The GCC region is the main growth engine for the MENA insurance industry, with its wealthy states and supportive demographics. Despite the prevailing headwinds, the markets are expected to hold up well.
The GCC region generates about 63% of MENA’s insurance business, and it has been an area of growth over the past decade despite various regional and global economic crunches. The GCC insurance market stood at almost $27bn in 2017 against $16.5bn in 2012.
Over the past few years, the energy shock, which started in 2014 and caused a sharp decline in oil prices, has played a major role in curbing growth. This was especially evident in Saudi Arabia where the market’s top line started taking a different curve by 2016 as GWP saw a mere 1% increase, followed by a 1% drop in 2017 to SAR36.5bn ($9.7bn), a sharp contrast with the double-digit growth trend in the preceding five years.
Similarly, Bahrain’s market has remained stagnant in the last three years at around $730m. In the third quarter of 2018, the market GWP grew by only 0.2%.
The Omani insurance market also witnessed flat growth as GWP increased by 0.3% in 2017 and around 2% in 2016, a notable drop from the 11% rate achieved in the preceding year.
Qatar, according to Alpen Capital, was the fastest-growing market in the GCC with a CAGR of 19.7% as GWP reached $2.9bn in 2016 from $1.2bn in 2011. In 2017, the market still managed to post a 14.5% growth, but the country’s diplomatic crisis and the impacts of the blockade are expected to bring this rate to single-digit levels in the coming years. Nevertheless, the mega projects and construction activities related to FIFA 2020 will continue to provide opportunities for insurers.
The UAE has fared better than its neighbours as the market registered double-digit growth in both 2016 and 2017, propelled by the introduction of the mandatory healthcare insurance scheme in Dubai and the increase of motor insurance tariff.
In Kuwait, the market growth was satisfactory, thanks to the implementation of the local retirees’ healthcare insurance scheme.
Risk appetite: Any takers?
Despite economic developments, the risk appetite for the GCC providers has not significantly altered in relation to how they choose to manage underwriting risks, said Mr Yassir Albaharna, president of the Federation of Afro-Asian Insurance & Reinsurance (FAIR). “With more or less stability of their corporate earnings, abundant and cheap reinsurance capacity and continued dominance of the motor and medical classes in their portfolios, there was really little incentive to increase their risk appetite.”
Insurers continued to be averse to emerging risks, which were beyond their comfort zone, he added. “On the investment side, low-interest yields have put a further damper on their mobility to move into riskier asset classes.”
The past two years has seen a deterioration in the insurers’ results as the profitability outlook has not been encouraging, said Mr Mahomed Akoob, managing director and CEO of Hannover ReTakaful, Bahrain. “There have been spikes in the overall picture due to regulatory interventions such as compulsory health insurance, unified motor policies, actuarial pricing and minimum capital requirements. The net retention of insurers has not increased markedly, and dependence on proportional capacity is still evident. Furthermore, the ROEs are also not at the desired levels, which has been shown up in the current low-yield environment.”
The factors affecting most GCC insurers in developing their risk appetites were capital, ownership structure, shareholders’ expectations, regulatory framework, product mix, asset/liability matching and historical volatility, said Mr Albaharna.
Limited growth
In 2018, growth was constrained compared to the preceding period, said Mr Gautam Datta, CEO of National Takaful Company (Watania) in UAE and advisor on the board of Al Madina Insurance of Oman. “Reports show a contraction for Saudi Arabia and single-digit growth for the UAE – the two biggest markets in the GCC. The slowdown of economic activity, tightening of liquidity and a more restrained spending pattern have had an impact on insurance premiums.”
He said motor and medical have undergone changes in 2018 as car sales slowed notably, while medical insurance has shown organic growth, driven mostly by inflationary factors and less through growth in new members. “While there is hope for renewed economic activity in 2019, growth will be challenged for the insurance industry as a whole.”
The redeeming feature for 2018 has been general improvement in profitability for the UAE insurance sector, said Mr Datta. “Profits have been influenced by improvement in combined operating ratio (COR). This augurs well for the future of the industry as companies are being guided by the regulators to pay greater attention to solvency and capital adequacy. This is bringing about healthier pricing of products. Regulators in Saudi Arabia, the UAE and Oman are also driving the companies to prepare for IFRS 17 that requires them to identify and provide for onerous portfolios to further improve underwriting discipline. The existing soft reinsurance market also seems to be levelling out and this will support the improving trend in COR.”
The UAE insurance sector net profit in 2017 reached AED2.2bn against AED1.8bn in 2016. For the first nine months of 2018, the listed insurers reported AED1.42bn in profit, compared to AED1bn in 2017 and AED778m in 2016, showing CAGR of 35%, according to Badri Consultancy.
In Saudi Arabia, the net profit of the sector in 2017 dropped by 67% to SAR688m from SAR2.1bn in 2016. For the third quarter of 2018, profits reached SAR701m, a 40% drop from the same period of the preceding year.
Traditional lines lead business
Motor and medical insurance are the largest lines in the GCC markets. In Saudi Arabia, both account for around 81% of the market volume, while in Oman and the UAE they control around 60%. Medical insurance continues to show high growth in the market despite fierce competition, said Mr Bilal Adhami, CEO of Fidelity United Insurance Co of UAE. “Nevertheless, I do believe that opportunities will keep emerging especially when medical insurance becomes mandatory in the (UAE) Northern Emirates,” he added.
Insurers should not be dependent on compulsory lines, said Mr Nabil Bazzari, president of Cogent Insurance Brokers, UAE. “Compulsory lines are sought to build up portfolios and expand the business, but the focus should be on bottom lines instead to ensure sustainability. Other lines, particularly specialty, are more profitable despite their smaller volume of business compared to lines such as motor or medical.”
