As the first emirate in the UAE to roll out mandatory health coverage, Abu Dhabi’s insurance sector has benefitted from over a decade of strong growth in both the life and general lines, with the UAE home to the region’s largest and most mature insurance market. Still, 2015 was a difficult year for the industry, as underwriters struggled with prevailing low global oil prices, increasing market competition, and sweeping regulatory reforms requiring many to realign internal process and restructure operations to meet rising national standards. Although the sector returned to profitability in 2016, strong competition continues to weigh on loss and retention ratios.
Insurers are set to remain profitable in 2017, as mandatory health schemes continue to expand, while technical capacity and underwriting performance should continue to improve under the recent reforms’ rolling deadlines. Changes to the life insurance segment could have a profound mid-term impact, however, after the UAE’s Insurance Authority (IA) released a series of proposed new life regulations late in 2016.
Legal Framework
Federal Law No. 6/2007, or the Insurance Law, is the primary piece of legislation overseeing the sector, establishing a legal framework for all entities operating in the country, and the IA as the main body in charge of overseeing the industry. The IA’s board of directors also governs the UAE’s insurance framework, under Resolution No. 2 of 2009, which issued executive regulations for the Insurance Law. Under the law, the IA enforces provisions and acts in a supervisory capacity for insurance companies and related professions. The authority is expected to support sustainable development for the sector, enhance activities in the UAE to reduce risk and promote economic development, protect fair and effective competition, and to Emiratise jobs in the industry.
The Emirates Insurance Association predates the IA, and was created through Ministerial Decree No. 62 of 1988 to act as an umbrella agency for all insurance companies operating in the country, as well as most of its insurance-related professionals.
Foreign firms are permitted to write business directly in the UAE through an agent or branch, provided the company makes an application to the IA and pays the initial registration cost of Dh10,000 ($2720). The IA also requires certain documents, including an economic feasibility study, company business plans and an actuary certificate for life insurance providers, which includes approval on the basis of calculating insurance premiums, adequate technical provisions, compliance with solvency margins and a minimum guarantee amount.
Compulsory Lines
Abu Dhabi was the first emirate in the UAE to enact compulsory health insurance legislation, with the promulgation of Law No. 23 of 2005, which established the National Health Insurance Company – Daman. This was followed by Resolution 83 of 2007, which directed the Health Authority – Abu Dhabi to launch a programme offering health insurance for “UAE nationals and those of similar status”. Titled Thiqa (“trust”), the programme is delivered through a number of third-party administrator (TPA) health insurance companies, as well as Daman, which manages the programme on behalf of the government. Reforms aimed at streamlining the Thiqa programme have seen premiums for both Emiratis and white-collar expatriates increase over the past year. Motor vehicle and construction insurance are also mandatory in the UAE.
At A Glance
The IA reported that there were 61 insurance companies registered in the UAE at the opening of 2016, including 34 national insurance operators and 27 foreign insurance companies. The total number of companies underwriting all insurance classes, including personal insurance, fund accumulation operations, and property and liability insurance, stood at 13, of which 11 are national companies. Meanwhile, the total number of companies underwriting non-life, or property and liability insurance, stood at 20 national and 18 foreign companies. Nine companies offered only life and fund accumulation products, including two national and nine foreign companies, while a total of 11 companies in the UAE currently offer takaful ( sharia-compliant insurance) coverage. One company, the Dubai-based Export Credit Insurance Company of the Emirates, underwrites export credit insurance.
The IA reported there were 19 insurance agents in operation in the country at end of 2015, and 143 insurance brokerage companies – including 139 national and four foreign companies. Sixteen insurance consultants were registered to operate, as well as 40 loss adjusters and damager estimators, 35 actuaries and 23 TPA health insurance companies.
Major Sector Players
Abu Dhabi National Insurance Company (ADNIC) is the third-largest insurer in the UAE by gross written premiums (GWPs) and largest Abu Dhabi-based insurer, with an estimated market share of 15% among listed companies in 2014. Dubai-based Oman Insurance Company and Orient Insurance hold first and second place in the market, respectively, with the top-three companies generating around 46% of market premiums as of mid-2016, according to ratings agency Standard & Poor’s (S&P).
