In order to elaborate on this topic, that is, whether the UAE insurance market is out of the woods and if so where is it heading one necessarily needs to first examine where it is coming from in terms of both the macro economic and legal environments as well as the global insurance market.
It would be well worth starting with addressing a significant misconception. Many have often described the insurance market in UAE (and in Dubai in particular) as a competitive market. In as far as the retail insurance market is concerned this is simply not true. It is aggressive but not competitive. The international insurance market acting vicariously through regional retail insurance companies is competitive but once we move from the global to the local retail arena what we witness is aggression and not competition. This assertion is based purely on the definition of competition in that:
- Products need to be homogenous: Whilst the core product i.e. financial capacity in the event of a claim is homogeneous (hence the reason for competition existing between reinsurers active through local retail insurers) the packaging (mainly in the form of policy wordings, selling and servicing of insurance by the respective insurance companies) and the underlying quality and quantity of reinsurance behind retail products sold by the various companies differ widely.
- Consumers possess ‘perfect’ knowledge: Of course, this is a theoretical absolute but, in many instances the UAE retail market is found to be nowhere close! Again, in the reinsurance arena because the buyers are either insurance companies or reinsurance brokers on behalf of insurance companies the level of ‘consumer’ knowledge is much higher, hence the reason for the regional reinsurance outward scene being relatively competitive. However, in the retail market the general lack of license-driven qualifications and/or continued professional development coupled with lack of consumer education on insurance means that the level of retail insurance awareness is relatively very poor.
- Retailers operate on the ‘price-elastic’ segment of a demand curve, at best generally only yielding normal profits in the long run: Barring the recent crisis period, most UAE retail insurers were enjoying economic rent in the form of consistent double-digit technical and/or net profits. In a particular year immediately pre-crisis, one of the largest UAE insurers actually experienced a net profit that was marginally short of its total gross revenue!
- A competitive market has clear, transparent and effective regulation and supervision. Federal insurance regulation in the UAE is still undergoing extensive development.
One may ask, if the UAE insurance market is not a competitive one, then what compels insurers to aggressively ‘write more for less’ to a point that most domestic insurers would not even print the amount of premium due on a renewal notice as a result of rife undercutting practices in the market? It is important to understand the difference between this phenomenon and competition to perceive where the UAE insurance market is coming from and where it is heading post-crisis.
This phenomenon runs parallel to a text-book definition of deflation in economics. How? All other things being equal, deflation is caused by insufficient demand relative to productive capacity or supply. Despite GDP growth in UAE particularly post-2001, the growth in insurance demand still remained relatively low when compared to developed markets. The geometric growth in economic activity did spur significant demand for insurance but this was insufficient compared to the growth in supply, whether in the form of new insurance licensees in the UAE insurance market or fresh reinsurance capacity. The chronic ‘excess’ capacity (at least for the past decade or so) relative to deficient insurance demand growth has spurred an imbalance resulting in a chronic squeeze on insurance premiums. Excess and economically available reinsurance capacity is also the reason why the crisis is having a delayed effect on the UAE retail insurance market as will be illustrated later on in the market.
It is estimated that (inflation adjusted) GDP growth grew by around 17% from 2006 to 2009. Insurance grew by a much higher rate result in a growth of insurance as a percentage of GDP of more than 50% for the same (2006 – 9) period. However, the insurance percentage of GDP per se is only around 2.6%. Compared to other emerging markets such as the BRIC economies (Brazil: 3.5%, Russia: 2.5%, India: 5.2% and China: 3.4%), UAE’s insurance spend as a percentage of GDP still has significant room for development.
