Dubai explores new forms of insurance to expand coverage

Insurance penetration in Dubai is very low and the potential for growth is immense, making the sector competitive and highly oriented toward future expansion. However, the current operating environment is challenging, with companies competing on price to capture market share, scale up customer bases and boost profits.

An additional obstacle in the past year has been the decline in oil prices. Though the emirate is not directly exposed – indeed, as a net importer it benefits – the regional focus on crude exports means less liquidity in the economy overall. It also means a drop in valuations for most types of assets, including those insurers typically hold in their investment portfolios, such as equities and real estate. Another impact on profits in the coming years will be additional regulatory obligations aimed at increasing sector stability, which are expected to add to insurers’ costs.

The emirate also hosts an offshore insurance sector in its financial free zone, the Dubai International Financial Centre (DIFC), and the operators housed there have helped create a centre for reinsurance, with specialist providers operating in niche markets. These firms are limited in their ability to service the domestic market and are instead looking at regional, African and Asian markets as a catchment area for customers.

Future Orientation

Dubai’s onshore and offshore insurance sectors serve different markets but are both areas in which the future is expected to bring significant growth over the long term. In both cases the penetration rate for insurance is low, though it is expected to grow as the concept of insurance becomes more popular and as policy reforms expand the areas in which coverage is mandatory. As it stands, the UAE has an insurance penetration rate of 2%, which is measured as the ratio of premium underwritten in a particular year to GDP, making it one of the more developed markets in the MENA region.

Premium growth has climbed from Dh19.2bn ($5.2bn) in 2011 to Dh24.9bn ($6.8bn) in 2015, according to statistics from the regulator the UAE Insurance Authority (UAE IA). Moody’s reported that the value of the insurance industry in the six countries of the GCC nearly tripled between 2006 and 2014, with premiums jumping from $6.4bn to $22.2n over the period. For a compound annual growth rate of 16.8%.

Industry Players 

There are 60 insurers, with 34 of them domestic and 26 foreign, according to the regulator’s 2014 annual report, the most recent available at the time of writing. Of the group, 11 are specialists in takaful, the sharia-compliant alternative to conventional insurance. While insurance licensees are based in a particular emirate and often have a strategy that reflects that location, they are able to offer their services across the federation without limitation. Operators in the domestic market are licensed at the federal level by the UAE IA.

In addition to the insurers in the domestic market, as of the end of 2014 there were 164 insurance brokers, five of which were foreign owned. Brokers account for about 50% of premiums. They have been subject to increased supervision in recent years, after Sun Insurance Brokers failed to meet some of its obligations in 2010 and 2011 during the aftermath of the global financial crisis, as it was facing a liquidity crunch. Other licensed actors in the insurance sector include 21 insurance agents, 20 insurance consultants, 72 loss adjusters and 43 actuaries.

The sector employed 9269 people in 2014, 742 of them Emiratis. In addition to the UAE IA, there are two other insurance regulators in Dubai – the Dubai Health Authority (DHA), which manages the provision of health insurance, and the Dubai Financial Services Authority, which oversees all activity in the DIFC but is limited to oversight in that jurisdiction.

Performance Trends

Gross premiums of all types reached Dh13.5bn ($3.7bn) in the first nine months of 2015, up 9% on the same period in 2014, according to ratings agency Standard & Poor’s (S&P). The rise in premium income was not, however, accompanied by an increase in underwriting profits – in fact, among publicly traded insurers there was an aggregate loss.

The UAE as a whole saw an aggregate net underwriting deficit of Dh211m ($57.4m) in September 2015, compared to an underwriting surplus of Dh221m ($60.2m) for the same period in 2014, according to data from S&P. A total of 13 companies with combined ratios above 100% represent 32% of market premiums. A figure above 100% means that payout for claims in the period exceeded income from premiums. It was 96% in 2014, implying a profitable year for underwriting. The combined ratio for 2015 was deeply influenced by negative results at one of the UAE’s larger insurers, and if the technical results of the Abu Dhabi National Insurance Company are excluded, the restated market ratio falls to 96%, similar to 2014, according to S&P.

