As the first emirate in the UAE to issue mandatory health insurance legislation, Abu Dhabi has grown into the nation’s most mature and robust insurance market. While the industry remains in its nascent stages, with overall penetration still low relative to more developed markets, an uptick in the life and medical segments offers significant opportunities for future expansion. The emirate has also witnessed a host of regulatory reforms aimed at fostering growth, including long-awaited brokerage regulations enacted in 2014, setting the stage for market consolidation, improvements in technical underwriting and a reduced reliance on foreign reinsurers.
Abu Dhabi’s insurance sector operates as one part of a national market regulated by the Insurance Authority (IA), which was established under Federal Law No. 6 of 2007 and charged with regulating and supervising the UAE insurance industry. According to the IA’s 2013 annual report, 60 insurance companies currently operate in the UAE, comprising 34 national companies and 26 foreign ones, making the UAE’s market one of the most fragmented and competitive in the GCC.
Of these, 11 national companies and two foreign companies provide both life and non-life insurance products; 20 national and 17 foreign companies provide property and liability insurance coverage; two national and eight foreign companies are dedicated to life insurance products; and one national company offers credit export insurance. The IA has also identified 10 national companies that offer sharia-compliant takaful insurance in the UAE.
By The Numbers
Total written premiums in the UAE stood at Dh29.5bn ($8.03bn) in 2013, dominated by the non-life segment, which made up 76% of the value of total premiums in 2013, an estimated Dh22.5bn ($6.12bn), compared to the life segment, at Dh7bn ($1.91bn). Within the non-life segment, medical insurance accounted for 44.1% of total premiums, compared to accident and liability insurance (32.8%); fire insurance (9.7%); land, sea, and air transport insurance (7.6%); and other products (5.8%).
The sector is dominated by publicly listed companies, according to an April 2014 report by Lloyd’s, with the government holding a majority stake in many. Regulations require insurers to be registered as public joint stock companies and eventually list on either the Dubai Financial Market or the Abu Dhabi Securities Exchange. Oman Insurance Company, Abu Dhabi National Insurance Company (ADNIC) and Orient Insurance Company are among the leading players, with government-owned, unlisted entities, private firms, and branch offices for foreign firms comprising the remainder of the market.
In March 2014 Moody’s Investors Service released a study that found the UAE tops the GCC region in terms of non-life insurance penetration, total revenues and density. According to Moody’s, the UAE’s insurance industry reached revenues of Dh26.4bn ($7.19bn) in 2013, representing around 45% of all premiums written in the GCC and making the UAE the largest insurance market in the region. According to Moody’s, the UAE’s insurance industry has experienced a compound annual growth rate of 17% since 2008, with total insurance density of $1464 per capita as of 2012. Total insurance penetration was around 2% in 2012 – high for the GCC but modest relative to more developed markets.
However, the IA’s estimates differ from this, with the authority reporting that total premiums expanded 12.2% to reach Dh29.5bn ($8.03bn) in 2013, including 10.8% in the non-life segment, reaching Dh22.5bn ($6.12bn) in gross written premiums (GWPs), compared with Dh20.8bn ($5.66bn) in 2012. At the same time, the IA reports that the life segment expanded 17.4% to reach Dh7bn ($1.91bn) in GWPs, up from Dh5.96bn ($1.62bn) in 2012.
Growth has been driven largely by conventional lenders, with the takaful segment struggling in the wake of fierce national and regional competition. IA projects the UAE insurance industry will have expanded 10% in 2014, driven by government reforms.
In an analysis of 29 listed insurance firms in the UAE, the Emirates Insurance Association (EIA) found total assets of Dh36bn ($9.8bn), against Dh20bn ($5.44bn) in liabilities, with the two categories rising 10% and 6%, respectively, in 2013. Equity as a percentage of assets increased slightly to 44% in 2013, up from 42% at end-2012, while the industry’s annual return on assets, share capital and equity stood at 4%, 20% and 9%, respectively, according to the EIA.
The UAE’s takaful industry had a bumpy 2013, with the EIA reporting that, of the companies reviewed, the takaful segment posted a loss of Dh93m ($25.31m), compared to Dh1.36bn ($370.19m) in net profits for conventional insurers. Similarly, takaful companies saw their return on assets, share capital and equity contract by 1%, 4% and 5%, respectively, over the year.
