Egypt's insurance sector overcomes external obstacles

Despite political and economic difficulties in the country in the past few years, Egypt has a growing and attractive insurance market. Penetration is low, and people are becoming increasingly aware of the need to cover risk. They are especially positive on insurance given the turmoil of 2011 and the fact that insurers made good on their policies despite the damage caused by the upheaval. The recovery has been strong and the market has been growing, recording a positive 2011. “Every year is up,” said Ahmed Moawad, an insurance researcher in the life insurance department of the Insurance Federation of Egypt.

At the same time, the country rarely suffers major natural disasters, so the chance of a catastrophic loss is low. That keeps rates down; Egypt is considered relatively “soft” in the international reinsurance markets. Returns are high and opportunities abound, with the sector becoming more sophisticated in terms of distribution, product design, regulation and innovation. Egypt is an attractive place to be for insurers, and it is becoming a key target for foreign investment. This sort of participation is expected to keep the sector competitive and dynamic going forward.

Key Challenges

While the sector is well positioned for the future, it is small for a country the size of Egypt, with less than $2bn of premiums, despite a population of 86m. The critical mass is not yet there. Insurance penetration is estimated to be 1.2% – just under the emerging market average of 1.3% and far below the global of average of 6.2% – and insurance density is just $22.30 per person. Inclusion is likely to remain a problem for some time, given the poverty rate, which officially stands at 25%, and the limited level of broader financial inclusion. Mastercard estimates that only 35% of Egyptians have a bank account.

“Egypt faces major hurdles including a widespread lack of financial literacy and awareness regarding insurance products and their benefits,” according to the Egyptian Financial Supervisory Authority (EFSA). The authority adds, “Insurance is often unaffordable.” Still, the economy has recovered nicely, with the country’s credit ratings upgraded as the political situation stabilised and with inflation subsiding. And the government is committed to efforts that will help this trend continue. However, risks remain due to global uncertainties, continued domestic threats and the drop in tourism. While GDP growth is close to where it was before 2011, it is volatile. This could hit already weak consumer confidence and result in lower demand for non-essential products like insurance.

From Nationalisation to Liberalisation

Undefined Egypt has a long history of insurance. In the mid 19th century, European companies established branches in the country after the announcement of the opening of the Suez Canal and the growth of the cotton trade. The first local insurer, the National Insurance Company of Egypt, was founded in 1900 and Egypt Re in 1957. In the 1950s and 1960s, the country quickly closed to international participation in the sector and then to private sector participation altogether.

After the Suez Crisis in 1956, Egyptianisation took place and full nationalisation was undertaken in 1961, leaving three state firms: Misr, Al Chark and National. Private companies were again allowed in the 1970s and foreign investors were permitted to own up to 49% in 1995. In 1998, 100% foreign ownership was permitted, though non-Egyptians are still not allowed to own a cooperative or mutual insurance company.

Regulatory History

Regulation of the sector has developed steadily. It officially started in 1939, with Law No. 92, as foreign concessions were cancelled. That was followed by a raft of relevant legislation over the years, including Law No. 156 of 1950, No. 195 of 1959, No. 119 of 1975 and No. 43 of 1975, the last of which allowed for the establishment of foreign owned insurance companies in free zones. Law No. 10 of 1981, or the Law on Insurance Supervision and Control, governs the sector today. Law No. 10 was amended twice, most recently in 2008. Other key laws include No. 156 of 1998, the statute that permits 100% foreign ownership. A third-party motor liability law was passed in 1956 and in 2007 a motor guarantee fund was created to cover claims of the uninsured, or those where one party in an accident could not be determined. It is funded with a 3% levy on premiums. Also in 2007, a law requiring liability insurance for highway transport vehicles was passed. In 2008, compulsory motor insurance was changed considerably, with unlimited liability being replaced by a cap. While compliance with the requirement for motor insurance has been high historically, it has been slipping since the political volatility that began in 2011.

Institutions, Authorities & Supervisors

Undefined The administration of regulation has also evolved considerably. The Egyptian General Insurance Institution was formed in 1966 (from a merger of the Insurance Authority and the Savings Institution). It was replaced in 1976 by the Egyptian General Insurance Authority, which in turn was replaced by the Egyptian Insurance Supervisory Authority (EISA). EFSA is now responsible for regulation, taking over for the EISA in 2009. EFSA regulates all non-bank financial activity in the country and oversees the application of Insurance Law 10.

Insurers must have LE60m ($8.2m) of capital, half of which must be paid up. Intermediaries must have LE2m ($272,600) of capital if they are corporations. The 1981 law does not distinguish between brokers and agents; they are both called intermediaries. The concept of corporate brokers was set out in the 2008 law (No. 118). In addition to meeting minimum capital requirements, the brokers must also follow a number of rules. They must keep client accounts separate from those of the brokerage and submit annual reports to EFSA, and key persons must be fit and proper. Licensing for brokers is every three years.

