The insurance industry in Egypt is benefiting from the economic development the country is witnessing. The regulator’s strategy to increase the penetration level is setting the stage for unprecedented growth in the next three years. Middle East Insurance Review organised a roundtable meeting with some of the sector’s leaders to shed light on the next period’s prospects.
Egypt’s economy is restoring its strength as microeconomic conditions continued to improve during the fiscal year 2017-2018, with external and fiscal deficits narrowing, inflation and unemployment declining and growth accelerating, according to the latest IMF country report.
Economic growth rates have been registering notable increase in the past two years on the back of bold governmental reforms, said Mr Alaa El-Zoheiry, chairman of the Insurance Federation of Egypt (IFE) and managing director of Arab Misr Insurance, gig. FDI has amounted to around $13bn over the past two years, the highest since 2011, he said.
Impressive growth for the sector
GWP reached EGP24bn ($1.34bn) at the end of the fiscal year 2016-2017 (which ended on 30 June 2017), a 32% jump over the preceding year.
Non-life business grew by almost 37%, while life increased by 22.3%.
The increase came from all lines of business as a reflection of the lively economic activity the country has been witnessing over the past couple of years, said Mr El-Zoheiry. “The massive infrastructure projects, including those related to the new capital and other new cities in various parts of Egypt, have been injecting new business into the sector.”
Currency devaluation also contributed to the GWP growth. In November 2016, the central bank decided to float the Egyptian pound to help stabilise the economy, attract investments and put an end to the shortage of dollar in the market, resulting in the devaluation of the local currency. For the insurance industry, this move resulted in the increase of the prices of covers to match the real value of insured assets.
The devaluation of currency, along with removing the limits on international currency transfers, has boosted the economy, said Mr Omar Gouda, regional director, North East Africa and Middle East Region - Africa Re. “For the reinsurance market, it has become easier to attain hard currency after a period of shortage. Additionally, the massive infrastructure and energy projects has whetted the interest of the reinsurance market.”
The insurance market witnessed impressive growth in all lines of business, and prices have increased, said Mr Hussein Atallah, IFE board member and managing director of Misr Insurance Co. “Moreover, the size of assets has increased on both the corporate and personal levels, which was reflected in an increase in the size of premiums.”
The economic reforms which aim to build a sound economy will bring about a sea change, said Mr Ahmed Arfeen, managing director of Egyptian Takaful Co and board member of IFE. “This has been translated to the increase in economic growth rates which have recently surpassed 5% after hovering around 3% in the past two years. This would open more windows of opportunities for insurers.”
Regulator increasing involvement
The Financial Regulatory Authority (FRA), the sector’s regulator, announced earlier this year that 2018 would be the year of insurance, indicating that there will be several initiatives to help forge a strategy that would expand the market GWP to EGP50bn by 2022.
Mr El-Zoheiry commended the FRA’s ambitious strategy to boost the market operations and the increased level of cooperation with the industry. “There are several initiatives in the pipeline to enhance business coming from both the public and private sectors.”
One of the initiatives the FRA is working on with the cooperation of the Federation is the insuring of state-owned assets. “IFE has submitted a proposal with a study on the project, and now the Ministry of Finance is looking into the best way to implement it. The project could be in the form of insuring the state’s assets through insurance companies or through a fund set up by the government with the support of insurers,” he said.
Another initiative involves introducing new compulsory products, including insuring professionals such as physicians, lawyers and other self-employed professionals. Moreover, compulsory covers could be imposed on high-risk public facilities such as shopping centres, and tourists visiting the country.
Yet another initiative is insuring the country’s 24m students. “A proposal in this regard has been submitted to the FRA. The Federation designed a simplified and affordable PA policy to cover injuries for students throughout the day,” said Mr El-Zoheiry.
Other projects in the pipeline include insuring Egyptians working abroad and offering PA protection on roads, he said.
“We have conducted thorough actuarial studies to submit them to the regulator to be approved. All these initiatives would help achieve the FRA’s strategy in amplifying the size of the market, while reinforcing protection level to the public.”
