Insurance Report Middle East 2012

7/29/2019 Insurance Report Middle East 2012

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- UAE, the second-biggest Arab economy,

- Deflation in Dubai eased to its lowest annual rate in four months in May, data

showed, dipping to 1.2 per cent to extend the emirate's longest period of price declines since

inflation hit a record 10.8 per cent in 2008.

- UAE inflation is projected to increase gradually through the second half of this year,

the latest study by Dubai Chamber of Commerce said.

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Takaful: is a type of Islamic insurance in which the members pool their money and

guarantee each other against loss or damage.

Insurance Density: is the premium amount per capita and is derived by dividing gross

written premiums by the population. Insurance Density: is the premium amount per capita

and is derived by dividing gross written premiums by the population.

Captive Insurance companies: are formed to insure the risk arising from the business

of the parent, or the group, when the parent is unable to find outside insurance firms to

insure its risk. Captive insurance companies do not cater to the general public.

Cession Rate: is defined as the proportion of premium ceded (to reinsurers) of the total

gross premium. It also represents the amount of reinsurance in the company.

Combined Ratio: It is the most popular measure of profitability used by insurance

companies. We have calculated Combined Ratio by dividing the expenses of the

companies (operating and underwriting, including net claims and commission paid) by

the net earned premiums. A ratio of more than 100% implies that the company is paying

out more in claims & expenses than it is receiving in premiums.


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- UAE and Saudi Arabai are the 2 biggest market in GCC region and Qatar is expected

to grow fastest ( 30% CAGR )

- Over all region is expected to grow at 20%

- GCC industry size - $16 billion .

- Non life segment comprises 85% of total premium.

- Non life penetration = 1.03%

- GDP growth primary growth driver.

- Growth expectation non life 18.5% and life segment 25%

- Takaful, being Sharia-compliant, has significant appeal amongst the local population

in the region.

- The sector is expected to grow manifold due to economic growth, right mix of

population and low penetration.

- Insurance sector has a strong positive correlation with GDP.

- The region has very young populace with approximately 70% of the population in the

15-64 years bracket.

- Governments in the region, in an attempt to reduce dependence on oil revenues,

invested across varied sectors including financial services, education, tourism, andproperty. The diversification will encourage the adoption and distribution of financial

services, including insurance.

- World Insurance market 2010 $4.3 trillion ( life segment $ 2.5trillion + non- life =

$1.8 trillion ) ..For Non-life segment - 85% of premium coming from advanced

economies and only 15% comes from emerging markets.

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The GCC insurance industry is relatively small with significantly low levels of insurance

penetration and density. While this points to the size of the growth opportunity, GCC

insurers continue to face a number of challenges. The region has very high cession rates

showing a high dependence on reinsurers. At the same time, the investment portfolios of

the insurance companies are heavily tilted towards equities and real estate, making them

vulnerable in a volatile market.


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High Cession Rates: The region has a significant number of small insurers that

lack sufficient capitalization and skills to underwrite or invest funds. The region

therefore is highly dependent on reinsurers and has significant cession rates.

Fragmentation: The insurance industry in the GCC is highly competitive with

predatory pricing in the region negatively impacting profitability and growth.

The ageing population can be a significant growth driver for the insurance sector pushing

demand for life products such as retirement and health provisions...( more economies will

move away from being the welfare state eruo / greek crisis; US pension problem , inflated

pension bills of both gov and private companies ). Additionally, as more

and more people move into the retirement bracket straining government resources in

advanced economies, the shift to private pension schemes will provide a strong impetus

for insurance industry growth in those countries.

Weaker insurance portfolios due to the financial crisis

The debt crisis and ensuing credit freeze has had a significant impact on the balance

sheet of the global insurance companies, particularly those investing in the European

countries. Insurance companies (globally) are one of the three biggest classes of investor

of the European sovereign debt and hold approximately 30% of the total outstanding debt.

Emerging economies represent a significant portion of the world population and an

increasing portion of the world GDP, however, the emerging economies account for only

15.0% of the world premiums.

Natural Calamity Losses

The insurance industry has been severely impacted by natural calamity losses in 2010 and

2011. According to reports, the 2011 earthquake in Japan and New Zealand, flooding in

Australia and the unrest in the Middle East resulted in USD 60 billion of direct insured


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losses to insurers. Further, tornadoes and flooding in the United States is expected to cost

upwards of USD 32 billion in insured and economic losses. The loss from natural

calamities is expected to be one of the highest in 2011 and may weigh on insurers balance

sheets.