Combined GWPs of the firms reviewed grew by 3% to reach Dh14.4bn ($3.92bn) in 2013, led by conventional companies, whose GWPs were up 9% at Dh12.2bn ($3.32bn), an improvement from Dh11.1bn ($3.02bn) in 2012. Takaful GWPs, meanwhile, dropped by 20% to reach Dh2.2bn ($598.84m) in 2013, compared to Dh2.8bn ($762.16m) in 2012.
Given the number of companies operating in the market, premium rates have come under considerable pressure in recent years, with price wars cited as a major growth inhibitor. As such, several stakeholders – including the IA itself – have repeatedly called for market consolidation.
Partners AXA and Kanoo Group acquired a majority shareholding in Green Crescent Insurance Company in February 2014, while the National Bank of Ras Al Khaimah announced plans to purchase a majority stake in RAK Insurance in July 2014. The following month Abu Dhabi-listed Islamic insurer National Takaful Company, also know as Watania, announced that regulators had approved the sale of 60.53% of the firm to MB UAE investments, which will acquire 51% of the company, and the remaining 9.53% to Al Madina Insurance Company.
Despite these announcements, a highly anticipated spate of mergers and acquisitions has not yet kicked off. The market did, however, attract a new entrant: Oman’s National Life & General Insurance Company, which acquired a licence to operate in Abu Dhabi in August 2014 and plans to focus on the UAE’s relatively untapped life insurance segment, in addition to providing group medical insurance offers.
The IA has launched a variety of reforms and regulations since 2007, aimed at developing and maturing the market, improving Emiratisation, regulating the takaful and bancassurance segments, and encouraging industry consolidation. Other regulations, such as the IA’s 2009 code of conduct, specify how providers may operate in the UAE, although stakeholders have pointed to the changing insurance landscape, including the emergence of new delivery channels, as underpinning the need for further regulatory reform.
The IA issued Resolution No. 4 of 2010 – the Takaful Law – which sets out additional requirements for takaful provision in the UAE, including a requirement for a National Sharia Supervisory Board to issue binding fatwas (rulings) concerning the conduct of takaful business in the country.
Regulatory reforms have also extended to delivery channels, with the IA publishing a draft resolution regulating the marketing of insurance policies by banks in January 2011. In September of the same year, the IA issued the Bancassurance Regulations to all insurance companies in the UAE, though this circular has yet to become law.
The industry has witnessed a steady flow of bancassurance deals, with law firm Clyde & Co reporting in September 2013 that an estimated 40% of insurance premiums in the UAE were provided through bancassurance channels, particularly products sold by Zurich Insurance Group, HSBC, Oman Insurance Company and the National Bank of Fujairah. Until these reforms, there had been no regulatory regime for bancassurance, despite the prominent role that banks plays in marketing insurance products.
More recently, regulations covering brokerage licensing and financial and auditing requirements were passed in early 2014. However, stakeholders have argued that the IA’s ongoing reform process has not yet addressed issues in other distribution channels, including telemarketing and websites that offer white-label products – products rebranded under the name of another firm (see analysis).
According to a November 2014 report by the Middle East Insurance Review, the IA is working on other directives, including regulations for actuaries and insurance consultants, instructions for third-party administrators and draft instructions for the licensing of representative offices of foreign insurers. “Of prime concern are the instructions the IA intends to issue by the end of 2015 to ensure the solvency of companies and the soundness of their financial procedures,” the report stated, in reference to a three-year solvency reprieve that extended the deadline for insurance firms carrying out composite business to segregate life and non-life into separate undertakings, part of a reform introduced in June 2012.
Accounting for the lion’s share of non-life business in the UAE, medical insurance has witnessed rapid expansion in recent years, on the back of government legislation requiring that all Abu Dhabi residents hold a medical insurance policy. The legislation is to extend across the UAE over the medium term, with Dubai having already adopted and implemented mandatory medical insurance legislation in 2013, to be rolled out in phases.
“With the introduction of compulsory health insurance the Dubai market has great potential, but it has to be approached cautiously,” Dr Michael Bitzer, CEO of National Health Insurance Company – Daman, told OBG. “A sufficient examination of how the programme will be rolled out will be critical in determining the level of commitment insurance firms are prepared to make. Essential to this will be the implementation of a long-term strategy in which the pricing of products is based on technical returns.”
