The profitability of the sector is holding up for the third year in a row. However, with the ongoing market competition and fragmentation, M&A is necessary for the sector to grow and sustain a healthy performance.
The preliminary results for the UAE’s 30 listed insurers have shown that GWP for the last year grew by 0.5% to AED21.9bn, a sharp decline from the 15% growth rate achieved in 2017. Net profit has improved for the third consecutive year reaching AED1.4bn, an increase of around 6% – compared to almost 44% growth achieved in 2017.
The slower growth in premiums was primarily due to the almost full penetration brought on by the universal health coverage mandated by the Dubai Health Authority (DHA) in previous years, according to the ‘Market Monitor UAE preliminary insurance disclosures 2018’ published by Milliman.
The good news is that the listed insurers remained profitable despite fierce competition that marked last year’s operations. However, the growth in top line was meagre and profits grew at a much slower pace compared to the past two years.
Mr Abdul Muttaleb Al-Jaedi, managing director and CEO of Union Insurance Co (Union) said, “The slight increase in premium in 2018 was not significant because of the drop in rates.”
Overall, the past year ended on a positive note, but the growth of the market wasn’t up to the aspirations of shareholders or managements of insurance companies, especially when compared to the performance of the past couple of years.
Motor witnessed severe competition in the past year, with prices dropping by up to 20%. In 2017, most providers benefited from the increase in motor rates enforced by the Insurance Authority (IA) and the introduction of the Dubai mandatory medical insurance. This was reflected in the 12% y-o-y GWP growth as it reached AED44.8bn, while profits increased 22% to AED2.2bn.
The Milliman report noted that pricing came under pressure in 2018 due to higher motor tari?s, VAT, increased market competition and general softening of the market. Although the market registered a minimal growth in premiums, the continued increase in net pro?t demonstrates the improved underwriting and claim management practices.
Underwriting income is expected to have increased by only 2-3%, unlike in the past two years, where it played a key role in boosting profits.
Mr Ramez Abou Zaid, general manager of Dubai National Insurance and Reinsurance Company (DNIR) said, “Despite the cut-throat competition, particularly in motor insurance, overall the UAE insurance market witnessed a positive development with a modest growth rate in GWP in 2018.”
The outcome should alert insurers to revise their underwriting strategies, he added. “This is for motor insurance in particular, as it has a direct and instant impact on the companies’ results. Competition has also heightened in medical – though it is determined by each company’s strategy – creating an impact on the market overall performance due to the fact that medical accounts for 43% of the market GWP.”
Unbalanced growth
Aside from the contracted growth of GWP and profits, a closer look would reveal that only a handful of operators are generating satisfactory results.
The top five listed insurers control around 59% of the overall GWP, while some players’ market share stands at around 2%. According to Milliman, 14 out of the 30 listed companies showed an increase in GWP in 2018, with the others experiencing a decrease. On the profits side, 14 companies have increased their profits, while four had a net loss in 2018 – the same number of companies in 2017. However, the actual loss was lower for three of the four companies.
The listed insurers’ results for the past year also indicates that nine players control almost 80% of the overall net profit.
The market profit has jumped from below AED5bn in 1999 to its current size of around AED50bn.
Varied market results
There are discrepancies among companies’ results, noted Mr Abou Zaid. “Operators who preserve strict underwriting guidelines have generated satisfactory results.”
He added that rates should improve for the market to grow soundly in the future. He also stressed that pricing is not a valid tool to differentiate business and attract clients. “In light of the ongoing competition, operators have no other option but to focus on the quality of service to face the detrimental price competition. This is the only way to retain and expand our customer base.”
He urged companies to create new products in response to the market needs, as well as to grow business and expand market share. “DNIR is continuously exploring new opportunities to serve our clients. Currently we have ramped up our activity in the personal line covers and we are trying to roll out appealing offerings to attract new market segments.”
Lack of diversification
The market remains dominated by the medical and motor lines, both generating around 60% of GWP. Therefore, the performance of these lines has an overarching impact on the market results.
This lack of diversification in lines of business, along with having a few players controlling the majority of the GWP could be the heart of the matter. Those companies dominating the business are competing fiercely, thereby dragging rates downward.
On the other side, loss-making companies continue their unsatisfactory results without showing signs of improvement. Almost 50% of the listed companies which witnessed a drop in profit last year are takaful players.
M&A should rule
Against that backdrop of limited diversification and high concentration of business, consolidation is a priority to overcome an imbalanced market structure and achieve sustainability. M&A is necessary because it is irrational for the few companies, who are causing price competition, to dominate profits. Concurrently, it is important for weak performing operators to find a remedy either by merging with another operator or getting acquired.
Mr Al-Jaedi said, “We have no future plans for an M&A activity but if we decide, we would buy a portfolio and not a company. I believe there has to be an advantage such as acquiring an operator across the border that has access to a different market or business segment that we need.
“The UAE is known to have the largest number of insurance companies in the Middle East. With the new financial regulations such as solvency margins and capital requirements, I believe that the market is likely to witness M&A activity. On the regulatory authority side, the Insurance Authority is encouraging small insurance companies to merge and is prepared to support with all facilitation needed.”
Mr Abou Zaid said M&A is difficult to be attained in the Arab region where family business is the dominant nature for most operators. “The M&A activities that took place in the market were based on certain circumstances – such as in the case of a company that needs a licence to enter a certain market. The nature of the market in the UAE, like other markets in the region, limits the chance of mergers. Therefore, acquisition is more likely to happen.”
