Growth has decelerated in the UAE insurance sector in 2018 for the first time in 10 years, which should prompt players to revisit their business strategies, avoid harmful competition and expand their offerings in new areas, especially life and savings, to ensure sustainable growth.
In 2018, GWP for the UAE insurance sector declined for the first time in a decade, reaching AED43.7bn from AED44.8bn the previous year, signifying a drop of 2.5%, according to data published by the UAE Insurance Authority (IA) and Emirates Insurance Association (EIA) at the 16th Gulf Insurance Forum held in Dubai last month. Despite this, the UAE preserved its status as the largest MENA insurance market.
The slower growth in premium income is understandable given the overall challenging business and economic environment the region has been facing in the past period. GDP growth in the UAE for 2018 is estimated to have hit 1.8%, an encouraging development from the 0.8% growth rate in 2017. However, it fell below the anticipated 3% growth for 2018.
Aside from the fluctuating oil prices, the slow growth in vital economic sectors, such as real estate and retail, has been a major factor in weighing the economic growth down. Other sectors, such as tourism and services, have managed to counterbalance the drop. Generally, there is no doubt about the steadiness of the country’s growth potential. Promising signs have been witnessed in the first half of this year, and AM Best has revised its market outlook in 2019 for the GCC region, including the UAE, from negative to stable, following reduced regional tensions and limited disruption caused by VAT.
A strong return for competition
The regional setting has been challenging and has understandably cast a shadow over the GCC economies, noted Mr Fareed Lutfi, secretary general of the EIA. “The economy has not been growing as aspired in the past year. Several factors contributed to this, but this is a regional case and not just confined to the UAE.”
In addition to the tough regional economic conditions, severe competition which marked the past couple of years has put further strains. Mr Mohammed Mazhar Hamadeh, GM of Al-Ain Ahlia Insurance Co blames unprofessional price competition for the slower growth of the sector’s businesses. “It is a price-sensitive market. Several players are seeking top lines by cutting prices which, as a consequence, has hampered the growth of premiums.”
Mr Bassam Chilmeran, CEO of Al-Wathba National Insurance Co (AWNIC) said the heated competition in the past period have exacerbated the challenges in the market. “Slower economic growth and harmful competition is a risky combination. Several players have resorted to slashing rates to generate cash so that they can pay claims and overheads, and expand their market share. It is a cash-flow underwriting.”
Unlike the decline witnessed in 2018, GWP for the market grew by 12% in 2017, 8.3% in 2016 and over 10% in 2015.
Motor adding to the challenge
Another major reason for the slow premium growth is attributed to the cuts in motor insurance prices recently. Between 2015 and 2017, the market had undergone essential reforms which included setting a minimum tariff for motor premiums. The new tariff included other benefits to policyholders, thereby it was a balanced offering which satisfies both the provider and client. For insurers, this was reflected in enhanced profitability, especially considering that motor accounts for 17% of the market premium income.
However, by 2018, and reacting to public discontentment over the increased motor premiums, the IA granted motorists certain discounts. Insurers, on the other hand, have been lenient in offering discounts, and this has caused a drop in the top line and profitability as well. In 2018, motor premiums decreased by 11% to AED6.7bn from AED7.55bn in the preceding year. For 2018, though loss ratios and paid claims were in the reasonable range, this is not necessarily a reliable indicator in the medium term since the impact of claims and underwriting is usually felt in the medium to long term.
Medical insurance, a different story
Medical insurance business has flourished in the UAE on the back of the implementation of compulsory healthcare for the largest two emirates, Abu Dhabi and Dubai. The size of medical insurance has amplified to become the largest insurance line, accounting for almost 44% of the market premiums. In 2018, medical premiums reached AED19.1bn, down by 1.6% from the past year, while paid claims for this line grew by 8% to AED15.1bn from AED10.5bn in 2017.
The risk today is that medical insurance controls the lion’s share of the market and therefore has great influence on the sector’s results, said Mr Chilmeran.
“The adverse impact of medical insurance is hard to reverse because the segment absorbs large amounts of liquidity. It also has an instant effect unlike other types of insurance where a claim only kicks in when, say, an accident happens. For medical insurance, policyholders tend to use the service instantly.”
Additionally, profit margins are extremely meagre, he said. “Therefore, profitability of medical was modest over the past two years, where achieving 2% profitability from large premiums is a very low figure. However, having achieved positive results reflects companies’ willingness to increase prices, but the stiff competition and increased medical costs are putting a brake on yielding reasonable profits.”
Mr Hamadeh noted that some companies offer high commissions for medical though it is a loss-making account. In addition, “reinsurers are not helping, whether for medical or other lines. They intensify competition by offering high capacity without proper terms. This has been witnessed across all lines including P&C”.