Preparing for a new market setting
The FRA has been revising the insurance legislation to update the laws and regulations. Law no.10 of 1981 remains the main source of regulations though several amendments have been conducted over the past decade. Reportedly, a new law submitted to parliament at the end of 2017 is in the process to be ratified and implemented.
The new law is expected to bring about several changes, including raising the minimum capital requirement, currently at EGP60m. “The current capital size is modest by all standards, especially after floating the currency,” said Mr El-Zoheiry.
Other features of the law would include setting schemes for specialised healthcare and microinsurance providers that would be different from those governing the regular providers – by allowing them to operate with a lower capital base and permitting microinsurance providers to operate as composite insurers with lenient regulatory and tax obligations.
The new law will also spell out the necessary regulations when it comes to online selling, liquidation cases and organising healthcare TPA companies under the FRA’s umbrella.
Consolidation, pending the new market settings
After the issuing of the new law, it should become clearer if there is an inclination towards M&A activities in the market, said Mr El-Zoheiry. “If the new capital requirements increase significantly, to EGP300m or more for example, some operators might mull over mergers. If not, then companies would have the ability to pump in the necessary capital increase from their own resources. The ball is now in the regulator’s court.”
M&A is part of a global trend and should be considered to strengthen the local market, said Mr Atallah. “Creating big entities will help increase retention capabilities and boost the competitiveness of operators.”
He added that other factors such as ROA and the profitability of investing in the sector would determine whether investors are willing to inject more capital to meet the new capital requirement or seek other alternatives such as M&A.
“Some investors might shy away from investing in the insurance field as the interest rates outside the industry give better and safer returns,” Mr Atallah said.
However, he added that with improved economic indicators and reduced inflation and interest rates, the state is more interested in increasing the size of the capital market. “The size of capital in the stock exchange is around EGP800bn, which is an inadequate figure for a country like Egypt. This is another incentive to increase the capital requirements which will benefit the economy and companies. Therefore, we might see M&A activities in the market. It is a good trend, though there remains a need to have companies of all sizes to serve various social segments.”
Microinsurance to reach the unreachable
There are 650 licensed microfinance institutions in Egypt, while the number of beneficiaries stands at only 2.5m people, which is way below the targeted 25m, said Mr El-Zoheiry. “There is a great potential for insurers in this area. A main advantage is that insurers will be reaching out to the masses through the microfinance institutions instead of addressing them individually. And this will save time, effort and money.”
The FRA intends to impose credit insurance policy for microfinance loans that are between EGP1,000 and EGP100,000. “The cover will help clients in case of accidents and support the microfinance institutions to expand since coverage includes protection against default of payment.”
The government in Egypt considers microfinance an important pillar in its financial inclusion plans, and the FRA has made great strides to organise the activities and licensing of microfinance institutions. For microinsurance, there have been plans mooted by the Authority to prepare a special scheme for licensing specialised microinsurance providers. The scheme might include lower capital requirement and other criteria that respond to the needs of microinsurance providers.
Mr Arfeen noted that the government looks to microfinance to play a greater role in the economy as the public sector is not able to offer more employment opportunities. “Therefore, microfinance will support people to launch their small initiatives to seek income. This is a good source of business for takaful operators.”
Medical: Promising but challenges remain
Medical insurance has been a hot topic in the past year as the government prepares to launch a universal healthcare insurance scheme to ensure that the entire population receives basic healthcare services. A thorough analysis on the situation is in progress to help shape the final scheme.
The state looks to offer the minimum standard of services, and insurers can expand by offering quality services, said Mr Arfeen. “Launching a universal plan should pave the way for increasing demand for additional medical services insurance companies can offer.”
Last year, medical insurance premiums increased by 49.3% to EGP2.08bn. Mr Arfeen pointed out that the actual medical insurance market is much larger than this. “There is a parallel market, which could match the size of the present market, offered by around 70 unlicensed healthcare organisations. They are putting tremendous pressure on the results of this line.”
