When political turmoil hit in early 2011, the insurance sector was in a transitional state. Several reforms were in various stages of implementation, including overhauls to state medical and pension plans that could have a profound impact on insurers. For the long term, however, the sector remains rich in potential, thanks to a combination of factors, including a low penetration rate and large population.

DEMAND: As Egyptian consumers gain purchasing power, demand will rise across all economic sectors. Consumers are likely to spend more on insurance themselves, and their broad-based needs will translate into more insurable assets in the country and, in general, more opportunities for risk management.

Until there is greater legislative clarity, however, insurers’ focus is likely to continue to be on the daily execution of company strategies, building capacity and forecasting the bottom-up changes that could come about in the medium term. Those may include a more prominent role for sharia-compliant (takaful) alternatives and increased demand for a range of products in response to instability.

INDICATORS: The country’s insurance and re-insurance companies had an asset base of LE40.1bn ($6.71bn) as of June 2011. Regulation does not treat sharia-compliant companies separately, so included in the totals are four takaful firms selling general insurance and three takaful companies underwriting life insurance. The sector is open to foreign participation, as the 49% ceiling on foreign ownership in commercial banking and insurance has been lifted. The private sector, however, has a limited role – the dominant suppliers in both the life and general segments of the market are government-owned.

Overall Egypt ranks 84th globally in its insurance penetration rate, at 0.7%, and also 84th in spending, at $18.80 per capita per year, according to data from the Middle East Insurance Review. “This reflects the weak income and awareness of the Egyptian people,” Aly Bashandi, the general manager of Arab Misr Insurance Group, a local insurance company that became the first to earn a financial rating (from A.M. Best) in 2011, told OBG. “Restoration of peace and security will be a strong driver for growth in the insurance sector in Egypt,” he added.

CONSOLIDATION: The biggest actor in the sector is Misr Insurance Holding Company, the government arm created to hold the state’s insurance assets. The company was established by a presidential decree in 2006 and includes multiple state-owned insurers in the system: Misr Insurance Company, Al Chark Insurance Company, Al Ahlia Insurance Company and the Egyptian Reinsurance Company.

These businesses were consolidated according to their underwriting types into two subsidiaries of Misr Insurance Holding Company: Misr Insurance Company (non-life) and Misr Life Insurance Company (life). According to the Egyptian Financial Services Authority (EFSA), which regulates the insurance sector, Misr Insurance wrote 60% of the premiums in the 2009/10 fiscal year, and Misr Life’s share of premiums was about 40%. Furthermore, of the total of LE35.3bn ($5.91bn) held in insurance companies’ investment accounts as of June 30, 2011, about 70% came from the government entities.

Each of these companies’ pooled assets include real estate holdings, which are sizeable enough that Misr Insurance has created three subsidiaries to manage them: Misr Real Estate Assets Company handles the land bank; Misr Real Estate Development Company oversees project development; while Misr Real Estate Management Company handles property management, safety and maintenance issues.

PRIVATE SECTOR PRESENCE: In both the life and non-life segments, Misr Insurance Holding is the only public sector operator. There are also 13 privately owned insurers underwriting non-life policies, with four of them operating as takaful firms offering sharia-compliant versions of insurance policies. Sharia-compliant insurance has long had only a small portion of the market – about 5% as of 2009, according to EFSA figures. Islamic finance has a long history in Egypt; however in its modern incarnation, the first provider of sharia-compliant financial services was Mit Ghamr Savings Bank, which was set up in the Egyptian town of the same name in 1963. A low point came in the mid-1980s, when Egyptians were victimised by several Ponzi schemes calling themselves Islamic investment opportunities that would yield a higher rate of return than conventional bank interest rates. However, Islamic products such as takaful could present an opportunity. “At some stage we will think about how to offer sharia-compliant products,” said Deepak Barsay, the head of distribution and marketing for local insurer Commercial International Life (CIL).

There are three private sector insurers that have both life and non-life policies, and two specialist insurers: the Export Credit Guarantee Company and the Cooperative Insurance Society. There are also nine firms that sell only life insurance, three of which comply with sharia guidelines.

