The regulatory reforms launched in the past four years have been paying off with GWP growing and profitability improving in the last 18 months for the UAE, the largest insurance market in MENA. Despite the large number of players and intense competition, the introduction of mandatory healthcare insurance and increasing motor insurance tariffs have helped insurers grow and thrive. Nonetheless, going forward, providers need to seek new growth trajectories, take advantage of technology in growing their client base and be prepared for the next wave of regulatory reforms.
The UAE insurance market has been undergoing profound changes since the Insurance Authority (IA), the sector’s regulator, started introducing new financial instructions, which emphasised the role of actuarial pricing and properly managing assets. Besides, launching the unified motor insurance policy helped control competition and improved motor insurance results.
By the end of 2017, the market GWP grew by 12% to AED44.8bn ($12.2bn) against AED40bn in the preceding year. Property and liability lines account for around 74% of the market share, while the remaining is from the life segment.
Both motor and medical account for around 60% of the premium income. Hence, their results affect the overall market performance. Over the past three years, the two lines saw notable progress that has boosted the premiums and profitability of the sector, which happened to be timely in light of the overall slow economic growth caused by the plunging oil prices.
Motor: Making a difference
In 2017, the IA tightened the motor insurance pricing by adopting higher tariffs and a unified motor insurance policy in a bid to raise the standards of competition in the market and encourage companies to offer the best services. Last year, motor premiums reached AED7.5bn from AED6.5bn in 2016, a 15.4% growth rate, making it the fastest-growing line of business.
The performance of the UAE insurance market has been largely encouraging from 2017 to the first half of 2018, supported by the positive results of motor insurance which improved because of the regulatory initiatives, noted Mr Bassam Chilmeran, CEO of Al-Wathba National Insurance Co (AWNIC) and head of the technical committee for the Gulf Insurance Federation (GIF). “As motor insurance represents more than one fifth of the non-life market, any improvement in its results will be reflected on the overall market results.”
He also attributed the improved motor results to the enhancement of new roads and modern traffic control technology to monitor speed and driver violations. The increased penalties and punishments against traffic violations have also helped reduce the rate of motor accidents.
Changes affecting motor in 2018
Beginning this year, the IA introduced some amendments to the tariff system that include changes to the minimum tariff for motor insurance. The amendments allow insurers to offer premium rates within specified limits and make insurers responsible for their pricings actuarially. They also allow discounts for loyal drivers with clean records and others who meet certain criteria. For some analysts, this move has put the brakes on the growth which started last year, and they believe the regulator should have postponed the amendments to give market players sufficient time to consolidate the gains from the unified motor policy.
Concurring, Mr Parvaiz Siddiq, CEO of Islamic Arab Insurance Co (Salama) said the introduction of new tariffs and regulations on motor policy by IA was a welcome change, one which positively influenced the market and stabilising motor portfolios for many providers. “It would have been even better if further amendments made to the new tariff by the authority were given more time; allowing providers to get a firm grip on initial changes before moving to further price updates. These amendments brought competition back to the market, once again raising price sensitivity among players,” he said.
Medical insurance: Is it losing momentum?
In 2017, medical insurance made up 43% of the market share, making it the largest line of business. Its premiums grew by 13% to AED19.4bn from AED17.2bn in 2016, and almost doubled the AED9.9bn achieved in 2013.
Medical insurance has become a game changer in the past two years with Dubai adopting the mandatory healthcare scheme. However, after ending the last phase of implementing the scheme last year, medical insurance is not expected to see a notable increase in 2018 compared to the past years.
Another factor for medical to witness slower growth this year is the fact that renewing compulsory medical insurance is tied with visa renewals which is done every two years. For this year, it has been reported that a considerable number of medical policies have not been renewed as they expired while the visas are still valid. “Simply put, people take up the insurance just because it is compulsory. Because they didn’t need the insurance document to renew the visa, people skipped the renewal. The relevant authorities need to solve this matter,” said Mr Shadi Al Mahameed, GM of Medgulf Insurance Co, UAE.
This year, the Dubai Health Authority (DHA) obliged insurers to disclose the loss ratio and utilisation of claims for groups of 10 or more members, compared to the previously set level of above 100 members. According to Mr Al Mahameed, this move diminishes competitiveness for the SME segment and raises the price for small groups. “Previously, groups used to pool together to benefit from the economies of scale because they will be offered a better price as a large group. Now, each group will be treated independently, so those with high loss ratios will be charged more for their insurance. Consequently, the consumer will have to bear the extra financial burden.”
He added that writing medical for the SME segment will be tied to restrictions related to the loss ratio of small groups. “Therefore, for insurers, it is not feasible anymore.”
The net results of medical insurance are still unstable because there is a need to increase the level of regulatory intervention to further organise the relationship between the various stakeholders, said Mr Chilmeran. “The healthcare authorities in Abu Dhabi and Dubai are fully doing their role, but this sector requires greater regulatory efforts to oversee healthcare providers and the insureds instead of confining supervision to insurance companies only.”
Yet, medical can be rewarding
Medical can be profitable, but it requires close monitoring and prudent management, said Mr Al Mahameed. “Using technology has helped us a lot. We have been updating our systems and investing in advanced IT to offer swift services to the various stakeholders, including brokers and end users.”
He said his company’s loss ratio has dropped this year, putting the company in the black. “This is no small feat for a new insurer writing medical only. We are very selective and follow the right underwriting guidelines. This is our second year of operations, and we managed to clean the portfolio to ensure we drop the loss-making accounts and keep the healthy ones.”