Step By Step
Indeed, incremental implementation has been cited as a key success factor in Abu Dhabi’s near-universal coverage. The reform process began in 2005 with approval of the Abu Dhabi Health Insurance Law No. 23, which provided the legal framework by which insurers, intermediaries, health care providers and third-party administrators are governed. Following two years of preparation, which included the 2006 establishment of a national health insurance provider, Daman, the law was implemented in 2007, mandating that all expatriates and their families be covered by medical insurance, with the Health Authority - Abu Dhabi (HAAD) made responsible for overseeing the successful roll-out of the law.
HAAD’s basic package offers government-subsidised coverage at a cost of Dh600 ($163.32) per year, administered by Daman, which has quickly become the region’s largest health insurer. Enhanced packages are also available to customers and provide additional coverage for services such as dental work, with policy pricing to be determined by the market. According to reports from Daman, officials are currently negotiating an increased index rate for Dubai’s basic package, which presently sits at Dh500-700 ($136.10-190.54). “We believe the rate is sufficient [in 2014] for those being insured in Phase 1, but looking at the risk profiles for those being insured in Phase 2 and Phase 3, the rate needs to increase [in 2015], and [in 2016] even more so,” Sven Rohte, chief commercial officer at Daman, told OBG.
The Abu Dhabi health insurance scheme’s second phase was launched in 2008 with the establishment of the thiqa (“trust”) system, providing mandatory, comprehensive coverage to all UAE nationals living in Abu Dhabi at no cost. Thiqa coverage is likewise administered by Daman, which services transactions between the Abu Dhabi Department of Finance, which pays for policies and coverage, and health care providers. During the first phase of the programme’s implementation, Daman was given certain privileges, including exclusive rights of providing government-run entities and direct billing within the facilities of the Abu Dhabi Health Service Company, which effectively required patients covered by other firms to pay cash and file claims.
These privileges have since been rescinded, opening the market to private sector players, although recent regulatory reforms have moved to encourage consolidation and discourage new market entrants. Major health insurance providers include multinationals like AXA, as well as domestic players including ADNIC and the Al Dhafra Insurance Company, all of which offer direct billing to customers.
To curb the growing problem of medical inflation, HAAD introduced a diagnosis-related group (DRG) system in 2010, replacing the previous fee-for-service model. Under the new DRG model, insurers pay providers an average amount per procedure. Nevertheless, rising health care costs remain a significant challenge to the insurance industry: in 2014 analysts from Strategy& (formerly Booz & Company) reported that medical inflation is forecast to continue growing by 5-10% annually in the coming years. Meanwhile, the UAE’s medical insurance segment reported loss ratios of 85.1% in 2013, the highest ratio among all insurance segments in the UAE.
“Medical inflation has risen faster than normal inflation due to innovations in the medical field with new drugs and procedures being introduced, which are very expensive. New breakthrough treatments are great from a medical perspective, but are very costly. As a result, insurance companies have to raise premiums accordingly,” said Bitzer.
Despite these challenges, the introduction of mandatory health coverage in Abu Dhabi has had a considerable impact on the wider UAE’s insurance and health care provider market. While IA data showed that medical insurance premiums accounted for 12.2% of the sector total in 2006, at a value of over Dh1bn ($272.2m), by 2013 their share of total non-life premiums had grown to 44.1%, equal to Dh9.92bn ($2.7bn), or 33.6% of all GWPs in the UAE.
As identified by credit ratings agency A.M. Best, the relatively small size of the UAE market poses a problem for Abu Dhabi, especially given the launch of a new free zone in the emirate – the Abu Dhabi Global Market – which is hoped to bolster the emirate’s position as a regional centre for insurance and financial services. In October 2014, Ministry of Health officials announced that the mandatory health insurance scheme already implemented in Abu Dhabi, and launched in Dubai, is to extend across the entire UAE. Previous laws mandating nationwide insurance coverage for workers were considered in 2004 and 2007, and while legislation has yet to be implemented, Dr Amin Hussain Al Amiri, assistant undersecretary for medical practices and licensing at the ministry, told The National that the near-term goal is 100% coverage for all UAE residents. The US-UAE Business Council likewise reported in June 2014 that it expects Sharjah will introduce similar policies “in the near future”.