He noted that there is a cutthroat competition in the medical insurance. “Hopefully this would come to an end as the FRA has taken steps to regulate these providers and is going to make them decide to operate either as TPAs or become licensed healthcare insurers. There will be a clear segregation between TPAs and health insurers. This is vital to protect the policyholders and raise the standards of the profession. Eventually, this will increase the size of medical insurance.”
The inflation in the cost of healthcare services and medication is one main reason for the increase in premiums, said Mr El-Zoheiry. “Because of the increase in the cost of healthcare, companies have started to offer their employees medical insurance. Another reason for the increase in the size of medical insurance is that it is packaged with life insurance policies.”
Another move that has supported the growth in medical is attributed to group medical covers offered by companies with eight to 10 employees. Previously, such covers were applicable only to groups of 30 employees and above.
Challenges of the day
The severe price competition is the biggest challenge facing insurers, said Mr Atallah. “Companies are not focusing on the quality of service to differentiate themselves,” he said.
Additionally, there is a need to build special models to mitigate Nat CAT risks in Egypt as there are regions in the country which have become susceptible to earthquakes, he said. “An adequate analysis of the Nat CAT threats is necessary to create suitable models that would help operators set the right price in this regard. Due to the small size of premiums coming from insuring such threats, individual companies are unable to invest in conducting thorough studies to define the right price and underwriting means. This requires a collective effort from the market.”
Another challenge is the need for a qualified specialised workforce. “The federation is increasing its efforts in supporting programmes offered by educational institutions, but there is a continuous need to create new human capacities for the insurance industry,” said Mr Atallah.
Mr El-Zoheiry said that a current challenge is to keep up with the fast pace of technological development. “We need to develop modern means of operations, create simple solutions and reach out to the masses before someone else from outside the sector comes in to offer services.”
He added that legislation is the main barrier. “The Authority has allowed online selling of some products such as individual life, motor compulsory, certain PA covers such as travel insurance and certain microinsurance products. With a population of around 100m, online selling is the best means to reach out to greater masses – comparison sites can streamline the process. It has become a necessity and no more a luxury.”
Mr Atallah said that in light of the ubiquitous use of mobile apps, new and different ways to distribute insurance will be introduced.
Is there a room for newcomers?
Despite the unstable socioeconomic and political conditions that have plagued the country over the past period, the insurance market has not lost its appeal. At least four new entrants were licensed in the past three years, the latest was Misr Takaful Insurance, the shariah-compliant arm of the state-owned Misr Insurance Holding, which started operations earlier this year with an authorised capital of EGP500m, thereby raising the number of direct insurers to 37 companies.
The implemention of new compulsory lines will increase the scope of insured and would certainly increase the potential for new capacity in the insurance market, said Mr Gouda. “This applies to new reinsurance capacity as well.”
To Mr El-Zoheiry, the need for new players should be dictated by whether they add value to the marketplace. “We look forward to welcoming newcomers who bring innovation in terms of distribution, claims settlement, or even paying premiums. Multinationals, for example, were the first to launch bancassurance, and now it is a reliable channel for all operators. We hope to see the same experience in other facets of the business.”
Brighter horizons ahead
In light of the positive developments in the country, the growth momentum is expected to continue in the coming years, said Mr El-Zoheiry. “The economic stability was reflected positively on the sector’s performance, and we expect double-digit growth to continue until 2022.” He added that insurers are working with the regulator to raise insurance awareness. “We have launched a big campaign to promote insurance.” On the internal front, the Federation is forging a code of conduct for the market to boost the standard of the profession and upgrade the image of the industry.
Mr Arfeen pointed out that the sector managed to grow and show resilience even in the darkest days. “Therefore, with the current uptrend in the economy and after recovering stability, the sector is to benefit largely in the coming period and demand is expected to increase.”
Mr Gouda noted that a main positive development is the high level of communication and coordination among the market forces, including players and the regulator. “This is an important link to achieve the sector’s strategy. There is a huge potential ahead and we expect penetration levels to increase notably in the coming few years. Egypt is one of the very important markets which has much to offer yet.” M
All interviewees’ opinions are based on their status as IFE members and do not necessarily reflect their companies’ views.