The UAE insurance market, leading the GCC with US$8 billion in premiums in 2013, might see major changes when new regulations aimed at ensuring solvency are introduced by the end of this year.
After years of appealing for market corrections, some insurance executives may get their wishes granted if new regulations aimed at ensuring solvency are introduced as planned by the end of this year.
In terms of market size, the UAE’s insurance business has been expanding moderately. In 2013, it grew 12.2% to hit AED29.5 billion (US$8 billion) in premiums, improving the rates recorded in previous years (see table).
However, premium size provides only a partial picture of performance. The UAE insurance sector is arguably the most fragmented one in the GCC, with around 60 insurers vying for shares of a relatively small market and sometimes even compromising on technical underwriting standards in doing so. This is a key area which upcoming regulations are expected to address.
No shortage of regulations
The UAE insurance market is not lacking in regulations. Since becoming an independent body and issuing the Insurance Law in 2007, the Insurance Authority (IA) has passed various legislations regulating various areas from bancassurance to takaful. More recently, broker regulations have been passed and will be fully implemented by November this year. With brokerages dominating distribution in the UAE, these laws are expected to have a positive impact on the market by curbing current malpractices by brokers.
The IA is now working on other directives, including regulations for actuaries and insurance consultants, instructions for third-party administrators, and draft instructions concerning the licensing of foreign insurers’ representative offices. But of prime concern are the instructions which the IA intends to issue by the end of this year to ensure the solvency of companies and the soundness of their financial procedures. The IA has attached great importance to these – at an industry forum last year, its Chairman and Minister of Economy HE Sultan Bin Saeed Al Mansouri urged operators to work on improving their solvency margins and management of assets and risks for sustainable growth and profitability.
Major losses may be imminent
Commenting on the upcoming rules, Mr Sami Sharif, General Manager and Assistant Group CEO, SALAMA - General & Health Takaful, said: “If the IA does this right, they will find out which companies are under-reserved. These companies may then have to inject capital to cover their losses. About 30 to 40 insurers in the UAE could be affected and these include some of the market leaders.
“We have seen the same thing happen in Saudi Arabia, where some of the largest players recently announced huge losses due to under-reserving and ‘fake’ profits. Will this happen in the UAE? By all means. I would not be surprised if we see major losses in the market by the end of 2014.”
The need for enforcement
“If the IA does this right” is a key condition, as market watchers have voiced concerns about the lack of enforcement, or regulations being either too vague or ignored.
It seems that the IA is aware of these issues, as indicated following its appointment last year of Bin Shabib & Associates to help redraft the UAE’s insurance laws. The aim, the law firm said then, was to “create an active regulator and a unified approach to insurance regulation whereby supervision and enforcement are standard rather than exceptional occurrences”.
The Authority “must have teeth in order to regulate and supervise the sector,” said Mr Peter Hodgins, a Partner with Clyde & Co, writing in an article. “The Insurance Authority should have the power to issue regulations that are recognised and enforced by the courts and have the power to impose sanctions directly on those industry players which flout the regulations. These powers must include the ability to sanction, or cause to be sanctioned, entities established in the Free Zones which seek to conduct business in the wider UAE without the requisite licences.”
Price war
Given the level of competition in the market, rates have come under considerable pressure and companies from big to small are bearing the brunt of it. “Market conditions are tough even though there’s an increase in business demand. Pricing is still a big issue,” said Mr Andrew Smith, CEO of RAK Insurance.
Even larger companies like National General Insurance have not been spared the price competition, with its CEO Dr Abdul Zahra A Ali naming this as one factor behind the company’s sluggish premium growth in the second half of 2014.
Underwriting profit also took a hit, due to negative results of the motor business for the first time in the company’s history.
But for some, competition is not the main challenge. “I love smart competition,” said Mr Sharif of SALAMA. “My challenge is the ‘dummy’ price war which is affecting this region.”
He noted that SALAMA is staying above the price war in various ways. “In medical, we are working with a reinsurer who is putting conditions in place. In non-motor, the price war has been there for such a long time that rates have shrunk to the point where they cannot shrink any more.
“The problem with motor is one of cash flow, where many companies collect premiums today to cover claims of the past. Premiums should instead go into reserves which should then be used to pay future claims, not previous claims. SALAMA wants to make sure that we don’t look just at cash flow, but also profit and loss, and solvency.”
Opportunities to develop
Many in the insurance fraternity, including the IA itself, have repeatedly called for consolidation as one solution to the market’s problems. There have been ripples of such activity in the last few months, with AXA Group and Kanoo Group acquiring a majority shareholding in Green Crescent Insurance, and a plan by National Bank of Ras Al Khaimah to buy a majority stake in RAK Insurance.
However, no serious consolidation appears to be taking place in the near term. In fact, the market is still attracting new entrants like National Life & General Insurance of Oman, which recently received a licence to operate in Abu Dhabi, although it will focus on the under-developed life sector.
In fact, there are still plenty of opportunities waiting to be tapped in the UAE, as indicated by a low penetration rate of 2%. And one solution could be to develop distribution channels, said Mr Sharif.
“One reason insurance has not expanded very much so far is because in the recent past, life insurance was dominated by foreign companies who relied very much on captive agents. When bancassurance was introduced to the UAE in 2003, there was a huge jump in customers. So it’s not really true that people don’t buy insurance because it’s haram. It’s because of the lack of distribution channels. If more effort is placed on developing distribution channels, insurance sales in the UAE, and the Middle East in general, will pick up,” he explained.
Will the UAE insurance market to turn around soon? With signs of more regulation, the answer seems to be “yes”, but enforcement and timelines remain uncertain. It is therefore up to the various players to proactively make a difference, rather than wait for the authorities to take action.