An estimated 80% of UAE residents do not have critical illness, or disability coverage, according to a March 2014 report by Zurich International Life. With just 4.67m of the UAE’s 9.35m residents living in Abu Dhabi and Dubai as of 2013, the extension of mandatory schemes in the UAE presents considerable opportunities for existing insurance brokers. “As it stands now, you can only gain market share at the expense of other firms. Extension of mandatory coverage across the UAE represents a growth opportunity for insurers, and it is something the industry is certainly looking forward to,” Rohte told OBG.
The wider GCC insurance industry has long been viewed as overly dependent on reinsurance, and the UAE is no exception, with the EIA reporting that among listed companies, reinsurance is not being used effectively to hedge risk, as demonstrated by comparing the industry’s overall reinsurance net loss ratio, which stood at 49% in 2013, to its total net loss ratio, which reached 71% in 2013.
“Of course there are variations between the firms, and for some firms the picture is more complicated when considering other factors, like commission. However, we believe that with actuarial modelling, most of the companies could improve their bottom line through better utilisation of reinsurance,” read the EIA’s 2013 annual report.
A 2010 report by Alpen Capital found the average ratio of ceded to retained premiums was 61.3% in 2007, falling to 56.4% by the second quarter of 2009 due to the growing sophistication and underwriting capacity of UAE insurers. Retention rates improved in recent years, and in its 2013 annual report the IA found that non-life retention rates averaged 55%, dominated by the accidents and liability segment (65.2%) and medical insurance (63%), while categories including fire insurance (25.9%), land, sea and air transport insurance (27.4%) and other risks insurance (19.2%) showed weaker performance.
Part of the wider UAE’s reinsurance dependency stems from the existing regulatory framework. There are no restrictions on the reinsurance of UAE risks by foreign reinsurers and regulations do not include any requirements for companies to monitor claims, settlements and underwriting activities of cedant companies, which are not required to disclose any relevant information to reinsurance providers.
Regulations permit treaty reinsurance, which generally involves an agreement between the insurer and reinsurer to protect entire classes of contracts, as well as facultative reinsurance, which covers one underlying insured item, written one account at a time. Facultative reinsurance is traditionally deployed for large, unusual risks, such as oil and gas rigs and tankers, and mega-projects. There has been more adoption of facultative reinsurance in the emirate, on the back of new infrastructure developments in the oil and gas, real estate and construction sectors, including projects like the UAE National Railway, the Louvre Abu Dhabi and developments on Reem Island.
The overall market reliance on reinsurance highlights weaknesses in technical underwriting, which is further evidenced by the large share of industry revenues generated by investment activities. The IA reports that technical provisions in the life and non-life segments reached Dh12.9bn ($3.51bn) and Dh9.3bn ($2.53bn), respectively, in 2013, while shareholder equity in national insurance companies stood at Dh17.5bn ($4.76bn) and investment income reached Dh37.8bn ($10.29bn), of which 57.4% comprised shares and bonds and 26.5% bank deposits.
Prior to the global financial crisis, local insurers were able to rely on income from property and equity assets rather than technical profits; however, asset price rebounds have created volatile market conditions that continue to threaten smaller players. Insurers’ heavy dependence on reinsurance and investment income, coupled with limited technical underwriting expertise, remains a key challenge for industry stakeholders. “In terms of investments and technical profits, some firms have no idea how to play the game. They act as brokers. However, this has changed in the past 18 months or so; firms are looking at the reinsurance contracts and trying to be more careful in the types of risk they have in place and the risks that they have appetites for, so they are being selective and cautious. At the end of the day you need to protect the consumer’s rights, and foster trust in the market,” Rasha Moukayed, manager of life and medical at Guardian Insurance, told OBG.
Abu Dhabi’s developing insurance market faces several challenges, including relatively low penetration, regulatory gaps and deficiencies in technical underwriting, though the IA has taken major steps to improve the business environment. Still, the industry has reported double-digit growth in recent years and is expected to continue this trend into 2015. While the expansion of the mandatory medical insurance scheme represents the most obvious future growth channel for the emirate, a period of industry-wide consolidation would also boost long-term growth prospects, with recent legislation and market developments indicating that 2015 could be the year of mergers and acquisitions in the industry. This would pave the way for greater market maturity and ensure the emirate, and wider UAE, remains a regional insurance leader in the years to come.
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