Sector Organisation 

In the UAE insurance market, rules are set by Federal Law No. 6 of 2007, which also established the UAE IA as the regulator. Insurers that are locally owned must be public joint-stock companies listed on a local exchange and 75% owned by UAE or GCC nationals.

Foreign branches do not face these restrictions, while they must have a local Emirati sponsor. Insurance intermediaries incorporated locally must be at least 51% owned by Emiratis. These rules do not apply in the DIFC.

In the domestic market, insurance companies are required to maintain a minimum paid-up capital of Dh100m ($27.2m), a figure that increases to Dh250m ($68.1m) for reinsurers. Foreign reinsurers are not required to seek UAE IA approval to service the market. For takaful providers, however, UAE IA regulations mandate additional requirements, including a sharia supervisory board. In early May 2016 the UAE Cabinet approved the launch of the new national Sharia Authority.

This regulatory board is tasked with overseeing the country’s Islamic financial services sector. The new national regulator is not designed replace individual sharia boards, however. Instead it will approve products and services approved by the sharia boards of individual banks. Legal and regulatory changes will likely be a significant factor for the insurance sector in the short and medium term. In the UAE system, the time between a law’s passage and enforcement is often lengthy, and provides companies extra time to meet compliance burdens while avoiding shocking the market with sudden changes. In the insurance sector, an example of this is the 2007 law’s mandate that general and life insurance cannot be offered by the same company. The deadline to comply has been extended multiple times and was due to come into force in 2015, but was pushed back once again to August 2016. There are no such restrictions in the DIFC.

New Regulations 

A major overhaul of the regulatory environment was completed in December 2014 and formalised in early 2015. The changes include enhanced accounting, auditing and solvency measures, calculating technical provisions, caps on investment in specific asset classes and higher governance standards. Implementation is scheduled in phases from January 2016 to January 2018. One of the first elements on the schedule is a solvency audit, and companies that do not pass the audit may be forced to inject more capital or seek a merger (see analysis). Later components of the plan are yet to be fully realised as of 2016.

While not all elements of the plan are clear – such as the UAE IA’s template to calculate solvency margins – the broad outlines of the regulations are in line with the new Solvency II requirements for insurers domiciled within the EU. The UAE is the first jurisdiction to adopt this approach, according to the UAE IA’s 2014 annual report. Industry watchers agree so far, the financial regulations usher in a more sophisticated era of regulation for the UAE insurance industry,” a review by the Dubai office of the international law firm Holman Fenwick Willan noted.

While the new rules will affect the market in very specific ways, as a group their overall impact is expected to include higher operating costs for insurers, perhaps to the extent that some could be open to mergers or acquisitions in order to improve long-term prospects. The market has long been considered a crowded one, in which consolidating the roster of licensees into a smaller list of larger companies would be beneficial for all.

However, these types of transactions have not been common in the commercial history of the UAE and the wider region. Executives generally prefer waiting out challenging conditions in the hope of better times rather than reading market signals as a cue to sell out or join forces. For foreign investors this could mean more opportunities to take minority stakes in insurers as opposed to the chance of buying a controlling share.

Health Insurance 

The fastest growth for insurance of any type since 2014 in the emirate has been health coverage. In September of that year Dubai embarked on a three-year rollout of a plan to make health insurance mandatory for all workers in the country, including the significant number of foreign workers, which account for around 80% of the population in the UAE. Emiratis working in the public sector already receive health care through the government’s socialised medicine programme, Enaya.

A legal reform approved in 2013 requires that employers buy insurance for their workers, starting with the largest companies – those with more than 1000 workers – and then applying to smaller firms in 2015 and 2016. Coverage will be universal by then, with an additional 2.5m health policies active as a result. Julio Garcia-Villalon, regional head of Middle East and Africa at MetLife, told OBG, “The implementation of compulsory health insurance showcases Dubai’s ever-evolving maturity in the industry. It has been rolled out on a steady basis, which can prove vital in terms of ensuring its long-term success.”

Currently, there are seven insurers that have been authorised by the DHA to offer the coverage. It is expected that more will be allowed to serve this market, and Al Sagr National Insurance Company has submitted a business plan in order to do so. As the number of providers grows, it is likely that price competition will also increase.

