Now entering its 10th year of mandatory health insurance legislation, Abu Dhabi’s insurance sector is at something of a crossroads. Although penetration is rising and the industry’s gross written premiums (GWPs) have recorded double-digit growth in recent years, loss ratios have deteriorated over the same period, the industry recorded some of its worst underwriting losses to date in 2014, and companies remain highly reliant on reinsurance. An overcrowded and increasingly competitive environment has led to unprecedented competition, further exacerbating existing challenges to sound underwriting.
Federal authorities have increasingly sought to promote consolidation, most notably through the introduction of new financial regulations aimed at strengthening the industry’s financial soundness and governance, and expected to push smaller companies into acquisitions. Combined with population growth and increased consumer awareness, these factors will likely keep the industry on a long-term upwards trajectory, bolstered by solid growth in the life and takaful (sharia-compliant insurance) segments.
Landscape
The insurance sector in Abu Dhabi is overseen by the federal regulatory body, the Insurance Authority (IA), established with the promulgation of Federal Law No. 6 of 2007, with health insurance being regulated by the Health Authority – Abu Dhabi (HAAD). Even before the IA’s establishment, however, Abu Dhabi was the first emirate in the UAE to roll out compulsory health insurance legislation with Law No. 23 of 2005, which was brought into effect in 2006 and established National Health Insurance Company – Daman.
According to the IA’s 2014 annual report there are 60 insurers in the country, including 34 locally incorporated companies and 26 foreign branches. Of these, 11 national and two foreign firms offer all lines of insurance, including life, property, liability and fund formation, while 20 national and 17 foreign companies offer non-life products. Two national and eight foreign companies sell only life insurance, and a further 11 firms offer takaful insurance.
Life and funds formation insurance remains dominated by foreign issuers, which account for 81.4% of underwritten premiums in the segment, indicating the life sector remains nascent, while local insurers hold 75.1% of underwritten premiums in the property and liability lines. The IA reports there are a further 21 insurance agents, 164 brokers (159 local and five foreign), 20 insurance consultants, 72 loss adjusters and 43 actuaries active in the sector.
Major Players
Oman Insurance Company (OIC), established in 1975 and headquartered in Dubai, is the largest listed insurance company in the UAE, with 15 locations spread across every emirate. The Abu Dhabi National Insurance Company (ADNIC) is the second-largest insurance firm in the UAE, holding a 17% market share, according to investment consultancy Alpen Capital, while Abu Dhabi-based Al Khazna Insurance, established in 1996, is the largest insurance firm in the UAE in terms of paid-up capital, with more than Dh420m ($114.3m) in capital assets. Daman is the country’s largest health insurance provider with a reported total of 2.8m members. The Abu Dhabi government owns 80% of the company, and the remainder is held by Munich Re.
Recent Growth
According to Alpen Capital, the GCC’s insurance industry has witnessed rapid recent growth in uptake, with GWPs registering a five-fold increase over the past decade, and doubling between 2010 and 2014 to hit $22.2bn, for a compound annual growth rate (CAGR) of 13.8%. Alpen Capital reports that the UAE’s insurance industry recorded a CAGR of 11% between 2010 and 2014, bolstered by favourable legislative reforms, with the country accounting for 40.9% of the region’s total GWPs in 2014. The IA, meanwhile, reports that industry premiums increased by 13.5% to hit Dh33.5bn ($9.1bn) in 2014.
Non-life lines continue to dominate the sector, with general insurance contributing Dh24.9bn ($6.8bn), or 74.3% of GWPs, an increase of 10.6% over Dh22.5bn ($6.1bn) in 2013, according to the IA. Industry investments stood at Dh39bn ($10.6bn) at the end of 2014, of which 63.4% were shares and bonds and 22.8% were deposits, while total equities for locally incorporated companies stood at Dh19.8bn ($5.4bn).
In October 2015 Ebrahim Al Zaabi, director-general of the IA, told media he expects the UAE’s insurance sector will grow by 10% in 2015, with GWPs up to Dh36.5bn ($9.9bn). “Despite challenging times due to the falling oil price, the insurance industry recorded excellent results in 2015 that contributed to increasing the growth of the insurance business and we anticipate the same type of growth in 2016,” Al Zaabi told OBG. The sector has become an important driver in recent years, with the Statistics Centre – Abu Dhabi reporting that financial and insurance activities were a significant contributor to economic growth in 2014, when they expanded by 27.1%.