The Egyptian Credit Guarantee Company was founded in 1989 by nine banks, one insurer, and assistance from the US Agency for International Development (USAID). The institution’s role is to guarantee bank loans to small and medium-sized enterprises and other commercial entities that may lack collateral. Its business model includes dedicated funds directed at specific areas of the economy and to certain underserved classes of borrowers.

LONG HISTORY: Insurance has a long history in Egypt – the National Insurance Company was established in 1900 and was the first of its kind in the Arab world. The first law on insurance in Egypt was passed in 1939, while the most recent overhaul of the legal environment was the consolidation of non-bank financial company regulators into one organisation, EFSA, in 2009. The new body absorbed three separate regulators, including the former insurance regulator, the Egyptian Insurance Supervisory Authority.

The new regulator and the merging of the state-owned insurers were among several recent reforms in the sector. Companies are no longer allowed to offer both life and general insurance unless the two activities are separated on the balance sheet, for example. In addition, membership in the Insurance Federation of Egypt, the industry association and lobbying instrument, was made mandatory.

As is the case in many countries, there is a shortage of professionals with experience and expertise in some of the more complex tasks required in a developed insurance sector. Egyptian insurers therefore lack some important tools for risk management, such as current mortality and morbidity tables. This lack of institutional capacity has also meant that some actuaries are working for multiple insurers, as well as for the regulator, creating the potential for conflicts of interest and further complicating the process of making wise regulations and ensuring that they are enforced properly.

SUPERVISION ISSUES: The recent move to consolidate regulators has brought the skills shortage to the fore. “One year after the formal merger of the Capital Markets Authority, the Mortgage Finance Authority and the Insurance Supervisory Authority, EFSA is only now finalising its internal restructuring and still needs to come fully into its own as a regulator,” stated a 2010 OECD report on the business climate. “With staff of around 800 persons, many of whom deal with internal issues, there is a strong need for more capacity building inside the authority. EFSA now oversees not only Egypt‘s capital markets, but also mortgage finance, insurance, leasing, factoring and all other non-banking financial services. This will require highly skilled and trained staff. Although an internal training programme of excellence was launched in 2009, it has so far produced only 36 graduates, who still need further training.”

In a step towards addressing this shortfall, Cairo University established an actuarial science programme in 1995. About half of its graduates go on to work for insurance companies, with the other half working for the government or elsewhere in financial services. However, a lack of local organisation in the field has resulted in graduates who may not practice in line with stringent standards like those found in more mature markets. According to the university, of the 165 graduates between 1998 and 2010, only four were able to earn qualification from the UK’s Institute of Actuaries or the US-based Society of Actuaries. The domestic equivalent, the Egyptian Society of Actuaries, was founded in 1998 and has 13 members who have qualified as actuaries. The American University in Cairo also offers an actuarial science programme, which is accredited by the Supreme Council of Egyptian Universities.

GENERAL INSURANCE: The total value of non-life insurance policies underwritten has shown steady growth during the past five reporting periods. Direct premiums were valued at LE3.3bn ($552.3m) in fiscal year 2006/07, according to the regulator. The amount rose to LE4.2bn ($703m) in the following year, then to LE4.8bn ($803.4m) in 2008/09 and LE5.2bn ($870.3m) in 2009/10. In 2010/11 the total was some LE5.7bn ($954m).

Of that, motor insurance, which is compulsory for all drivers, accounted for the greatest share. At LE1.4bn ($234.3m) in 2010/11, direct premiums for comprehensive motor insurance accounted for just over a quarter of the market. No other single type of policy brought in more than LE1bn ($167.4m) in business. The second-most popular line was fire insurance, at LE764.8m ($128m). The third-largest was oil, with premiums of LE618.4m ($103.5m) Some market participants have called for the passage of laws to make certain types of insurance mandatory, which could boost the size of the market, said Arab Misr’s Bashandi. Possibilities include medical malpractice insurance and personal accident coverage for Egyptians working outside the country; that may also include the repatriation of remains for expatriates who die outside the country, he said. Strike, riot or civil commotion coverage was often bundled for free into other policies in the past, but will likely be a for-profit underwriting activity in the wake of the revolution in early 2011, Bashandi said.

Similar to the growth in non-life insurance, the life segment expanded significantly between 2006 and 2011. Premiums rose steadily from about LE2.9bn ($485.4m) during fiscal year 2006/07 to LE4.31bn ($721.4m) in 2009/10, at which point the total then shrank slightly, to LE4.3bn ($719.7m), in 2010/11.