How important a role has reinsurance played in the regional market? The role has been significant. For example, figure 1 illustrates the movement of reinsurance outwards (i.e. purchase of reinsurance) as a proportion of gross written premium over the past five or so years. The top ten UAE insurance players account for more the lion share of the market (well over 70%) and, therefore, provide a relatively good indication of whole:
|Leading UAE insurance companies:||2009||2008||2007||2006||2005||4-Yr Mov||4-Yr Average||Outward to Recoveries Trade-off|
|1.a||Oman Insurance Company||46%||43%||50%||54%||56%||-18%||49%||Positive|
|2.a||Abu Dhabi National Insurance Company||61%||65%||70%||69%||69%||-12%||68%||Negative|
|3.a||Arab Orient Insurance||73%||72%||71%||69%||70%||5%||71%||Marginally Positive|
|4.a||Al Buhaira Insurance||60%||63%||63%||67%||65%||-8%||64%||Marginally Negative|
|6.a||Al Ain Ahlia Insurance||60%||60%||63%||63%||71%||-15%||64%||Negative|
|7.a||Dubai Islamic Insurance||69%||62%||59%||44%||42%||65%||56%||Negative|
|8.a||Al Sagr Insurance||42%||50%||51%||48%||56%||-26%||51%||Marginally Negative|
|9.a||National General Insurance||42%||40%||48%||28%||n/a||48%||40%||Negative|
It is immediately apparent that
a) The market as a whole is significantly dependant on outward reinsurance;
b) Although there appears to be a general downward trend in reinsurance purchase in the aggregate in recent years, this is not necessarily the case and may reflect more the changes in product composition changes within the market. For example, the growth in motor insurance as resident population increased (and the requirement for comprehensive insurance for bank-financed vehicles) plus the compulsory requirement of health insurance in Abu Dhabi and in the Dubai Free-zones has resulted in a proportionate increase in retention since in both of these classes (whether under proportional or non proportional treaties) retail insurers tend to retain more;
c) In cases where insurers have decreased their dependence on outward reinsurance any proportionate savings have drained out on claims as a result of lower reinsurance claims recoveries;
d) In other cases, a decrease in reinsurance dependence has had a negative impact on the net technical result of some companies;
e) Even with some of the largest players, top-line growth has resulted in a more than proportionate outward reinsurance expenditure.
Regrettably the crisis did not stem the flow of international reinsurance capacity as companies in Europe and elsewhere sought to mitigate loss of revenue from other markets with premium from this region. Hence, pricing which was already soft became even softer since 2008 on the back of available, more economical international reinsurance capacity.
The practice of aggressively holding on to one’s accounts and/or seeking to grow under the current trying conditions has continued seemingly oblivious of two very important factors namely:
- Although the regional insurance markets have not suffered immediate and more pronounced losses as did the more international markets (such as UK and USA), it appears that the effects have merely been delayed not avoided. The proportionate effect on the insurance markets is not that different in terms of drop in the rate of insurance growth over the same period under investigation for both mature and emerging market blocs.
- Since claims are a factor of the amount of business written (and not the price at which it is written) and since most policies have a 12-month attachment, we are only now starting to see the extent of ‘damage’ caused to some balance sheets of continuing to write business for the sake of maintaining or increasing market share. Figure 2 illustrates the movement in net technical results of the top 10% of UAE insurance companies (controlling about 60% of the gross written market premium) as against the movement in their gross written premium (revenue) performance as at June 2010. The full extent of reduced net technical result will become apparent as year end figures are published. The three leaders have all sacrificed net technical return to maintain leading market positions. Overall, the top 10% of the companies experienced a 2% drop in net technical return as at June 2010. What is even more worrying is that some companies , notably the Tafakul insurers are incurring significant losses that are eating away at the shareholders’ equity! All but one UAE Takaful insurer have experienced a deterioration in their net technical results; most of which were already in negative territory. Yet for most insurers the focus in the market remains on revenue growth, reinforcing the perception that the regional retail market is little more than a platform for reinsurers to compete on.
|Insurance Companies / Movement in (Results for June 2009 – 10)||Premium||Net Tech. Result|
|2009 – 10||2009-10|
|Abu Dhabi National Insurance||8%||-28%|
|Arab Orient Insurance||11%||24%|
|Al Buhaira Insurance||1%||-6%|
|Emirates Insurance Co||-8%||18%|
|Average drop in net technical return:||-2%|
FIGURE 2: Source: Analysis of public domain information of figures as at June 2010 by J. Portelli
|Insurance Companies / Movement in(Results for June 2009 – 10)||Premium||Equity|
|Al Salama Insurance||29%||3%|
|Dubai Islamic Insurance||46%||-1%|
|Dar Al Takaful||157%||-10%|
|Abu Dhabi Takaful||-39%||7%|
|Green Crescent (Not takaful but recent player)||84%||-10%|
|Average drop in net equity:||-2%|
FIGURE 3: Source: Analysis of public domain information of figures as at June 2010 by J. Portelli
One might say that the above does not present too rosy a picture of the UAE retail insurance industry pre and during the crisis. However, if in life we speak of success stories and learning opportunities, then this is certainly a learning opportunity for this market; one which the industry ill-affords to ignore.