That could lead to a situation resembling motor insurance, which is marked by a high volume of customers and low profit margins. The law encourages employees to insure workers’ families, and deduct the cost from their pay, but this is not a requirement. The coverage expatriates are to receive will be in accordance with their earnings, starting with basic plans ranging from roughly Dh585-700 ($159-190). For now, however, the seven authorised companies have found health insurance lucrative.

It helped Takaful Emarat, for example, declare its first quarterly profit since 2009 in 2014. The coverage includes a 20% co-pay, which limits excessive or abusive claims. And claims for complicated medial problems or age-related sicknesses are also low, as most of the workers covered are doing physical labour, so they would not have been hired if not basically healthy at the start. “People aren’t necessarily heavy users of their policies,” S&P’s Kevin Willis told OBG. “At least not for now.”

Growth Driver 

In the non-life sector, both growth and volume is driven by auto insurance, as coverage is mandatory for motorists. As a measure of the price-based competition insurers engage in, the typical motor policy now costs about 2% of the value of the vehicle, compared with 4% four years ago, Willis said. There was a proven business case for accepting low or no profit margins on this line of business in the previous decade, when asset prices in real estate, the stock market and elsewhere were rising fast enough to provide insurers with sufficiently high investment income to overcome underwriting losses. Now, with asset prices falling or stagnant, insurers are shifting their strategies. In the motor segment, this increasingly means pricing policies according to risks. Some 26 insurers now share in a database of driver histories and have the ability to adjust premiums according to a policyholder’s past performance on the road. Historically, motor policies have been the main catalyst for growth. High-growth periods have featured expansion across economic sectors, increases in population as foreign workers move to the emirate and higher automotive sales as a result. With penetration rates still low, some expect that this narrative will not be interrupted by lower oil prices and the overall negative impact on economic expansion they are expected to bring, because more people will embrace the concept of insurance and purchase types of coverage beyond only those that are legally mandated.

The emirate’s growing and young population is also expected to have a significant impact on long-term growth for the sector. “Population in the emirate is young so there is a bright future ahead. As the population matures, wealth develops and individual spending power increases. A growth in personal possessions, car and real estate ownership all drive an increased need for insurance protection,” Chris Dooley, CEO of Royal & Sun Alliance (RSA) Insurance Middle East – UAE, told OBG.

UK-based RSA Insurance has made inroads in the lucrative Middle East insurance market. The company established itself in Bahrain but also has operations in Saudi Arabia, Oman and the UAE. Their presence in the UAE is limited to Dubai, Abu Dhabi and Sharjah. In Dubai RSA has a 15% market share in the motor insurance segment. They have no current plans to expand to other countries in the Gulf, instead the company has plans to focus on developing its franchise with current partners in the countries where licences are already held, further diversifying its operations.

However, the current environment of low prices for crude oil could test the theory that Dubai is poised for more growth. Since it is not a major oil exporter Dubai may not be directly affected, but with the wider UAE and so many of its neighbouring oil-exporting countries feeling the impact, it is still facing challenges in terms of less investment, travel and shopping in Dubai, among other things. For example, vehicle sales in recent years have been boosted by expatriate buyers, but this population is expected to slow its rate of purchasing as long as crude prices are low.

For the 2014-to-2016 period, however, the health segment is expected to replace motor policies as the growth engine due to the implementation of Dubai’s health insurance scheme for foreign workers.

Market Shares 

Overall, in 2014 motor and other accident and liability insurance accounted for 33% of underwritten premiums, according to the UAE IA’s annual report. That was second to medical insurance, at 44.5%. Other categories of general insurance included fire protection (9% of total premiums); land, sea and air transport (6.7%); and others (6.8%). Domestic insurers accounted for 75.1% of the total and foreign firms 24.9%.

Real Estate Protection

A new growth area may be real estate, provided the Dubai government proceeds with a plan for a real estate insurance law. In February 2015 local press reported that the Dubai Land Department was studying the issue and that just 6% of homeowners had a policy protecting their assets against damages. In recent years fires at residential skyscrapers, including the Dubai Marina Torch Tower, the Tamweel Tower in Jumeirah Lakes Towers, The Address Downtown hotel and Ajman tower, have highlighted the risk. The costs for repairs to Tamweel, for example, reached about Dh78m ($21.2m).

