Over the last six years, Abu Dhabi's insurers benefitted from the emirate's rapid economic expansion. Many rode massive waves of petrodollar investment in the state's hydrocarbon and real estate sectors, registering impressive profits.
Personal insurance also grew at a healthy clip over the same period, buoyed by a mandatory health insurance law for expatriates as well as strong population growth.
However, since the onset of the global economic crisis the environment has changed.
The big three insurance companies all registered a drop in profits for 2008. Abu Dhabi National Insurance Company (ADNIC) reported a year-on-year drop in net profit from $89.9m in 2007 to $57.2m for 2008; Al Khanza's profit fell from $37.6m to $9.3m; and Al Ain Ahlia saw a 31% drop in profit over the year, to $39.2m.
Though these losses are significant, they are misleading when viewed in the context of the overall health of the sector.
Insurers' diminishing returns are mainly due to investment portfolios being weakened by volatile international and regional bourses. Although these investments have been affected negatively by the global economic crisis, the operational side of insurance, for instance health protection, continues to be profitable.
Put simply, it is merely this high exposure to the capital markets that has affected the profitability of many insurers – not any fall-off in demand for their offerings.
Of course, that is not to say that certain insurance products have not been affected by the slump in some sectors. For instance, construction and engineering insurance has been impacted. In October 2008, when projects such as Palm Deira in Dubai began to be suspended, it was evident that the region's real estate boom, as well as the construction sector as a whole, was under pressure. Naturally this downturn took its toll on insurers.
"In terms of the economic cycle – there is no doubt that the construction engineering insurance sector has been impacted," Walid Sidani, the chief executive of ADNIC, told OBG.
However, there is more to the weakening demand in this segment than just the slump in construction activity. "A lot of the projects we have insured over the last 3-5 years are coming to closure. So it's a normal process – the cycle of construction and completion," Sidani said.
Notwithstanding the slowdown in construction-related insurance, there are still areas where providers are optimistic of growth.
According to Sidani, "Takaful (Islamic insurance) offers tremendous potential in the region." He believes that as societies in the Gulf become increasingly aware of the value of insurance as a means of protecting their assets, they will align themselves with the product that is congruent with their own values and beliefs.
Most other industry experts agree. In a recent survey published by accountancy firm, BDO, most executives involved in the broad activities of Islamic finance picked out takaful as the product with the second-most revenue generating potential.
Another fillip to the insurance industry is the expected growth of the small and medium-sized enterprises (SME) market. The authorities have identified SME development as an economic priority and, as such, have allocated financial support to spur the growth of new businesses in line with its Abu Dhabi Economic Vision 2030.
The Sheikh Khalifa Fund for SMEs is the cornerstone of this strategy to buttress newly established companies. In 2008 the fund offered nearly $70m in capital for 154 new industrial and services enterprises. As this government initiative builds momentum in the coming years, so too will the scope of prospective insurance clients developing from these nascent businesses.
While growth in medical insurance and takaful should help offset the effects of other slower business lines, increasing public awareness and innovation are perhaps of greater importance to the insurance sector than ever before. In this post-crisis climate, insurers are expected to stick to the parameters of their core competencies, and move away from seeking returns from volatile investment portfolios.