The region has one of the lowest penetration and density in the world

Insurance penetration in the region is much lower than global and emerging market

average. While the penetration rate in the GCC region increased from 0.6% in 2000 to

1.3% in 2010, it remains significantly lower than the global average of 6.9%, Emerging

Markets average of 3.0% and OECD average of 8.1% in 201010. Given the high correlation

of penetration levels with GDP, the low regional penetration and density underscore the

significant growth potential of the rapidly growing economies in GCC.

Above figure despite the fact that per capital income in GCC region is high , insurance

penetration is pretty poor and this suggests high potential in the region. Low insurance

penetration and density suggests major growth potential for the industry as the market

remains largely untapped.


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GWP gross written premium

Market Structure

The GCC insurance market is fragmented with large number of domestic and foreign

players. The region is seen as attractive to international companies and there have been

many entries in the recent years.Non-life continues to dominate the markets with

approximately 85-90% of the premiums derived from this segment alone. In terms of

distribution, agents and brokers are the primary channels for sale while bancassurance

continues to grow rapidly in the region.


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There are 57 insurance companies in UAE ( India 23 LI companies incl LIC )

Non- Life Insurance Dominates

The nonlife insurance segment is the key contributor to the growth of insurance in GCC,

with motor and property coverage accounting for majority of the premiums. Comprising

approximately 87% of the total gross premiums, non-life premiums were USD 11.8 billion

in 2010. Life insurance segment premium contribution stood at USD 1.8 billion (13%) in

2010.

This is in stark contrast to the global market share of around 58% for life and 42%11

for non-life insurance. There is significant growth potential in the region.

Looking ahead, non life segment is expected to continue to dominate during our forecast

period (2011 to 2015) as more asset categories are made mandatory for insurance. Fire

and property insurance is expected to increase as the property market evolves further as a

result of increased diversification.


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The large expatriate populationprefers foreign insurers over the other lesser known local

companies. Besides the structural factors, most foreign insurers have focused exclusively on

the life segment which remains significantly under penetrated. Increased interest in the

segment will boost life premium growth.

Distribution Channels :

Non life distribution in GCC is dominated by direct sales and brokers, while life insurance

is split between agents for individual business and brokers for group life. Although the


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traditional channels continue to bring in the bulk of business, bancassurance is emerging

as a significant channel of distribution. Bancassurance refers to selling of insurance

products either individually or as a bundled product along with banking products through a

single distribution channel, usually the bank's branches. This channel allows insurance

companies to access ready customer bases, while the banks get to provide diversified

service to its customers.

Though the prominent insurers have provided insurance services to their customers

through banks in past as well, bancassurance has gained importance in recent times with

more and more insurers preferring to sell through banking institutions

ReinsuranceThe potential for the reinsurance industry in GCC countries is significant as most localinsurance companies rely heavily on reinsurance. As a result of shortage of underwriting

skills, the regional insurers are forced to reinsure significant if not all of the policies written.This dependence is reflected in the high cession rates in the region. In 2009, theaggregate cession rate in the non-life segment was 46% resulting in approximately USD4.8 billion in volumes. The cession rate in the region is higher than prevailing rates inemerging markets with similar levels of wealth and also significantly higher than developedmarket average of approximately 8%.

Exhibit 15 shows the composition of net premium and the ceded premium in the region in2009 while Exhibit 16 shows the cession rate by the GCC countries for the same year.Qatar has the highest cession rate of 57% while Saudi has the lowest at 40% due tosignificant growth of medical business which is largely retained by domestic insurers.


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Insurance Growth Cycle IMPORTANTThe insurance industry follows a defined pattern based on the population and incomedynamics. As per a study conducted by Swiss Re in 2000, the early stages of developmentare dominated by non-life products especially coverage oftransportation and trade risks.As income increases and households acquire capital goods such as vehicles, real estate,etc. the need for non life insurance increases as people look to protect their valuable

assets and avoid any losses on the same. Governments encourage insurance penetrationthrough mandating certain insurance classes such as motor. With maturing population, thenext stage is focused on life insurance and pension-like products (See Exhibit 17). TheGCC market is currently in its Late development and transition stage.