BANCASSURANCE: The main distribution channel for non-life insurance policies is brokers, of which there are about 300. However, in life, bancassurance has played an important role that may soon get bigger with regulatory reforms. Bancassurance was allowed in 2000 but a moratorium on new relationships was put in place in 2007.

According to Barsay, 15 Egyptian banks have bancassurance arrangements with life insurers; however only eight or nine of those are in use. CIL has three arrangements, for example, but is using only one at the moment in order to win business.

The ban on new relationships in this segment of the insurance sector is in part due to implementation problems, including a lack of clarity in what bank employees were telling customers about the products they were buying. “The law says you must have a trained team in the branches, but that is not necessarily what was happening,” Barsay said.

However, for insurers already established with a banking sector partner, business has been good in the past year. “The last five quarters have been the best in history for us,” Barsay told OBG. “Banks are pushing insurance now to capitalise on the fees due to the drop in lending activity since the revolution.” As of early 2012, CIL, for example, was in talks to better deploy its two additional bancassurance relationships, and if new tie-ins are once again allowed the company intends to seek more.

Solutions to the problems that led to the ban on bancassurance had not been aired as of mid-2012. One possibility is a new regulation that would require banks to take a stake in the insurers whose products they sell, according to a recent circular from the regulator. However that idea was unpopular and could be difficult to carry out. “How are 55 banks going to take a stake in 14 insurers?” CIL’s Barsay said.

Overall, despite the hiccoughs, the logic of bancassurance is compelling for local insurers, as the number of Egyptians with bank accounts is much greater than the total that have bought insurance, so insurers can access a much larger market of attentive customers through banking tie-ins.

CURRENT PENSION SYSTEM: The number of life policies in force has risen steadily in recent years, although new business has fluctuated. In fiscal year 2010/11 there were 1.03m existing policyholders, up from about 999,000 the previous year, according to EFSA’s annual report. The total has increased in each of the past five years. However new business dropped off somewhat in 2010/11: some 159,000 new life polices were underwritten, slowing by 11.7% from 180,000 in 2009/10, which was the best performance in the past five reporting periods. The worst performance came in 2007/08, when 157,000 new policies were added.

Growth in life coverage will be impacted by a government plan to overhaul the social security system. Defined-contribution pension plans cover 80% of workers in both the public and private sectors, making it one of the most active among emerging markets. It operates as a pay-as-you-go system, so the benefits upon retirement depend on the contributions made during working years.

Contributions depend on income, with a cap for monthly base earnings of LE875 ($146). Up to this amount the employee pays 14% and the employer 26%. Above this level, the rates change to 11% for the employee and 24% for the employer, but only on the next LE1050 ($176). Over LE1925 ($322), neither employee nor employer pays anything.

PLANNED REFORMS: The new plan, which was to have taken effect in 2012 but had not yet been implemented as of early in the second quarter, is, instead of a defined-contribution approach, a defined-benefit system, guaranteeing contributors a set amount regardless of contributions both voluntary and mandatory. The minimum pension payout will be 15% of the national average wage. The plan also raises the retirement age in phases. The present age is 60 and would rise to 61 by 2015, 62 by 2018, 63 by 2021, 64 by 2024 and 65 by 2027. Anyone entering the workforce as of January 1, 2012 would be impacted by the plan, were it enacted.

Contribution levels are not yet set. According to a US Social Security Administration report on the plan, contribution levels were set to increase for workers, to a flat 16.5% of earnings, with no cap and an option to pay in more; employers would provide 10%. However, debate prompted the proliferation of several versions of the plan with different contribution levels, said Ayman Kandeel, the chief operating officer of the Egyptian arm of global life firm Metlife Alico.

Private sector firms object to the plan because if Egyptians can get a large enough pension from the government they are less likely to buy life insurance. The system now, with a cap on base earnings, leaves enough room for life insurers. “The cap is the key,” Kandeel said. “Our market is the people who invest beyond the cap.” Another objection is to having the state invest contributions via pension funds, instead of creating opportunities for private sector fund managers. “They should let the private companies manage the money,” Kandeel said. “The government doesn’t have the capacity and the expertise.”