Strict limits are also placed on investments made by insurance firms. Decree 245 of 2008 outlines these limits. A total of 15% of investments can be in bonds (and only 5% in any one security), 25% in shares (5% in any single security), 30% in real estate (10% in any single investment), and 50% in cash or equivalents. Since April 2014, insurance companies have been permitted to outsource management to fund managers.

Concentrated

Egypt’s insurance market is concentrated, but becoming less so. The top five non-life insurers in the country commanded 73.15% of the market in 2014 and the top 10 had just over 90%. That’s down from 79.04% and 94.62%, respectively, in 2010. The sector has 13 life companies and 19 non-life. The number of life firms has grown from 11 in 2012, though the number of non-life companies has stayed the same in that time. One public sector insurer is active in both subsectors: Misr Insurance Company and Misr Life Insurance Company. The country has 610 private insurance funds, 41 insurance broker corporations, 7436 individual brokers and eight takaful.

Major Players

EFSA’s 2014 annual report lists Misr as the largest insurance firm in the country in the life and non-life segments. Misr Life Insurance Company wrote 36.7% of the gross premiums in its subsector. It was followed by Allianz Life, with 18.5%; Pharaonic American Life Insurance Company, with 16%; Commercial International Life Insurance Company (CIL), 12.7%; Egyptian for Takaful Insurance Company, 3.8%; and QNB Life Insurance Company, 3.7%. On the non-life side, Misr Insurance Company took in 54.9% of the gross premiums. Suez Canal Insurance Company was next, with 5.2%; followed by Arab Misr Insurance Group (GIG), 5.0%; Bupa Egypt, 4.2%; Allianz Insurance, 3.6%; and AIG Egypt Insurance, 3.5%.

In terms of capital, Misr is also the largest company in the sector. Misr Insurance has LE2.25bn ($306.6m) of paid-up capital while Misr Life Insurance has LE1bn ($136.3m). That is followed by Export Credit Guarantee, with LE250m ($34m); ACE Life Insurance, with LE190m ($25.9m); Egyptian Takaful-Life, with LE130m ($17.7m); Egyptian Takaful Insurance, with LE120m ($16.4m); Tokio Marine Egypt Family Takaful Company, with LE113m ($15.4m); and Suez Canal Insurance, with LE109m ($14.9m). Three companies are under the LE60m ($8.2m) threshold: Delta Life Insurance Company, at LE40m ($5.5m); Mohandas Life Insurance, with LE30.8m ($4.2m); and Suez Canal Life Insurance, with just LE30m ($4m). Delta Life and Mohandas Life received their licenses in 2014.

Foreign Interest

The sector has a significant level of foreign ownership, and more international companies are entering the market while those already there are increasing their commitment to it. Tokio Marine established itself in Egypt in 2008, creating a joint venture with Egypt Kuwait Holding Company. The venture has two businesses, Nile General Takaful and Nile Family Takaful. In 2013 the former acquired Egypt Kuwait Holding Company’s shares in the business and renamed it Tokio Marine Egypt General Takaful. AIG Egypt was founded in 1993 and is currently expanding. Allianz Egypt started in 1976 as a shareholder in Arab International Insurance Company, the first joint venture operating in a free zone. It increased its shareholding to 85% in 2000. Lloyds recently entered the market and is now accredited, but at least one foreign firm has left, Royal, in 2007.

The market also has regional participation. Arab Misr Insurance, which is part of the Gulf Insurance Group (GIG), has been active in the country since 1994. Egyptian Takaful has Kuwait shareholdings. Arab Orient Takaful has UAE shareholders. Africa Re, the regional reinsurer founded in 1976 and based in Cameroon, has both an office and a subsidiary within the country. At the end of 2014, EFSA said that four foreign companies had approached the regulator about entering the market. These were United Insurance Company in the non-life segment; Egyptian Emirates (life takaful); Mediterranean & Gulf Insurance ( non-life); and AXA Insurance Company. According to the US State Department, no licenses are being issued for insurance companies, but new entrants can acquire existing companies. AXA did make an acquisition. In June 2015, it purchased Commercial International Life (CIL) Insurance Company from Legal & General Group and Commercial International Bank for LE763m ($104m). The life firm was formed in 1998 and is third in the market, in terms of premiums.

Good Performance

In recent years, the sector has been performing well. Non-life premiums hit LE8.2bn ($1.1bn) in the fiscal year ending in 2014. That compares with LE7.5bn ($1bn) in 2013 and LE6.5bn ($886m) in 2012. The life subsector has also done well. Premiums hit LE6.9bn ($940.5m) in 2014, up from LE6.5bn ($886m) in 2013 and LE6.1bn ($831.4m) in 2012, according to EFSA..

In 2014, the asset growth rate for the sector as a whole was 15.1% – with life assets up 18.1% and nonlife up 12.4% – according to EFSA, while net profits for the sector were up 48.4%. Early numbers indicate that 2015 started out very strong. Life premiums rose more than 26% in the first quarter on year.