The overall retention rate for property and liability insurance in Dubai was 54.9% in 2014, according to the UAE IA’s annual report. Risks were most likely to be retained for accident and liability policies, where the rate was 66%. For medical insurance, the retention rate was 62.5%. For all other areas, it ranges from 16.5% to 26.8%. Reinsurers in the Dubai market are generally found in the DIFC, and look to service the region from there.

Insured Offshore

While less information is currently available about insurance activities in the DIFC – a result of different disclosure requirements – the financial free zone is now recognised as a reinsurance centre for the GCC and greater Middle East, Africa and Asia, and continues to attract a steady stream of specialists.

“Reinsurance is increasingly popular, but there is not much capacity, unlike the European market. As the reinsurance-driven market is very profitable, because it creates commissions, there is room for growth for this segment here,” Arvind Kashyapa, CEO of Howden Insurance Brokers, told OBG.

Lloyd’s of London opened an underwriting platform for specialist risks in DIFC in early 2015, boosting the number ventures within the DIFC owned by the UK insurance leader to nine. Another example of a niche player operating in the DIFC is Elseco, which specialises in coverage of satellites and aviation. Owner and CEO Laurent Lemaire founded the company in Dubai in 2006, picking the location because of the eastward migration of satellite manufacturing and usage, led by Asian countries, including China, Japan, India and Korea.

Life Premiums

In the domestic life insurance sector, total written premiums were Dh8.6bn ($2.3bn) in 2014, according to the UAE IA’s annual report. Foreign companies accounted for 81.4% of premiums, which stands in contrast to general lines of business, for which domestic insurers have a commanding market share.

Life insurance growth in Dubai has been limited in the past for several reasons, including the emirate’s historically low penetration rate for insurance in general and the large non-permanent segment of the population.

“Corporate and life insurance will grow within the next years, mainly due to their low penetration rates. However, the fact that people may not get permanent residency in Dubai is a major hurdle,” Mustafa Oliyath Vazayil, managing director of Gargash Insurance Services, told OBG. Encouraging expatriate workers to sign up for a long-term product in a market in which they do not see themselves retiring has been a challenge, but increasingly one that can be overcome. Online platforms have simplified the process of sending payments out and have made the insurance sector more portable and user friendly.

Investment Accounts 

As a group, insurers had invested Dh39bn ($10.6bn) in the UAE economy as of 2014, according to the UAE IA’s annual report. The value of equities and real estate in investment accounts has been dropping – as of mid-October 2015, the Dubai Financial Market General Index, the benchmark index for equities, had declined 11.2% in the past 12 months, and real estate sales had fallen by 69% in the first half of the year. While, worries about real estate in Dubai surfaced when prices surged in early 2014, followed by a warning from the IMF of a possible bubble, they have stabilised since.

The new regulations being introduced phase in caps on asset classes within those investment accounts. By January 2017 domestic equities cannot exceed 30% of the total, and foreign shares are limited to 20%. No single equity can surpass 10% of the total. By the same date, loans secured by life insurance policies will be capped at 30% and derivatives at 1%. They are to be used for hedging purposes only. The second phase, to be enforced from January 2018, sets a maximum for real estate investment at 30%, which will be measured according to the current market value of the properties.

In general, valuations must be on a mark-to-market basis where possible. Real estate valuations must be done by two independent firms if the value exceeds Dh30m ($8.2m). Each insurer’s investment account must hold at least 50% domestic assets. With sukuk (Islamic bonds) and other debt securities offering yields in the single digits, insurers have historically avoided fixed income as an asset class; however, with the new caps in place that may very well change.

Outlook

Even with weaker oil prices, Dubai’s insurance sector is poised to grow, with analysts like as S&P expecting continued and positive growth through to 2018. As the new regulations are implemented and governance standards rise, insurers may respond to the improved operating environment by seeking fresh capital to apply to their business models.

This could mean a sector in search of outside capital and, for foreign investors, an opportunity to participate in a promising industry. This confluence of interests has the potential to transform the existing marketplace, with a young, dynamic population presenting significant opportunities.