For now, a more generous national pension scheme is affordable because the country’s demographic bulge is among its youth – the share of the population aged 65 or older was only about 4.6% in 2010, according to the Social Security Administration report. However, when today’s teenagers and young adults retire, unless the population growth steadies or reverses its slowing trend, a defined-benefit approach means the government is taking on the risk that pay-out volume one day could overwhelm the government’s ability to meet its commitments.

HEALTH COVERAGE: Another change that may be imminent is a reorganisation of health insurance. Egypt has had a centralised health scheme since 1964, administered by the Health Insurance Organisation of Egypt (HIO). As of 2011 there were more than 45m beneficiaries, or 56% of the population, according to a USAID report. Currently, HIO acts both as the payer for treatment costs and as the service provider. It owns 37 hospitals, 600 outpatient clinics and other various treatment facilities; it also has outsourcing relationships with 640 private hospitals and 1141 private clinics. One of the least sustainable aspects of the system is that premiums were set in 1964 and have not changed since then.

One proposed reform plan aims for universal coverage alongside a more sustainable approach. The plan would make HIO exclusively the payer, and its hospitals, clinics and other spots where health care is administered would be brought under the supervision of a different body. HIO would be responsible for contracting with service providers and inspecting their facilities to ensure consistent quality.

Whereas in the past, those who had private coverage could opt out and in doing so exempt themselves and their employers from contributing to the system, the proposed new system does not contain this feature, Metlife Alico’s Kandeel said.

For the state, one potential benefit would be the adoption of a more systematic approach to managing resources. In Al Gharbia governorate, test cases using closer monitoring methods prompted a 36% reduction in medication spending deemed wasteful, according to a USAID report on a capacity-building programme conducted in the 2009/10 fiscal year. There was also a 24% decline in payments to hospitals outside the HIO umbrella.

AWAITING CLARITY: As of mid-2012 it was unclear whether the new plan would be implemented. Much like the proposed pension scheme, insurers are wary of its effects on their customer base. And as long as the specifics remain unclear, industry executives can only speculate on how to plan accordingly. For example, the potential market for group health plans was considered at risk because employers are less likely to offer a health component in their benefits packages. That could shrink the market for group health plans as employers drop what they see as a redundancy with public services in their employee benefit packages. “Group programmes will be affected heavily,” Arab Misr’s Bashandi told OBG. “It’s not easy to pay twice. But individual plans should not be affected. The people who have these policies have the money to pay for them.” Higher-income Egyptians however, are still expected to be able to choose personal plans in order to top up coverage levels or give them the option to seek a higher level of care.

One potential positive impact would be curtailing unregulated activity in the health insurance market. In the current system, there are more than 300 third-party administrators (TPAs) who can be contracted to manage a private insurer’s policies. These TPAs are not regulated, and some of them have gone beyond managing insurers’ schemes by offering coverage of their own without the appropriate EFSA licences. Without EFSA’s supervising role in place, the quality of service can vary greatly, said CIL’s Barsay. With insurers as a whole concerned about preserving their reputations as reliable companies, these actors present a complication. The desire to cut out unscrupulous management has bred ideas such as forcing TPAs to apply for licences.

OUTLOOK: Several catalysts for change are on the table. Top-down reforms such as the new pension and health schemes could have the most immediate impact if implemented, by reducing demand for health and life coverage. However, short-term uncertainty in Egypt may boost demand for strikes, riots and civil commotion (SRCC) policies from those concerned about stability. As this coverage was typically bundled with other non-life policies in the past, it may represent a major standalone opportunity for the medium term. Occasional protests in the lead-up to the presidential election in 2012 were a reminder that property damage is still a threat.

Another promising segment is that of takaful, and Islamic finance more broadly. Growth in Islamic finance assets has been significant in the past decade to a large extent because rising oil prices have left many oil-producing Muslim-majority countries with money to invest. In the countries where Islamic finance is most popular, such as the Gulf Cooperation Council (GCC) members and Malaysia, populations are small. There are more Egyptians than the populations of the GCC and Malaysia combined, which gives sharia-compliant firms a large market.

Finding enough Egyptians to staff insurance companies as well as regulatory bodies will continue to be a challenge. Education efforts continue apace, but the capacity for risk-based underwriting will likely remain less than the sector’s leadership would like.