What are the learning points to develop the industry concretely post-crisis? The following are some thoughts on how to improve the quality, performance and competitiveness of the UAE insurance industry:
- If asked to sum up my recommendations in three words I would probably opt for, “Education, Education and Education.” At the risk of upsetting practitioners in the market, some of whom have been active for more than three decades, the UAE market severely lacks appropriately qualified and skilled human resources. The situation is better in some companies than in others; but as a whole there is dearth of skill and knowledge. License-driven qualifications imposed by regulators are in some cases inadequate and continued professional education is sparse. Few insurance companies support training beyond lip-service or regulatory / ‘political’ compulsion. There is no concerted effort or mechanism (in the sense of the regulator, insurance association and individual insurance licensees pulling together) to continuously attract, technically groom and retain young Emiratis in the industry. This is a must and one would expect the regulator to take a firm and pragmatic lead on this for the association and licensees to follow;
- Structured reduction in outward reinsurance can only be achieved if companies move away from a wholesale or predominantly proportional reinsurance approach to non-proportional protections. With this comes a responsibility to underwrite to one’s own account as opposed to passing the bulk of the responsibility to reinsurers. Therefore, it brings with it a compulsion to improve the quality of underwriting and claims control; which brings us back to the issue of education;
- Taking control of one’s destiny through higher retentions or the adoption of higher non-proportional protections, means that a company would focus more on areas where it identifies core or comparative strengths rather than endeavouring to be everything to everyone; a practice perpetuated by the prevailing largely ‘intermediary’ mentality;
- The Emirates Insurance Authority, the federal insurance regulator, needs to become visible and active in the market. The 2007 law generated optimism that a process of market revitalisation is finally in place. However, save for the implementation of regulations that are mainly subsidiary to core business (i.e. AML+CFT regulations, Authority / License fees, cleaning of the brokers’ register, publishing of the code of practice etc.) there has been little evidence that the regulator is in fact more than the previous ministry function migrating to a new title. Critical issues surrounding licensing, solvency, technical returns and effective supervision all still need to be addressed;
- From a governance and compliance perspective, greater involvement of independent non-executive directors (NEDs) would help speed up the implementation of internal corporate governance also taking on board, for example, SCA and other local governance regulations as well as international rules to which UAE is a signatory (such as those relating to anti-terrorism and its financing, anti-money laundering, UN and other applicable sanctions etc.) Independent NEDs would also contribute to transparency and a sense of equity in business operations with their involvement on the various board committees.
If the above were not to be implemented would this stunt the growth of the UAE insurance industry post-crisis? No it would not. Just as the industry grew before the crisis so it would post-crisis; and there are already signs of economic re-awakening with some of the large mega-projects scheduled to continue with effect from Q4-2010. However, as things stand, in economic terms, insurance continues to be either a complement of some other product (i.e. legal compulsion in, for example, in Motor or Health insurance, or financing / leasing / chartering / contract requirements etc.) and/or an entry point for international reinsurers. Retail insurance needs to become a product of its own right. This will happen if the rate of growth in insurance demand grows at a much higher rate than GDP growth (i.e. insurance as a percentage of GDP grows). Effectively, this can be achieved through a two pronged approach, namely more effective control on supply (without imposing a ban on new licensees) through firm but fair regulation and supervision and driving demand by fostering a transparently competitive (as opposed to deflationary) insurance level playing field.
It is not a course for the faint-hearted. But an industry that has contributed to rebuilding of sectors or economies after massive conflagrations, socio-political losses or natural catastrophes is not intended for the faint-hearted anyway. The UAE insurance sector as a whole has the inherent capacity to become an international player but several milestones and thresholds still need to be covered. UAE and its insurance sector also probably do not lack people with a vision either; what we need now are people with a vision on a mission.