He said though medical insurance has given negative results for some insurers in MENA, it can become more profitable only if insurers receive the right training and know-how to enable them to better manage such delicate portfolios. “It is better for insurers to stay away from or minimise their involvement in medical without in-depth knowledge of this line.”
Regulations: A mixed bag
A decade ago, there were some sentiments to unify the insurance regulations across the GCC region, considering the countries’ socioeconomic and political ties. With time, it was realised that it would be imprecise to paint the region with a broad brush because each GCC market has its own features – discrepancies are evident in penetration rates, business models, distribution channels and most importantly, regulations.
Today, there are clear variances in regulatory regimes across the GCC. Saudi Arabia is being dubbed as the most advanced regulated marketplace with the Saudi Arabian Monetary Authority (SAMA) handling the supervision and regulatory tasks. In Bahrain, the Central Bank is in charge of the task, while the Capital Market Authority (CMA) in Oman oversees the sector. In the UAE, there is an independent authority, while in Kuwait, insurance businesses are being monitored by the Ministry of Commerce and Industry.
Consolidation: Mirage or reality?
The GCC insurance market is intrinsically overcrowded and it lends itself to M&A, said Mr Akoob. “Cost, sustainability, market share, expertise and profitability will be the key drivers towards M&A. Clearly the trend has already started. Regulators are driving toward higher capital and solvency requirements, and pure business sense will push for M&A.”
Over the past three years, positive signs started to emerge in some markets with a few M&A deals taking place in Bahrain, one in Oman, a couple in Saudi are in the pipeline and one major deal in the UAE in the past year. These moves, however, remain below the desired level to lead to defragmentation of the marketplace.
Factors such as sentiments and family ownership are hindering the process, said Mr Akoob. “However, indications are that pure economics, stakeholders’ activism and ROE requirements will enhance M&A.”
“Consolidation moves should become a priority for boards as a means to seek diversification and higher shareholder returns,” said Mr Albaharna.
Regulators are taking action. In Oman, the CMA doubled the minimum capital requirement. SAMA has recently loosen requirements for the anticipated M&A deals. In Kuwait, the market remains open to new entrants despite it being the most congested in the GCC.
Consolidation is also happening in Lebanon. Fidelity United is the fruit of a partnership between Fidelity Insurance Co, a major player in the country, and United Insurance Co, one of the UAE’s well-established insurers. “Their contribution towards the UAE market will definitely bring the best practices used and allow exchange of expertise. It is always interesting to evaluate what is working in other markets and how other markets are behaving and this would definitely have a great beneficial impact on the end user,” said Mr Adhami.
Strong presence for takaful
The GCC takaful operators have acquired considerable market share where the region’s contributions account for around 77% of the almost $15bn global takaful market in 2015. The region has around 80 takaful providers, inclusive of players in Saudi Arabia which are shariah-compliant. However, family takaful penetration rates in the region are much lower than those observed for general takaful, according to Milliman’s 2017 global takaful report. The report indicates that general takaful in the GCC grew by CAGR of 18% in the period 2012-2015, exhibiting the highest growth globally and dominating 88% of the global general takaful contributions in 2015. S&P, on the other hand, indicates that growth of takaful contributions in the GCC has slowed significantly to less than 1% in 2016, following years of approximately 20% annual growth.
There are fundamental issues that need to be addressed in order for takaful to create a profitable model that is sustainable, said Mr Datta. “From a shareholder’s perspective, takaful investment falls well short of ROI benchmarks for equivalent opportunities. There has to be some structural changes in the regulatory framework and some government support. The positive aspect is the return to profitability in the policyholder’s fund. The factors driving this improvement are similar to that of conventional – greater focus on underwriting performance,” he said.
Looking ahead
GCC insurers should accelerate the process of technology integration into their operations to drive down operating costs, increase efficiency and cultivate more client loyalty through segmentation, said Mr Albaharna.
Insurance penetration remains low in the GCC countries hence, growth potential is substantial, said Mr Akoob. “The protection gap needs to be narrowed and opportunities do exist for companies. Innovations and the use of technology and InsurTech will enhance growth. The slowdown in the economy will influence growth, but at the same time, the prices of hydrocarbons are at sustainable levels which will drive insurance and reinsurance growth. On the profitability side, this will pose a challenge and hence, cost control, technology, risk management and professionalism will probably differentiate the winners from the losers.”
Mr Datta expects a satisfactory outcome compared to the previous year. “Growth will be flat, but profitability will be higher. Companies will focus on operational efficiency, but maintaining ROI will continue to be challenging. The withdrawal of some well-named regional reinsurers will require a review of the reinsurance strategy. For takaful operators, the next three to five years will be critical. The implementation of IFRS17 will have a significant influence on operators. It will also drive consolidation of takaful entities which I expect to be the turning point for takaful companies in the region.”
There has been a change in the behaviour of customers in terms of purchasing their insurance policies, especially on the retail side, said Mr Adhami. “There is an increased demand on the products sold online, where more of our customers are browsing the web looking for options and comparing what is offered in the market.”
Fidelity United is working hard on providing the latest technologies that would facilitate its business with clients and increase the channels of distributions. “Empowering our partners is one of our commitments and it is a project that we are continuously evaluating and upgrading,” Mr Adhami said.
Mr Bazzari concluded there remains many opportunities in the region and the future bodes well for insurers if they continue to upgrade their standards to reap the benefits. “There is a lot in store with development projects on all levels afoot in the UAE,” he said. “Insurance providers are required to equip themselves with the right tools and act professionally by focusing on the bottom line to achieve sustainable growth.” M