Competition Heats Up
Although GWPs and overall penetration have risen considerably in recent years, fierce competition, deteriorating loss ratios and a heavy reliance on reinsurance activities have presented serious challenges. In May 2015 ratings agency Standard & Poor’s (S&P) reported that 2014 was the worst year on record for UAE insurers in terms of underwriting performance due to intense competition in the vehicle and medical insurance segments, with the agency reporting it expects 2015 will be a year of recovery as a result of companies halting price reductions in these lines.
Alpen Capital reports that the UAE’s 29 listed insurance firms recorded a net underwriting deficit in 2014, with an average combined ratio of 102.2%, compared to 97.4% in 2013. Return on equity (RoE) fell to 5.6%, down from 10%.
ADNIC posted both underwriting losses and a net deficit in 2014, reporting Dh157m ($42.7m) in underwriting losses, compared to Dh266m ($72.4m) in underwriting profits in 2013, and a Dh280m ($76.2m) net loss, compared to Dh156m ($42.5m) in profits the previous year. Excluding ADNIC, the combined ratio of listed insurance companies stood at 96.4%, while RoE was at 7.8%. Consolidated net profits of listed firms, including ADNIC, fell to $239m in 2014, down from $323m in 2013.
A Challenging Year
Although the industry was expected to recover in 2015, some of the larger players did not witness the rebound anticipated by S&P. ADNIC, for example, reported a net underwriting loss of Dh248m ($67.5m) during the first half of 2015, more than its total underwriting losses of 2014, while net losses reached Dh299m ($81.4m) during the same period, again higher than those incurred in 2014. The company’s GWPs fell to Dh1.4bn ($381.1m), a 9.4% drop compared to the same period in 2014.
Insurance House, also based in Abu Dhabi, reported a net loss of Dh10.5m ($2.9m) during the first nine months of 2015, compared to a net loss of Dh7.1m ($1.9m) during the same period in 2014, although it noted that despite “unprecedented intense competition among insurance companies”, it was able to expand GWPs by 23% to reach Dh94.2m ($25.6m).
OIC, meanwhile, reported that its net profit declined by 25% year-on-year to Dh44.5m ($12.1m) in the first quarter of 2015.
According to Andrew Woodward, the chief business officer at ADNIC, an increasing number of companies are operating at a loss as a direct result of rising competition in the industry.
“Despite the combination of difficult trading conditions and a more demanding regulatory environment, we continue to see new capacity entering the market. This is likely to place more pressure on weaker insurers,” Woodward told OBG.
Reinsurance Activity
One of the most significant challenges currently facing the emirate’s insurance industry is an over-reliance on reinsurance activities, despite having made modest improvements in recent years.
Although there is a disparity among retention rates across different lines – rates in the accident and liability segment stood at 66% in 2014, compared to 16.5% and 26.8% in the fire and transportation lines, respectively, according to the IA – the industry remains hampered by premium cession, with a number of stakeholders complaining that underwriters’ activities are resembling those of insurance brokers.
“Very little has changed with regards to reinsurance in recent years. The portion of premiums ceded is massive. We have huge capacity in the UAE, but it’s not used,” Mahdi Attya, branch manager of AXA Insurance’s Abu Dhabi office, told OBG. “You’ll see agencies accepting a 10% cut of the premium and passing all the risk on to a larger company, which is exactly the wrong approach if you want the market to expand and mature.”
Loss ratios have also been worsening, with the IA reporting that average industry loss ratios rose from 55.7% in 2011 to 75.3% in 2014, a trend expected to continue as a result of excess capacity in the reinsurance market. With such a heavy reliance on reinsurance activities, law firm Clyde & Co reported in September 2015 that a number of reinsurers are hoping to establish an on-the-ground presence in the emirate at Abu Dhabi Global Market. Lack of underwriting expertise in specialist commercial lines offers one of the few opportunities for new businesses in the sector, although the firm noted that an ongoing moratorium on the issuance of new insurer licences by the IA will see fronting arrangements remain the sole mechanism to access the local market.
Life Insurance
Although the UAE’s life insurance market has the highest penetration across the whole of the GCC, it remains under-penetrated compared to developed economies.
Nonetheless, life insurance has become the fastest-growing segment in the UAE’s insurance industry, recording a 14.9% increase in GWPs in 2014, according to Alpen Capital, while the IA reports life GWPs rose by 22.8% to reach Dh8.6bn ($2.3bn), up from Dh7bn ($1.9bn) in 2013. Life insurance density rose from $212 in 2013 to $237 in 2014, driven by the growing middle class and sizeable expatriate community, which comprises 80.9% of the total population. “Where there is still ample room for growth is in the life insurance segment as this market remains underpenetrated,” Al Zaabi told OBG.