Competition intensifies
Intense competition, caused by the large number of players, continues to erode the market results. Competition gets keener especially in the fourth quarter of the year because companies become more aggressive to achieve their top-line targets before the year-end, said Mr Siddiq.
For healthcare insurance, fierce competition among players is growing, said Mr Al Mahameed. “Companies are vying to increase their top lines to reduce their administrative expenses. This is quite visible in the last quarter of the year where players try hard to meet their GWP targets,” said Mr Al Mahameed.
Another reason for growing competition is that general lines, including engineering, marine, and others, have been witnessing modest growth rates over the past period, reflecting the slow economic activity which has been impacted by the drop in oil prices. “As oil prices have started to rise, we expect the economic activity to pick up and this should help support growth in the sector,” said Mr Chilmeran.
Financially strong, but…
Net profit for the insurance sector in the UAE has seen notable upsurge in 2017 as it reached AED2.2bn compared to AED1.8bn, a 22% increase. The market’s paid-up and issued capital stood at AED7.5bn against AED7.2bn in 2016.
The size of profits is considered one of the highest in the region, but its concentration could be worrisome. The total profits for the top three insurers in terms of GWP in 2017 reached AED692m, accounting for around 31% of the market’s gross profit. Taking into account the 62 insurers operating in the market, it is worthwhile to revisit the size of profits small players generate.
Profits for the 31 listed insurers reached AED994m in the first half of this year compared to AED711m in the same period last year, an almost 40% increase. The top five insurers in terms of profitability control around half of the total profit.
According to several analysts, the improved profitability of the market players, particularly in the past two years, is giving companies a stronger reason not to consider the M&A path. Market consolidation has been a thorny issue for too long. Mr Siddiq said most companies are working to build their businesses through organic growth rather than considering acquiring other operations. “However, consolidation inevitably will happen, the only question is when. Smaller companies will have to consolidate at one point with solvency requirements and other regulatory demands becoming more stringent.”
New reporting requirements
Another challenge the industry faces is the implementation of IFRS 17, which companies need to comply with by 2021. This new standard will bring fundamental changes to the accounting procedures. “Companies need to start preparing for this as many existing KPIs and standard measurements will change in line with the new standard. The biggest challenge would be finding the right talent,” said Mr Siddiq. “Now is the right time to start investing in training and development and building human capital.
Surety, a new market component
A new low-cost insurance scheme, replacing bank deposits as guarantees for foreign workers, was implemented last October. The scheme offers a coverage of AED20,000 per worker for their end-of-service benefits in addition to other employee allowances and compensations. The insurance policy, sold at an annual price of AED60, replaces a bank guarantee of AED3,000 per worker and is offered by a pool of six operators. The insurance scheme is expected to pump AED14bn back into the private sector, improving the liquidity of businesses.
To Mr Chilmeran, it is a positive gesture to involve the insurance sector in this kind of protection. However, writing this business should be open to all providers, he said. “There are national insurers who are capable of offering the right service. It should not be limited to certain players.”
Takaful making progress
Takaful contributions reached AED4.2bn in 2017 from AED3.7bn in the previous year, a 13.5% increase – surpassing the market growth rate. Takaful contributions account for 9.5% of the market GWP.
Takaful operators are improving their results in terms of income and profitability, said Mr Siddiq. Last year, net underwriting income for takaful operators reached around AED42m from a loss of AED158m in 2016, according to IA statistics. Total profit for the same period has also jumped to AED117m from a loss of AED81m.
He noted that the results for the first half of this year are promising and bode well for takaful operators to continue with the same upward trend.
“A few takaful operators are still in the nascent stage of establishing their portfolios; they may have found it difficult to keep the balance between profitability and following prudent underwriting at the same time. Differentiation in product and service offering is the key to success for such players. They should look at possibilities to stand out while keeping their focus on their top line. Coming through and delivering promises made with regards to distribution of surplus, customer experience and service is important.”
Looking ahead
In 2018, growth in the top line is expected to be limited unlike the previous year where mandatory healthcare insurance pushed premiums upward. Growth in the premium income of compulsory lines (motor and medical) will most likely be subdued in 2018 and this would be reflected on the market altogether. The growth of GWP for the 31 listed insurers was around 3% in the first half of this year.
The UAE insurance market remains promising and full of potential, said Mr Chilmeran. “Until the third quarter of this year, profitability of the sector was on the rise and hopefully it will sustain until the end of the year.” With oil prices starting to rise, there is hope for more growth, he said. He projects for the market GWP to grow by 7.5% in 2018 while profitability could grow to reach between 5% and 7.5% of the top line. “There are some conservative players, such as AWNIC, who seek profitability regardless of the top line. We are giving extra attention to prudent pricing based on sound technical strategy committed to the tariffs while putting in place a proper risk management. This will protect the rights of policyholders and interests of shareholders in the long term.”
He said after securing healthcare coverage for individuals, the next step should be securing life and social insurance coverage. “Making this compulsory will contribute largely to increasing the GWP, not to mention the advantage of expanding the social security safety net in the country.”
To Mr Al Mahameed, the UAE insurance sector is not expected to see the same growth rates achieved last year. “This year is going to be good, but the top line is not going to see notable or double-digit growth. The gap in the medical insurance is a main reason particularly for those companies relying on the compulsory scheme to generate income.”
Mr Siddiq expects the market growth to be around 7% to 8%. “The impact of compulsory medical insurance was over in 2017 and the medical insurance will see around 6% growth because of the increase in the cost of medical treatment and net change in population. If medical insurance becomes compulsory in northern emirates, then that too might boost the growth of the insurance sector.” M