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The insurance industryfollows a defined patternbased on the population andincome dynamics

Life Insurance

GCC is governed by Islamic laws. Since conventional life insurance is not acceptable

under Islamic law, insurance density is significantly low and falls below the GDP growth

rate in the region.

Life insurance premium grew by 12.0% in 2010 whereas the GDP grew at 17.8% in the same

year.

Our estimate for total premiums is USD 16.5 billion in 2011 increasing to USD

33.6 billion in 2015 representing a CAGR of 20%. Non-life insurance will comprise 85% of

total premium in 2015 while life insurance will be 15%, contributing USD 5.2 billion in 2015

United Arab Emirates will continue to be the largest market in the GCC in 2015 comprising

50% of the total region.


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Demographic ..Saudi Arabia has the largest total population but the country has the lowest working

age/young population (people aged between 15 64 years). Qatar has witnessed fastest

growth in population and has the highest percent of young population. Approximately 85-

90% of the population in the country falls in the 15-64 years age bracket.

Growing expatriate population will drive health

insuranceThe new regulations in most of the countries in the GCC now require mandatory health

insurance for expatriates. The increasing expatriate population thus converts into higherrevenues for the insurance sector.

Above figure :: See Qatar has highest per capital income in GCC region..with highest GDP

growth rate of 28% approx ..

Compulsory Insurance

The introduction of compulsory health, third party motor and home insurance has resulted


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in significant premium growth in the non-life insurance segment. Third party (compulsory)

motor insurance rates are frequently capped by the government and remain a low margin

business in the many of the countries.


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Distribution Channels

Captive Insurance CompanyA company that provides risk-mitigation services for its parent company. A captive insurance

company may be formed if the parent company is unable to find an outside firm to insure

against a particular business risk; if the parent company determines that the premiums it pays


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to the captive insurance company are sufficiently deductible; or that the insurance the captive

insurance company provides is more affordable or offers better coverage.

Liability InsuranceThere are many different types of insurance policies available, but liability insurance is one of

the most popular because it costs much less than many other options. For example, in regard

to auto insurance policies, liability insurance costs far less than full coverage. The reason for

this is because full coverage insurance must pay for both your vehicle and any other vehicle

involved in a collision, as well as property damage and medical expenses due to injuries to

you or another party.

On the other hand, liability insurance is only responsible for the other party's losses. Your

person and your property are unprotected, but liability insurance protects you from being held

responsible for the other party's damages

There are different types of liability insurance, including general liability, which works in

much the same way as auto liability insurance, but covers businesses. General liability

protects a company from third party claims. Aside from general liability, there is also D & O

liability, employer liability, and professional liability insurance.

D & O liability stands for "directors and officers" liability and is intended tocover the acts or omissions of those in the director or officer position. An entire company

should not be held liable for the statements, actions, failure to act, or other mistakes that are

the responsibility of an officer or director.

Industry Consolidation

There are more than 180 insurance players operating excluding reinsurance companies in

the region. As a result, insurance companies seem unable to generate scale, retain a

sufficient volume of premiums, build meaningful risk pools and underwriting capacity, and

innovate.Many insurance companies seem to act simply as brokers or front offices,

reinsuring most of the business.


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Challenging Investment Market

With a significant of insurance portfolios invested in real estate, the performance of the

sector significantly affects the health of insurers. Soft market conditions continue to

depress prices leading to poor portfolio performance. The value of the real estate has lost

much ground post the recession and most insurers have reduced exposure to the sector

Skill shortage Vs rise of re-insurancebusiness

The industry lacks the required expertise in underwriting skills and portfolio management

skills which are crucial to the retain premiums in-house. As a result, most local insurance

companies pass on their businesses to reinsurers with sophisticated tools and skilled

manpower which impacts their profitability.

The Cession Rate is defined as the proportion the total gross premium ceded to other

insurance companies. It also represents the amount of reinsurance in the company.

The Combined Ratio is the most popular measure of profitability used by insurance

companies. We have calculated Combined Ratio by dividing the expenses of the

companies (operating and underwriting, including net claims and commission paid) by the

net earned premiums. A ratio of more than 100% implies that the company is paying out

more in claims & expenses than is the premiums received.

UAE was the worst hit country among the others in the GCC during the global financial

crisis.

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Insurance Report Middle East 2012

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