Life insurance growth is further bolstered by the presence of large international life insurers able to mobilise expatriate savings to build a savings pool in their respective home countries. As the UAE offers social security programmes for its citizens, Emiratis generally do not require life coverage, and as a result the life sector will likely remain dominated by foreign companies for the foreseeable future.
Takaful
Offering an alternative to conventional insurance, and a possible inroad to the Emirati market, takaful insurance involves policyholders mutually insuring each other, acting as both the insured and insurer. Alpen Capital reports that the wakala model, in which the takaful operator acts only as an agent or trustee (called a wakeel), managing the fund for an upfront fee, is currently the most commonly employed model in the UAE.
There is significant potential for expansion of takaful in the UAE. According to Alpen Capital, GWPs in the GCC’s takaful market grew at an 11.8% CAGR between 2010 and 2014 to reach $8.9bn, accounting for 63% of the global market, while consultancy EY projects that at its current growth rate the GCC Islamic insurance market will reach $20bn by 2017.
In sharp contrast to conventional insurers, the UAE’s takaful companies have recorded positive growth in recent months. Takaful Emarat, the sole sharia-compliant health and life insurer in the UAE, opened its second branch in Abu Dhabi in September 2015, after recording a 187% increase in sales during the first half of the year to reach Dh164m ($44.6m), and seeing underwriting profits rise by 82% to reach Dh17.3m ($4.7m) during the same period.
Abu Dhabi National Takaful, meanwhile, posted a Dh12m ($3.3m) profit in the financial year ending March 2015, compared to Dh10.3m ($2.8m) the previous year, as well as Dh10.4m ($2.8m) in underwriting profits, an increase from Dh8.6m ($2.3m) the year before. “The role of Islamic banks is getting stronger as the takaful concept becomes increasingly attractive to all parties. It provides value added to policyholders and investors are incentivised by the return on capital,” Osama Abdeen, the CEO of Abu Dhabi National Takaful, told OBG.
Non-Life
The UAE’s non-life GWPs recorded a CAGR of 8.9% between 2010 and 2014, according to Alpen Capital, slower than the life segment but comprising a much larger proportion of the total, roughly 75% of industry GWPs in 2014. Non-life premium density rose to $742 in 2014, 9.6% growth over 2013, due to rising demand for mandatory medical insurance. The trend is expected to continue into 2016, as Dubai prepares to launch the final implementation phase of its own compulsory medical insurance legislation, which will bring the total number of covered individuals in its medical insurance market to 4m, according to Alpen Capital, compared to 1.5m in 2015.
The non-life segment is dominated by medical insurance, which comprised 44.5% of non-life GWPs in 2014, according to the IA. Medical insurance was followed by accidents and liability insurance, at 33%, fire insurance (9%), other risks (6.8%), and land, sea and air transport (6.7%).
Motor
Alpen Capital reports that the motor insurance segment yields almost no returns at present due to premium price pressures, and expatriates comprise the sector’s largest market across income levels. This will necessitate higher premiums and more skilled technical underwriting. Although the motor insurance segment has been a loss-maker in recent years, S&P reported that it expects companies will halt damaging price wars in the future.
Meanwhile, Julian Audrerie, senior vice-president of customer integration at OIC, told the media in May 2015 that he expects motor premiums on saloon cars valued at less than Dh100,000 ($27,220) will see gradual increases across the board in 2015, although more profitable segments such as 4x4s and luxury vehicles will likely remain extremely competitive over the medium term, keeping premium growth limited.
Medical Coverage
HAAD is responsible for overseeing the rollout of the emirate’s medical insurance scheme and is the sector’s regulator. The agency has recorded a number of notable successes equating to near-universal health insurance coverage since the scheme was launched in 2006.
HAAD’s basic package offers government-subsidised coverage for low-income employees at a cost of Dh600 ($163), which is administered by Daman. The scheme’s second phase was launched in 2008 with the thiqa (“trust”) system, offering premium, mandatory coverage to all UAE nationals living or working in Abu Dhabi. The programme is also administered by Daman, which provides Emiratis with their thiqa cards and invoices Abu Dhabi’s Department of Finance for claims. Daman also offers packages aimed at mid-high-income expatriates. According to HAAD estimates, there were around 3.3m active insurance members in the emirate in 2013, more than the entire population, meaning that the government has achieved its goal of universal coverage.
