenario – the relatively high costs of DIFC office space – may be alleviated by the development of DIFC 2.0, launched in early 2019. On completion in 2024, the initiative will triple the size of the zone, adding 13m sq feet of space, including office, retail, hospitality and residential components.

Regulation 

As well as the development of new infrastructure, Dubai’s future as an insurance centre rests on its ability to maintain a competitive edge in regulation. The federal-level IA has responsibility for the licensing and regulation of onshore insurers and brokers, and has since its establishment applied Federal Law No. 6 of 2007 to the industry.

For the firms based in the DIFC, however, the authority for regulatory matters is the Dubai Financial Services Authority (DFSA). Insurers operating under its jurisdiction may only write business directly for entities situated within the DIFC. Despite this restriction, the DIFC has proved popular with foreign insurers due to the fact that the DFSA allows 100% foreign ownership without national shareholding requirements in the free zone, unlike the onshore authorities. DIFC insurers are also able to overcome the prohibition on writing directly for onshore risk by carrying out reinsurance activities, or establishing a branch office or a subsidiary onshore.

Lastly, health insurers in Dubai must register with and acquire a licence from the Dubai Health Authority (DHA), the government office charged with overseeing the emirate’s health care system. The most significant development in the insurance regulatory landscape in recent years has been the IA’s introduction and gradual application of new financial regulations. First revealed in 2015, they represent the UAE’s response to the worldwide move to ensure the solvency of insurance firms, pioneered by the EU’s Solvency II directive. Dubai’s insurers were asked to adopt the framework in a number of phases, starting in 2016 with interim financial statements and actuarial reports, followed by the application of investment limits, investment reports, compliance with technical provisions and the establishment of risk committees in 2017. In 2018 the final Solvency II regulations were implemented, including full compliance with solvency requirements and a demand to hold assets sufficient to meet accrued liabilities. The financial regulations present a considerable regulatory burden for insurance firms, and are set to continue with the introduction of International Financial Reporting Standard (IFRS) 17 – the latest iteration of the international accounting standard for insurance companies. Companies have been required to report on their IFRS 17 implementation progress since mid-2019, and have been asked to begin parallel reporting according to both the current and IFRS 17 standards for year-end 2020.

Lines

Insurers in Dubai are permitted to focus on life, non-life or act as composite insurers covering both types of business. Medical and motor insurance are the major compulsory lines in the UAE, and as such premium from these lines form a significant proportion of the industry’s annual GWP. In 2017, the most recent year for which the IA has published aggregate data, health insurance accounted for 49% of total GWP. Dubai began to implement its mandatory health insurance scheme in 2014, starting with companies with 1000 or more employees and later extending to companies with fewer than 100 employees, as well as domestic workers and dependents. Since April 2017 all employers registered in Dubai have been legally obliged to provide their employees with the essential benefits plan coverage as set out by the DHA. Dubai residents without adequate health insurance face fines of Dh500 ($136.10) per month, which are added to their visa renewal and cancellation fees. Property and liability insurance, of which motor cover was the single biggest component, accounted for nearly 42% of the total. Other important lines within this category include fire, engineering, construction and energy, and marine cover.

Life insurance in the UAE, as with other markets in the region, is underdeveloped, accounting for 8% of total GWP. However, despite this modest share of this overall figure, Dubai is the largest life insurance market in the region. Within the larger segment, group life and group credit life are roughly equal in size, accounting for 2.4% and 2.2% of GWP, respectively. The contribution of individual life to GWP is 3.5%, while annuities and fund accumulation account for a much smaller 0.014%. In terms of potential changes in the composition of GWP in the Dubai and the wider UAE, the most likely cause of any significant shift is the expansion of compulsory insurance. Beyond mandatory motor and medical cover, compulsory insurance is limited to a small number of contractual insurance obligations, such as professional indemnity insurance for foreign legal consultants and auditors, as well as mandatory health and disability income cover for employees within the financial free zone.

Distribution

The crowded nature of the domestic insurance market means that Dubai’s insurers are keen to expand beyond the traditional broker-andagent distribution model. Bancassurance in Dubai and the wider UAE is relatively well developed, with tie-ups between larger banks and insurance companies taking place since 2010. However, in 2018 the IA issued a circular that placed a number of limits on activities, including a requirement for insurance companies to secure prior approval from the regulator before engaging in bancassurance, as well as stricture that prevents foreign insurers from striking distribution deals with UAE banks, which previously had been permissible. Banks and insurance companies joining forces for bancassurance must also finalise written agreements in areas such as commission and payment dates, and for the first time banks have been compelled to open their books for inspection by the IA with respect to bancassurance arrangements. Despite these regulatory changes, however, bancassurance remains a useful channel for insurance companies seeking to secure access to a wider customer base.

