Insurance Insight’s news-piece dated May 8th entitled, “UAE Insurance Sector Expected to Grow in 2013” proved interesting to read for a number of reasons.
Firstly, as an insurance practitioner active in the region since the 1990s and having experienced the cyclical peaks and troughs emanating from September 11th, petro-dollar activities and the financial crisis, it is heartening to note that the industry is again showing signs of, albeit cautious, optimism.
Secondly, the much needed changes at UAE regulatory level seem to finally be taking place. Some more new faces (and brains) may also be required but the appointment of the current Director General is certainly a step in the right direction. He comes with significant ESCA experience that can and should translate into positive momentum. The market consensus on this is a very positive one.
Thirdly, the financial crisis helped expose the importance of technical competence and heads are still rolling at senior executive level in some insurance companies. Consolidation may not be happening (and won’t, save for one or two exceptions) but changes at top level will continue take place as crisis-savvy Boards demand more technical accountability from their management.
There are some worrying factors from the upturn in outlook and performance in the region. For example, some of the major reinsurers who plundered the heavily proportional markets in all but motor insurance for many years (and contributed to an almost burnt-out market) started pulling out post-crisis on the pretext that rates on line did not justify the financial return on the capacity they provided. This may be true. But it is equally true that consumers – cedants in this case – are programmed to consume more as prices decrease (all other things being equal). Therefore, the blame of readily available reinsurance capital at ridiculous prices has to be shouldered by the reinsurers (and the reinsurers alone). What is worrying is that some of larger reinsurers may already be on scouting reccies to either plunder the only remaining market they haven’t ravished (i.e. offering proportional treaties in motor) and/or in anticipation of the compulsory health insurance legislation in UAE.
At a time when the primary market should be looking at greater market discipline, reinsurers should be at the forefront in providing the UAE market with expertise and capacity that sees primary market companies assuming greater responsibility. Quota Share treaties across all motor and/or medical lines of business is certainly a step (or two) in the opposite direction.
Another concern is that with a positive investment outlook, reliance on the equity and investment markets is again growing. This, in itself is not bad. Insurers are, after all, institutional investors. But one needs to be constantly reminded that we are, first and foremost, insurers and not investors. End of year 2012 and Q1-2013 results of two of the largest companies in the market (i.e. Oman Insurance Company and Abu Dhabi National Insurance Company) are not very encouraging from a technical profitability perspective. Many of the smaller companies also share the same predicament.
2013 Market Outlook
Insurance in UAE is reactive to the economy and therefore any predictions on premium growth would generally reflect the pace of growth of GDP (with some sectors of the economy contributing more to premium growth than others). However, since compulsion is one of the main drivers of insurance demand throughout the region, there is a significant variable that will affect growth in 2013 and 2014. If health insurance in Dubai and the Northern Emirates becomes compulsory then we are looking at a growth rate that would be much higher than the indicated 10%. There are over 1 million lives that still need to be insured and this is not accounting for the influx of expatriates that is again taking place. This alone would generate around AED 1 billion in premium (or 5% of current total UAE insurance premium).
Why 5%? Doesn’t the above mentioned article (quoting the Insurance Authority) mention AED 25.5 billion as the current UAE market size? Yes it does; but this is not quite correct. The figure does not account for the internal spiral generated by local, reciprocal reinsurance. This is again on the increase in the market particularly because of the incestuous relationship of some conventional and Takaful companies in the UAE. One hopes that the spiral is a controlled one and that a catastrophic loss does not expose weaknesses similar to the early 1990s in the London LMX market. There are no readily available statistics for this, but if one had to deduct the impact of local reciprocal reinsurance in UAE, the overall premium spend would probably be more in the region of AED 20 billion.
Another important variable is the rate of economic reconstruction and development taking place in Dubai. This seems to be picking up pace again and, with greater optimism, since the Emirate honoured its 2012 debt repayment obligations. The 2020 Expo expectations will also pay a role.
The combined effect of compulsory medical insurance, growth in expatriate work-force and rate of economic growth across all Emirates in the UAE will make it difficult to predict the rate of insurance growth. Per capita and as a percentage of GDP insurance spending will certainly rise as and when medical insurance becomes compulsory. But, netting the impact of this, proportionate insurance spending is otherwise unlikely to change significantly as a percentage of GDP.
What is perhaps predictable is that the combined impact of these economic factors will result in double digit growth, in the higher percentage teens, in insurance within the short to medium term i.e. by, say, 2015.