PREMIUM MARKET

UAE, Dubai 2012 | FINANCE | REVIEW: INSURANCE

Nothing but growth is predicted for Dubai's insurance market, as premiums skyrocketed over 2011.

The promise of the insurance market in the UAE, and in Dubai specifically, is growth for many years to come. In 2011, total insurance premiums written in the UAE expanded to $6.6 billion and premium growth stood at 10.5% after adjusting for inflation. As it occurred in a year when insurers in worldwide and emerging markets faced many new pressures, the rise in premiums highlights the country's consistent growth potential for insurance and reaffirms its position as the largest insurance market in the region.

When compared with its peers, the UAE represents 45% of the $14.7 billion combined gross insurance premiums in the GCC, well ahead of large neighbor Saudi Arabia, which accounts for just under 34% of the total and in 2011 achieved inflation-adjusted premiums growth of 8.3%, according to the world insurance review compiled each year by the Sigma research unit of global reinsurance group, Swiss Re.

After seeing a first blossom of Arab insurance companies around the middle of the past century, some countries in the Levant and North Africa placed their faith in statist or quasi-socialist economic models and stifled insurance along with other parts of the financial system. Other countries in the region, benefiting from well functioning Islamic care and societal solidarity systems in conjunction with having small population sizes and growing national oil incomes, required insurance only for narrow tasks, such as joint venture projects undertaken in cooperation with energy multinationals.

Until five or 10 years ago, it was not rare for policy makers and even members of the regional insurance industry to be unable to offhand cite a consolidated premiums figure for either the GCC or the wider Middle East and North Africa region. Today, awareness of regional premiums performance is high, at least among insurance leaders and skilled practitioners, and concerned policymakers are emphasizing the value of insurance.

However, while insurance has grown at stunning nominal rates in some GCC markets (over 20% in some years before accounting for inflation), the regional industry still represents a force that is marching but not fully moving. The GCC's combined share in the $4.56 trillion global premiums pie is smaller than Portugal's 0.36%, and the GCC countries' insurance penetration, or share of insurance in national GDP, has not seen as much growth as would be needed to bring the region up to par with emerging market averages.

Globally, average insurance penetration rates in 2011 stood at 8.6% in advanced markets and at 2.7% in all other markets. According to Swiss Re, the UAE insurance penetration in 2011 actually dropped by 0.3% points to 1.8%, the second highest in the GCC.

The Gulf's lag vis-à-vis insurance penetration averages in advanced and emerging markets is much larger in the life business than in non-life insurance. Bahrain and the UAE rank above the emerging markets average when it comes to non-life insurance. But life insurance contributions in GCC countries, at most, equate to about one-quarter of non-life contributions, and to much less in Saudi Arabia and Qatar.

Among factors besides low acceptance of life insurance that have played a role in keeping insurance penetration rates in the UAE and GCC stymied, one has to name the rapid expansion of nominal GDP values in the past decade and the large contribution of hydrocarbon exports in this GDP growth.

As the Gulf's overall economic expansion has kept outpacing insurance growth that came from a small base, the widening of the insurance base in the UAE depends on drivers of premiums growth that can penetrate society on a broad scale. As developments in Saudi Arabia and Abu Dhabi have shown, the strongest growth spurts in premiums across all Arab markets have been wholly linked to the introduction of mandatory insurance schemes in two high-volume lines: motor and medical.

Dubai, which has postponed the introduction of mandatory health insurance a few times since 2009 because of the economic crisis and concerns over the impact on businesses, will provide the next great boost to insurance demand in the GCC when the scheme is implemented in 2013, as expected.

TAKAFUL TIME

Another much-discussed growth factor for insurance demand is takaful, or Islamic insurance. Integrating principles of mutuality in protection against the impacts of adverse events and professional financial management in sharing of profit and loss, takaful has many positive applications that wait to be explored.

According to the 2012 World Takaful Report by consultancy Ernst & Young, the sharia-compliant general and family takaful contributions in the UAE stood at $818 million in 2010. Aggressive competition and challenges on the ability to generate returns are issues confronting the budding takaful industry, which is nonetheless coming into its own as regulatory, ratings, and political conditions in a growing number of Islamic markets begin to work in its favor.

Weaknesses that affect all Arab insurance markets and that are gradually being addressed in relation to both Islamic and conventional insurance entail needs for more reliable and more detailed market data, for better collaboration among regulators and supervisory bodies, and for more human capital.

In parallel to expanding the capacities for academic and practical insurance training and making careers in insurance more attractive to GCC citizens, education of the markets and awareness building among potential insurance buyers is just as pressing a need, for insurance leaders such as AXA.

Another point of note is that the insurance industry in the Middle East and North Africa region is still, after many years, searching for its natural hub. While Lebanon has long served as the region's undisputed main source of talent in the insurance industry, the country's market is falling more and more behind the size and growth dimensions of the GCC economies. Egypt, the region's most populous market with huge development hopes, is the seat of the General Arab Insurance Federation secretariat, but Cairo has many issues to work out before it can aspire realistically to serve the regional industry as a hub. Bahrain and Qatar have each put their hats in the ring as contenders for a role in regional insurance, but, so far, no regional hub solution has compellingly presented itself from there. Dubai has the strength of the DIFC and the benefits of a city that never stops dreaming of greater things. This bears well for the insurance players who base themselves there. A diverse range of international and Dubai-based insurers and intermediary or services specialists testify to TBY how the business infrastructure and social attractiveness of Dubai have drawn Chartis, Now Health, and Metlife to anchor their Middle East operations in Dubai. Local companies like Arab Orient and Dubai Insurance aspire to ever-greater regional roles and Salama, the world's largest takaful and re-takaful provider, is incorporated in Dubai.

Although financial investors have fewer opportunities to explore in nationally fragmented MENA insurance sectors than in the most populous emerging economies, strategic investors and international providers value Arab insurance beyond its current size. According to global reinsurance operators such as Swiss Re and Munich Re, the path of insurance growth is clearly marked by the shift from developed economies into emerging markets. This path leads through the Middle East.

Adding in moderate profiles for catastrophe risks and historically small natural disaster exposures in the GCC means that the growth potentials and risk diversification opportunities of Arab insurance markets provide more than enough reasons for international and regional risk specialists to base themselves in Dubai. As the clustering of providers inescapably enhances the quality of the industry's products and offerings in the local market, it also makes more and more sense that the industry has bright days ahead.