Technological advances and the emirate’s techsavvy, high-income population mean that there is significant potential in the digital channel. According to the Telecommunications Regulatory Authority, the country’s mobile phone penetration rate is over 200% – one of the highest in the world. Internet penetration, meanwhile, stands at over 80%. The internet is an attractive medium for insurers seeking cost savings and increased customer retention, and Dubai’s insurance companies are using it to advertise their products, speed up distribution, and streamline and automate their business processes.

Online insurance aggregators have also recognised the opportunity in Dubai’s digitally connected population, and a number of them have recently entered the market to offer consumers a convenient platform to compare policies by price and coverage. Two aggregators began UAE operations in 2018: India’s Policybazaar, which has more than a decade of experience in the aggregation business; and domestic firm Aqeed, which launched with $18m in funding. They join an already thriving segment which includes yallacompare (formerly compareit4me), Souqalmal and Bayzat. The rash of new aggregators, however, start from a low base: while data on the segment is scarce, an estimated 3% to 5% of all policies are sold through online aggregators, according to Aqeed. Insurance aggregators are also developing their businesses against a backdrop of significant regulatory change.

In January 2019 the IA issued its draft Electronic Insurance Regulation which, if carried through to implementation, will apply to all insurance companies wishing to sell policy contracts electronically. While potentially useful as a regulatory platform from which to expand this important distribution channel, it also places limits on some activities. Most notably, the proposed regulation prohibits the selling of life insurance and fund accumulation policies through a website, and also introduced significant number of rules relating to disclosure requirements, privacy policies and complaints procedures.

Performance

The last decade witnessed a fundamental change in the business practices of Dubai’s insurers. The era in which insurance companies could rely on their investment accounts – usually with a heavy real estate focus – to provide an easy margin ended with the global financial crisis of 2008. Since then, volatile markets and an increasingly comprehensive regulatory environment have made it untenable for insurers to maintain profitability through investment income alone. One of the most significant regulatory restrictions came in 2015, when the IA issued rules that limited insurers’ aggregate exposure to real estate to a maximum of 30% of invested funds, as well as requiring them to have a minimum 5% exposure to cash and deposits.

For the most part, Dubai’s insurers have successfully negotiated the changing investment and regulatory environment of the past 10 years. According to the IA, annual GWP increased steadily between 2007 and 2017, from Dh18.3bn ($5bn) to Dh44.8bn($12.2bn). During this period, insurers succeeded in remaining profitable despite the new constraints on their investment activities, partly as a result of mandatory health cover and an increase in the government-defined level of motor tariffs. “Increased consumer awareness and improved regulations are driving the growth of new segments, including medical, life and household insurance,” Parvaiz Siddiq, CEO of Salama, told OBG.

Healthy Profits

According to an analysis of the financial results of listed UAE insurers released by Millman, GWP grew by a modest 5% in 2018, down from the 14.4% expansion of the previous year. However, the industry posted a healthy net profit for the third year in a row, showing a 8.5% increase. This relatively strong performance was secured despite a decrease in the industry’s average investment return during 2018, which fell from 8.5% in 2017 to 7.1%. The net combined ratio for 2018 showed a modest increase, rising from the 83.7% the previous year to reach 84.4% – still comfortably below the 100% level, above which companies are paying more money in claims than they receive in premium.

Timely penetration data is scarce. In 2016 the UAE penetration rate was estimated at 2.9% of GDP by regional investment bank Alpen Capital, having expanded from 1.8% in 2011. Despite this positive trend, insurance penetration remains low compared to more developed markets such as the UK and the US at 10.6% and 7.2% in 2017, respectively, as well as the global average of 6%. The potential for growth in the domestic market, therefore, remains high.

Outlook

Stricter accounting standards, increasing regulatory costs, high levels of competition and muted oil price forecasts are likely to challenge the growth of Dubai’s insurance industry in 2020. However, the fundamentals of the market remain strong. A growing awareness of insurance in an expanding population, the ability of the government to drive infrastructure initiatives at all stages of the economic cycle, continued involvement of international players in the market and the extension of mandatory health care to the UAE’s Northern Emirates are expected to underwrite future growth in the sector (see Health chapter). From a structural perspective, the intermediary segment is likely to undergo change in the short term, with brokers coming under increasing pressure from digital channels and insurance aggregators. Consolidation in this area is therefore likely. The larger question, however, is whether this trend will extend to insurance companies themselves, as has been the case in the banking sector (see Banking chapter). However, the majority-government ownership of strategically important banks – which made a number of recent mergers possible – is lacking in insurance, which has thus far been resistant to encouragement from the regulator to combine balance sheets in the interest of stability and capacity. What is more, the 2018 decision to permit 100% foreign ownership of UAE-based firms is expected to bring more international interest.

From a regulatory perspective, the most pressing short-term challenge is the approaching deadline for IFRS implementation, which places unprecedented demands on insurers’ data, IT, actuarial and risk functions. The implementation date was recently pushed back by the International Accounting Standards Board to January 2022, providing respite to the UAE’s insurance firms, who for the most part did not begin preparations until the beginning of 2019.