Abu Dhabi: Evolving insurance market

Regulations enforcing higher capital standards in the UAE's overcrowded insurance market have reduced the amount of insurance brokers, while slower growth in commercial business means the sector is looking to opportunities in the retail segment.


"The number of brokers has decreased by 20% compared with 2008," the Insurance Authority said recently. Put simply, brokerages selling insurance underwritten by bigger companies were hit hard, with one in five leaving the market in 2009. "The reason for the decrease is the deletion from the register of those who have not complied [with the new rules]."

In 2006, a ministerial decision requiring insurance brokers to raise their capital to $272,161 was announced. Brokers were given a two-year grace period to meet the new rules, and in June 2009 the authority blew the final whistle on those that had not stepped up to the proverbial plate. Many industry observers applauded the decision as a useful step in enforcing firmer control and increasing international best practice. Stricter rules which buttress stronger financial foundations can only be good for the long term health of the sector.

It is not just insurance brokers that have felt the effects of new regulations. Late last year, the Federal Cabinet decided that insurance companies underwriting policies must meet a minimum paid-up capital of $27.1m.

By the same token, reinsurers, which are fee earning organisations that assume the insurers' risk, have to control a minimum capital requirement of $68m. Both these important market players have, however, been given until the end of 2012 to come into line with the new laws.

Industry experts believe that this is not the last of the new regulations. Many expect rules regarding the sale of insurance through banks and third-party agents may also be established in the future. Naturally new laws will change how the insurance sector operates both in Abu Dhabi and the wider UAE market. But most players welcome the developments. After all, Abu Dhabi's increasingly sizable and complex insurance market calls for increasingly sophisticated regulation.

The UAE's insurance sector has for some time been considered overcrowded, with about 170 brokers and 58 fully fledged insurance companies. It is for this reason that recent pressure on smaller operators with uncertain capital reserves has been welcomed by the majority. Besides flushing out some of the smaller players, higher capital requirements will serve the industry better in the long run. Insurance firms will be in a position to contain losses more comfortably, while customers will have a more robust protection.

In addition to this, bringing regulations closer in line with international standards should help grow the overall market and a more professional industry will be better placed to promote the importance of insurance, while potential consumers are more likely to be convinced of its virtues by a well regulated sector.

The popularity of insurance, especially in the retail segment, in Abu Dhabi, and the wider UAE, is currently low when compared with the developed world. A UAE insurance penetration rate of around 2% (based on gross premiums as a percentage of GDP) compared with a global average of 7.1%, suggests there is significant room for further growth.

However, it is not all good news for insurers. Economic uncertainty has impacted profitability. According to the financial statements of 24 of the country's publicly listed insurers, profits declined by 42.38% in the second quarter of 2010 to $45.1m, compared with the same period in 2009. Coupled with a slowdown in construction and engineering related insurance, which has been a good source of business in recent times, and it becomes clear why the sector is shifting strategy towards individual consumers.

This trend is expected to continue in the coming years as regulations help the market to mature and the awareness among retail customers increases. In addition to this, insurance providers, particularly those based in the Abu Dhabi, will benefit from the emirate's long term economic plans. Spending on large hydrocarbons, water, energy and transportation projects over the coming years means insurance players can look to the future optimistically, thanks to a steady flow of underwriting opportunities.


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