In October 2012 HAAD revised the price list for health care services, known as the mandatory tariffs, which are paid by insurance companies to health care providers. Reimbursements for surgeries fell 14.9%, laboratory services by 24.4% and radiology procedures by 0.7%, although costs payable for doctor visits rose by 24.6%, for hospital daycare services by 22% and for medical services by 0.05%.
Inflation
At the time of its establishment it was hoped that the changes would increase the amount of time doctors spent with patients and reduce the number of unnecessary tests. Yet a 2014 report by the International Journal of Emergency an unexpected increase in demand for premium and comprehensive coverage. Despite this, margins for enhanced products remain thin due to escalating medical costs,” Dr Michael Bitzer, CEO of Daman, said.
With analysts from global management consulting firm Booz & Co. reporting in March 2014 that medical inflation in the UAE is rising by an average of 5-10% annually, and the medical segment reporting a loss ratio of 87.8% in 2014, reforming the emirate’s insurance scheme to reduce the incidence of medical fraud is becoming a critical priority for stakeholders.
Although HAAD introduced a diagnosis-related group (DRG) system for medical claims in 2010, replacing the previous fee-for-service model in which insurers pay providers an average amount per procedure and taking into account the specialisation of the doctor treating the patient, the authority has since noted that the DRG system still leaves additional room for improvement.
The authority stated in its 2013 statistical report that an evaluation and management code reimbursement system based on the severity of the patient’s condition, rather than the grade of the doctor visited, would be advisable for outpatient payments. The adoption of an evaluation and management-based reimbursement system could be the best means of curbing costs and inflation.
“With health care costs escalating there is an even greater emphasis that needs to be placed on technical analysis and data analytics to monitor the procedures of health care providers and ensure costs are managed appropriately,” Dr Bitzer told OBG.
Regulatory Reforms
The IA, meanwhile, has been active in rolling out reforms designed to improve the performance of underwriters and promote industry consolidation, most notably through the introduction of new financial regulations in December 2014, which apply to both the conventional and takaful segments (see analysis).
While not directly targeting the reduction of reliance on reinsurance activities, these measures are expected to strengthen the industry through the enactment of a risk-based capital requirement for insurers. The regulations follow similar capital standards to those introduced for brokers at the end of 2013, which have since reduced the number of broking companies in the emirate from over 200 to 164, according to Clyde & Co.
The authority had already moved to segregate the activities of the sector’s composite insurers, and in August 2015 the UAE Cabinet issued a resolution granting insurance companies that offer composite life and non-life products a one-year grace period to “regularise their positions” in accordance with Article No. 25 of the Insurance Law, which stipulates that companies are not permitted to combine personal, fund accumulation, and property and liability insurance operations under one roof.
“Insurance companies have to ensure sufficient liquidity to meet their claims responsibilities, as newly introduced regulations by the IA limit the types of investments insurers can maintain,” ADNIC’s Woodward told OBG. “The IA can take credit for creating a strong regulatory environment as insurance companies and brokerages are taking it upon themselves to implement stricter measures.”
In March 2015 the Ministry of the Economy announced that the federal government was working on legislation to allow full foreign ownership of companies, even those operating outside of economic free zones. Although the legislation is likely to apply only to foreign firms in certain sectors, with law firm Al Tamimi & Co writing in a September 2015 legal update that it does not expect the legislation to extend to insurance, the firm notes that the move could have significant ramifications for areas such as trade credit insurance, with the UAE’s trade credit insurance penetration estimated to be four times lower than the US and six times lower than in Europe.
The IA is also finalising regulations governing bancassurance, the actuarial profession and amendments to the Insurance Authority Establishment Law, as well as regulations on motor insurance policies.
Outlook
Strong growth in GWPs is likely to continue given the UAE’s relatively low penetration compared to developed countries, although whether the industry can maintain the double-digit CAGR recorded in the last six years remains uncertain. Declining oil prices are expected to impact investment in new commercial projects, which will likely be felt within the industry at large, although the country’s track record of political stability will help offset these near-term challenges.
At the same time, the IA’s regulatory reforms could bring about the necessary period of consolidation, with premiums expected to rise and price wars ending as a result. This will ultimately benefit underwriters, brokers and policyholders, thereby paving the way for sustainable, long-term sectoral expansion.
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