Over the past few years, there have only been a handful of M&A initiatives in the UAE. The most recent case resulted in the formation of United Fidelity Insurance Co, where the Lebanese Fidelity Assurance acquired shares at the UAE-based United Insurance Co, which gave the former access to the UAE market.
There was also another major acquisition in the past year with Takaful Emarat taking over Al-Hilal Takaful. The main motives behind the move were for Takaful Emarat to obtain a licence to write general insurance, as well as expand its presence to the Abu Dhabi market, where Al-Hilal Takaful is based.
Regulations upgraded
The IA has issued a new resolution, the Administrative Fines, which lists 204 violations and their corresponding penalties. Insurance companies, professionals and insurance-related professions are subject to these fines for any violations committed. Repeat offenders will face double the penalties, with the maximum fine of up to AED2m.
The resolution took effect on 6 April 2019. “Enforcing the fines system is expected to put an end to unhealthy practices such as selling below the tariff minimum limits or offering products without prior approval from the IA,” said Mr Al-Jaedi.
Commenting on the regulatory environment in general, he commended the high level of support from the authorities and their efforts to develop the UAE insurance market.
Life: More offerings, wider distribution essential
Earlier this year, the IA issued the third draft of the ‘Regulations for Life Insurance and Family Takaful Business’, which included more stringent guidelines to revamp the way life and savings insurance policies are sold. The first draft was released in 2016 because of the alarming number of complaints from policyholders over the heavy and upfront commissions. Among the notable adjustments, the new draft includes capping commissions, limiting the upfront/indemnity commissions and imposing certain criteria of qualifications and licensing requirements for those selling life insurance. The regulation is expected to take effect within this year.
Mr Anand Singh, senior associate at BSA LLP in the UAE said the IA has taken a prudential approach to the enforcement of commission caps as it has directed insurers to initiate market conduct practices to determine commission abuse by insurance producers. “These include random audits of the insurance producers and detailed questionnaires signifying a shift in the IA’s approach. In the coming months, we can expect to have the final life regulations implemented most likely with minor changes to the current draft, if any at all. While the current draft states that the industry can expect an alignment period of one to two years depending on the provision, given the rampant mis-selling and abuse in the life insurance market, it is highly recommended that insurers start bringing the house to order,” said Mr Singh.
Life business in the UAE accounts for almost 22% of the GWP and it is the largest life portfolio in MENA. In 2017, the size of life business reached AED11.7bn (Table 4).
Mr Al-Jaedi said the introduction of regulations is a positive move and is in line with the global best practices.
Though the introduction of the new regulations would support the position of local companies in the life market as it creates a level playing field, it is not the magic solution to increase the size of life sales overnight. Apart from a couple of international life players, the remaining companies lack significance in the size of their life portfolios. Companies still need to work actively in acquiring qualified staff, improving their systems and more importantly, their offerings. All these are long-term investments that require time and follow-up to start delivering decent returns.
Resorting to efficient distribution means is paramount, he said. “Banks remain to be a very key channel for selling insurance products. They have a rich database and sell insurance products that have been customised to offer protection as well as investment and savings opportunities.”
Aside from the already well-established bancassurance channel, Union has teleassurance means to distribute and promote products through telecom providers. “Sales in retail and personal lines, such as motor, home and travel, are growing via this channel.”
Etisalat partnered with Union Insurance to offer motor, travel and home insurance to their customers.
Technology and distribution
There is a shift taking place in the distribution mechanisms in the UAE, largely propelled by the advanced level of technology and the majority of expat population who are familiar with modern methods of purchasing insurance. Aside from bancassurance and online sales, the use of aggregators has picked up in the country recently with five platforms offering comparison services.
Aggregators’ share of the GWP is estimated to be around 5%, mainly from motor insurance. However, there is definitely a broad market for them in the coming few years and they are gaining acceptance with time, said Mr Al-Jaedi. “Digital distribution is helping the market expand. Presently aggregators offer motor and medical in an interactive way through rating insurers’ quality of services (by stars).”
Union on right track for growth
Mr Al-Jaedi believes that the market has a great potential and serious players can grow profitably. “Union has managed to grow amid tough market conditions.”
The company market share is 4.3% with premium income of AED952m in 2018. It preserved its level of profits last year at AED10m after investment losses. The company is ranked as the sixth largest listed insurer in terms of GWP “and targets to sustain its position among the market leaders in the industry”.
Success is in differentiating services. “We try to add value to the quality of the product and level of services while at the same time enhancing the customer experience.” Union is the first insurance company using artificial intelligence to develop an AI-empowered motor insurance system that issues a motor policy in less than one minute.
He believes the market will grow satisfactorily this year. “There are growth prospects with expectations for business to be more active. We have witnessed an increase in business in the first two months of 2019 and that’s a promising start to the year.”
DNIR sustains positive performance
Last year, DNIR achieved another success. The company managed to grow its top line by 8.7% to AED351m from AED323m in the preceding year. Profits have also grew to AED53m, achieving a 6% increase. “Thanks to our prudent underwriting strategy, we have been able to maintain a healthy book of business. The goal is to continue with the same spirit in order to progress ahead,” said Mr Abou Zeid.
He expects a better year ahead for his company and the market in general. “Despite challenges, insurers can find means to grow. The market is promising and full of opportunities for those who know how to find their niche.” M