Life business requires more attention
Life and savings premiums account for around 22% of GWP. In the past year, life premiums dropped by 2.5% to AED9.5bn from AED9.76bn in 2017. The drop could largely be due to the decrease in annuities & fund accumulation premiums which reached AED533.2m in 2018 from AED1.4bn in the previous year, indicating a decline of almost 61%. In addition, again, the slower economic growth could have played a role – which can be seen in the slower growth pace of bank loans. According to the UAE Central Bank’s 2018 financial stability report, the average private credit growth in the UAE over the past 10 years was 5.2%. However, in the past three years, private credit grew at a slower rate than the average. In 2018, private credit growth was 3.5%, a slight acceleration from 2.5% during the previous year.
On a positive note, the annual gross credit growth accelerated to 5.1% y-o-y in July 2019 with expectations for further improvements for the whole year.
Overall, there is a large pool of potential life clients which has been untapped, said Mr Lutfi. “Companies need to do more to expand the life business.”
Recently, the IA issued new regulations for life insurance and family takaful which are in line with latest international standards. Some new regulations include restructuring the commission payments to ensure the protection of policyholders and beneficiaries, putting controls over policy surrender and redemption and revamping the upfront commissions payments. “This is a healthy development that would bolster confidence in the life business and would create a level playing field for all providers, especially national companies, to expand their life portfolios,” said Mr Lutfi.
Mr Chilmeran noted that there is a possibility in the future for the GCC states to adopt compulsory savings and pensions schemes, especially for expatriates. “There is a growing interest in developing the corporate social responsibility (CSR) agenda in the region, particularly in the UAE as the government is pushing public companies to embrace CSR activities. Therefore, covering pensions and savings is expected to become compulsory in the future, which will provide a big source of income for the GCC insurers.”
AWNIC is a non-life provider, but plans to delve into the life segment in the future, said Mr Chilmeran. “The life market is very important and offers great growth opportunities in the future.”
M&A, any prospects ahead?
There are talks between some companies on M&A deals. A number of operators are feeling the pinch, and it has become necessary to consider this alternative, said Mr Lutfi. “With the imminent implementation of IFRS 17, companies will find themselves being forced to merge or seek another solution.” He added that the IA has required the implementation of IFRS 17 by 2020. “Companies should start early as this requires much time and preparation.”
Another impetus for market consolidation is the low level of profitability. “Creating larger entities would help insurers benefit from the economies of scale and act as true risk takers. Even players with strong solvency standards have low retention rates,” said Mr Lutfi. He added that the mentality of executive managements and their boards, however, has been a barrier in achieving mergers.
For Mr Hamadeh, M&A has a slim chance of happening in the market as it would be hard to merge with or acquire insolvent or troubled companies. “Moreover, shareholders of some troubled players keep injecting capital despite seeing unfavourable results.”
Investing in technology
Financial institutions need to keep pace with technological progress to compete efficiently and enhance communication with clients, said Mr Chilmeran. “In order to survive, insurers have to adjust to new technologies to reach out to new segments and decrease their expense ratios. This is of great importance especially with profits deteriorating.”
AWNIC has recently launched a mobile application which handles the entire motor insurance process. The app is linked to the traffic department and also offers motorists the chance to check on the progress of claims.
Future looks promising
With Expo 2020 imminent, there would be greater opportunities for the insurance sector to recover its growth trajectory. Seeing GWP decline in 2018 was not a surprise after all because the growth over the preceding two years was largely propelled by mandatory health insurance. Therefore, slower growth was expected as the impact of compulsory lines was phased out.
Still, the UAE market continues to offer massive growth opportunities in the future but more effort is required, said Mr Lutfi. He added that introducing more compulsory covers should help increase the penetration level and strengthen the social safety net. “The EIA is exerting huge efforts to expand public awareness on the role of insurance in protecting lives and assets. Nonetheless, obliging individuals and families to buy certain lines would help. For example, there has been a suggestion to apply compulsory insurance for residential apartments.”
Competition is intensifying. The prices are declining while liabilities are still high, he said. “Profitability is so fragile that a single big incident could wipe out the profits of the sector. Therefore, we need to expand the pool of insureds.”
Mr Hamadeh said insurers in the UAE should act responsibly and demonstrate professional standards. “Providers should focus on competing by offering quality services. Rationalising competition is the responsibility of executive managements of insurance companies.”
He added that one major strength for the UAE insurance market is the healthy regulatory environment. “The IA has come a long way in regulating the marketplace and demonstrates a high level of cooperation and coordination with players to create a sound business environment.”
For the coming period, he expects businesses to pick up as the state has already started reactivating its projects which will help insurers sustain growth.
Mr Chilmeran is positive that the coming period will witness further stability on the regional context. “The current cycle will come to an end for sure. All parties in the region are interested in preserving stability, and this would lead to notable economic developments in all financial services and industrial sectors across the region.”
He is confident of the sector’s ability to overcome the challenges. “The present challenges are not new for the insurance sector. There have been times where competition intensified, but eventually players were able to overcome the challenges and make it to the next level.” M