Over the past decade, the MENA insurance industry has witnessed some of its biggest achievements as well as its toughest challenges, whether in terms of market conditions or the overall socio-political environment. With Middle East Insurance Review turning 10 this year, we recap the highlights faced in the region.
The past decade in the MENA insurance industry has seen numerous developments. The year 2005 saw the beginning of an era best described as the rediscovery of the MENA’s insurance sector by regional investors as well as foreign players. This was notably demonstrated in the Saudi market, one of the region’s largest sectors in terms of capitalisation and size of premiums.
The region also witnessed downturns in the financial markets over the past 10 years, including the 2008 global financial crisis which left its mark on both technical and investment results. It was a huge test for insurers, given their reliance on investment income.
In 2010, Arab markets generated less than US$23 billion in premiums, with over 80% from non-life businesses, mainly motor. Today, according to estimates by the General Arab Insurance Federation (GAIF), GWP for Arab markets have exceeded $30 billion, making it one of the fastest-growing regions in the world, yet barely accounting for 1% of the global market.
Growing foreign interest
The low penetration rate of around 1.6%, signalling huge untapped potential, coupled with the low Nat CAT events, are some of the factors which have attracted many insurance companies to MENA. In Saudi Arabia, at least a quarter of operators are associated with international brands and the same goes for the UAE.
But despite the presence of many such companies in MENA in past decades, it was the emerging financial centres which have lured most new entrants in the past decade. In particular, the Dubai International Financial Centre (DIFC), which started operations in late 2004, today has around 85 insurance-related entities.
Probably the biggest milestone in this development was the opening of Lloyd’s in the DIFC in 2015, a move believed to strengthen the global recognition given to the regional insurance industry and open broader horizons, especially for the region’s specialty markets.
In general, the foreign interest has remained even after the Arab Spring. International players have continued to expand their presence, with AXA acquiring Commercial International Life in Egypt, AIG opening in Morocco’s Casablanca Financial City, and many other similar moves over the past few years.
Takaful rejuvenated
The number of takaful operators has grown notably over the past decade. Aside from Saudi operators, which are considered Shariah compliant under the cooperative system, seven out of the 17 UAE operators founded since 2005 are takaful firms. In Kuwait, 14 of 33 direct companies are takaful, many of which entered the market since 2000.
Over in Egypt, eight out of 12 operations started between 2006 and 2015 are takaful. In Tunisia, three operators were established after the 2011 revolution and in Libya, almost all 13 players either have fully converted to the takaful model or opened windows after the regime change.
Among the biggest changes in the takaful landscape was Oman’s allowing of Shariah-compliant products in 2011; there are now two takaful operators in the market as well as draft takaful law.
The rush to takaful took place despite the reality that many MENA markets are already saturated and operators are facing the same challenges as conventional players. For many, the challenges were even greater as they started business after the financial crisis and shortly before the unrest erupted. The slower growth rate and increasing pressure on profitability have cast shadows over takaful market, but it is still projected to fuel the region’s growth.
The retakaful arena, too, has attracted prominent names such as Hannover Re and Asia Capital Re. However, a major setback in this area in the past few years has been the collapse of Best Re, one of the oldest retakaful players.
Growth in compulsory medical schemes
Ten years ago, the Abu Dhabi government made a pioneering move when it teamed up with Munich Re and launched the National Health Insurance Co (Daman) to manage the mandatory health plan for nationals and low-income expats. The company today caters to over 2.8 million members in the UAE.
In Saudi Arabia, compulsory medical insurance was launched for expatriates after the market was liberalised around a decade ago; the plan is to cover nationals in the future. In 2013, Qatar and Dubai launched universal health insurance. More recently, Kuwait has started to look into similar schemes for non-nationals. The large percentage of expatriates in the GCC’s population, as well as the states’ interest to reduce the fiscal burden, especially with plunging hydrocarbon prices, are probably strong motivating factors for these moves.
Health insurance is also increasing in importance in other parts of MENA, with estimates that the business has grown to around a quarter of the region’s overall GWP. In 2014, medical insurance accounted for around 52% of the Saudi market, almost one-quarter of the UAE’s and Bahrain’s insurance markets, and 15% in Tunisia. All in all, this line is expected to continue growing along with governments’ eagerness to reduce spending.
However, this expansion comes with a price. The increasing loss ratio due to competition and increased cost of medical services have been eroding insurers’ profitability. For several markets, medical is on the way to becoming another “dilemma” like motor.
Regulatory developments
With insurance in MENA growing in importance, governments have started to look into setting up dedicated bodies to supervise the sector. This has been the trend since at least 2006 – all GCC states have now assigned supervisory tasks to a specific department at the Central Bank or relevant ministry, or even created an independent body for this purpose – like what the UAE did in 2007 when it founded the Insurance Authority (IA). Egypt, Morocco, Tunisia, Sudan and Syria are among the other countries which have established separate bodies to supervise insurance operations.
Yet in a step backwards, in 2013, Jordan’s Insurance Commission – the first independent Arab regulatory body for the sector – merged with the Ministry of Industry and Trade as part of the government’s attempts to cut public spending.
Nonetheless, developments in the MENA insurance industry gave the impetus to the formation of the Arab Forum for Insurance Regulatory Commissions (AFIRC), in an attempt to develop supervisory capacities and harmonise legal frameworks in the Arab world. Its establishment brought value add and recognition to the industry, particularly in communicating with international regulatory bodies to help upgrade the region’s markets.
The way forward
The Arab Spring in 2011 has been the biggest development in the MENA region in decades, resulting in regimes being toppled, wars erupting in multiple areas, and political instability in several countries. All these culminated in the rise of ISIS, which has grown to become an international terrorist threat.
Five years on, the Arab Spring is still leaving an impact, with investments and public spending declining, and the risk landscape looking more threatening. Many have become to realise that the current socio-political condition is not a short-term one.
However, there are many signs that the region is heading on with expansion, as seen in insurance investments as well as developments in related fields such as technology. Innovation, modern distribution tools and building up technical capacities are some of the issues which the industry needs to look into to strengthen its position. Above all, solving outstanding issues such as controlling cut-throat competition, expanding the life business, increasing retention and achieving consolidation, are needed for profitable growth. It will be a bumpy ride ahead, but dealing with the challenges will help in creating strong leadership for the industry.