Motor

The largest category of business in non-life is motor comprehensive. A total of LE1.6bn ($218.1m) of premiums were collected in the 2014 fiscal year – representing 21% of the total – up from LE1.3bn ($177.2m) in 2010. Next was fire, at LE1.2bn ($163.6m) and 16% of the total. That was followed by health (12%), oil (11%), motor act (10%), engineering (10%), accidents (10%), marine (4%), marine hull (2%), aviation (2%) and inland (2%). Non-life has remained profitable and most categories have achieved loss ratios of under 100%. The exception is motor act, which was over 100% until 2014 (301.6% in 2010).

Life

Certain deficiencies in the social safety net have helped the rise in life insurance. “Life insurance is OK in Egypt because people try and save,” said Aly Abd Elmoneim Bashandy, reinsurance and technical affairs sector head at Arab Misr Insurance Group GIG. “Because the government is not generous enough to pay for retirement, so they want savings products.”

Takaful

While takaful has considerable potential and has been growing fast, it lacks its own underpinning legislation and demand has been weak recently. The subsector has had eight institutions for a number of years running (three life companies and five non-life). EFSA cites the lack of awareness, the lack of standardisation and the lack of sharia-complaint investments as holding the sector back.

Takaful is one of the priority areas for the regulators, and in 2014 EFSA published guidelines for legislative committees undertaking work related to sharia-complaint products. It is believed that once products are made complaint and standards are issued, demand will increase. According to press reports citing EFSA, in the first five months of 2015 takaful took in 13% of all premiums in the sector. For full-year 2014, it was 8% of the total.

New Coverage

There is potential across the sector. The market is highly competitive, and people in the country are in need of coverage and are increasingly starting to understand the need for it. In particular, confidence has been boosted by the fact that claims were honoured in the wake of the 2011 political turmoil and by the fact the sector has responded by updating policies to reflect new risks. The biggest losses have been related to the turmoil of 2011, with strike, riot and civil commotion damage estimated at over LE1bn ($136.3m) that year.

Progress has also been made on tackling inclusion. A microfinance law was passed in 2014, and under the law the regulation of relevant products, including insurance, will be the responsibility of EFSA. In 2015, the Insurance Federation of Egypt (IFE) set up a microinsurance committee in an effort to help in the promotion of products. In 2014 EFSA published rules on the selling of insurance via Egypt Post.

“The government’s financial inclusion initiative is increasingly driving the need for micro insurance products,” Walid Auf, managing director of Medmark, told OBG. “These are primarily geared towards the lowest-income segments of the population.”

New Reforms

Bancassurance has been allowed, by the central bank, since 2013. As of May 2015, a total of eight insurance companies were working with 17 banks to offer insurance products. Bancassurance had been allowed previously – in 2003 – but was ended in 2007 because the central bank felt as though the arrangements were leading to excesses and dangerous practices. Revisiting the subject in May 2013, the Central Bank of Egypt issued a newer and stricter framework for bancassurance. The framework emphasises transparency and calls for a strict separation of the banking and insurance activities. New deals are being signed and others are in the works, with insurers actively looking for partnerships. In January 2015, Pharaonic American Life Insurance Company-Alico (MetLife Alico) said that it would be offering products through AlexBank, which was founded in 1957 and has 170 branches across the country. Other partnerships include: Emirates NBD Egypt and AXA; and Banque du Caire and Allianz.

The regulators are considering an increase in capital requirements. They are also examining investment and reserving rules, transparency and consumer education and are contemplating a policyholder compensation fund. The regulators have a few areas of pressing concern. EFSA said that excessive competition has led to unsound strategies and dumping for the sake of market share, and it is focused on making sure that these practices are curtailed and that competition does not destabilise the market.

Reinsurance Strategy

As with many African emerging markets, there is a push to ensure that reinsurance activity is at least partially domestically domiciled. While the country has been adjusting its domestic reinsurance strategy for a number of years, a solution that works has been elusive. Until 2003, local insurers were required to cede 30% of non-life and 50% of life business to a state reinsurer. The original Egypt Re was folded into Misr Insurance in 2007, but the move led to an increased outflow of premiums as the other insurers in the sector were hesitant to cede business to a competitor. “The government is currently studying the feasibility of introducing a national reinsurance company,” Hamed Mabrouk, managing director of Gras Savoye Egypte, told OBG. “However, the market is a bit too soft to fully support such an institution at the moment.”

New Insurance Law

Sweeping reforms are in the works. As of early 2015, a draft proposal for the updating of the legislation underpinning the sector was being prepared in consultation with the insurers. According to press reports, the new law will cover distribution channels, microinsurance, third-party administrators, health insurance, takaful and governance. EFSA believes that the old law – the 1981 statute – is outdated and needs to be modernised.

Outlook

The sector is well placed at present and emerged from the events of 2011 in better shape than it went in, having earned the respect and confidence of clients and prospective clients. The sector is fighting headwinds, in terms of the lack of spending power in the country and broader economic pressures, but is being helped considerably. The regulators are working to keep the sector well managed and competitive, and investors are showing an interest.