The Abu Dhabi Securities Exchange is currently home to 17 of 29 listed insurance companies in the UAE, including: Al Ain Al Ahlia Insurance Company; ADNIC; Al Buhaira National Insurance Company; Al Fujairah National Insurance Company; Al Khazna Insurance Company; Al Wathba National Insurance Company; Emirates Insurance Company, the fourth-largest by GWPs; Green Crescent Insurance Company; Insurance House; United Insurance Company; Methaq Takaful Insurance; Ras Al Khaimah National Insurance Company; Sharjah Insurance Company; Abu Dhabi National Takaful Company; United Insurance Company; Union Insurance Company; and the National Takaful Company, or Watania.
Recent Growth
According to the IA’s 2015 annual report, GWPs for the UAE’s insurance industry rose by 10.2% in 2015 to Dh37bn ($101.bn). Foreign firms’ market presence continued to grow in 2015, with the IA reporting that foreign companies accounted for 79.4% of life insurance premiums, up from 69.7% in 2012 and 78.2% in 2013. National companies maintain a dominant position in the non-life segment, however, accounting for 74.1% of total premiums, according to the IA. Non-life GWPs rose by 10.4% to Dh27.5bn ($7.5bn) in 2015. Of this, medical insurance accounts for 47.8% of GWPs, followed by accidents and liability at 34.3%, fire insurance at 8.4% and transportation insurance at 6%. GWPs in the life and pension segment stood at Dh9.5bn ($2.6bn), or 20.6% of the total, up from Dh8.6bn ($2.3bn) in 2014. Gross earned premiums in the non-life segment stood at Dh26.4bn ($7.2bn) in 2015, while gross incurred losses in non-life classes, before deducting the reinsurers’ share, was Dh20.7bn ($5.6bn).
Industry investments have been high, and the IA reported that the total amount of investments held by insurance companies in the UAE stood at Dh45.7bn ($12.4bn) in 2015, of which 60.5% is in stocks and bonds, and 20.7% in deposits. Shareholders’ equity in national insurance companies was Dh17.5bn ($4.8bn) in 2015.
Slowdown In 2015
In January 2016 S&P reported that despite recording consistent premium growth, the sector had been negatively impacted by regulatory reforms and a macroeconomic slowdown. The agency reported that the UAE’s 29 listed insurance companies recorded an aggregate net underwriting deficit between January and September 2015. The firms’ net combined ratio, which includes losses and expenses, stood at 103% over the period, compared to 102% in 2014 and 97% in 2013. Any number over 100 is a loss.
The UAE’s insurance industry suffers from high loss ratios and low premium retention, indicating the negative impact of intense competition in the market. According to the IA, gross loss ratios for general, non-life insurance classes stood at 78.3% in 2015, compared to 75.3% in 2014. Loss ratios are particularly high in the medical segment – at 91.9% – followed by fire insurance at 90.2%, accidents and liability insurance at 73.1%, and transportation at 42.5%.
Market Reaction
Rising competition in previous years has led many companies to chase top-line growth over profitability. In many circumstances this has led to price wars spurring underwriting losses. “It is necessary to maintain an acceptable level of underwriting to maintain technical results despite the pressure on growth and market share acquisition, partly due to unsustainable pricing philosophies driven by some insurers in the GCC market,” Mahdi Attya, regional head of direct business at AXA Gulf, told OBG. “These practices are leading to a deterioration of either the service offered to customers or reduced benefits given by employers to their employees.”
General insurance lines have become so competitive, and profits so low, that some firms have overhauled their business strategies and internal operations. In November 2015, for example, Zurich Insurance Group announced it would exit its general insurance business in the UAE by the end of 2016, following a review which found that the investment needed in the market was not justified by its limited growth potential. The company ceased offering new services to retail and small business customers as of November 2015, and has not renewed any policies since then, although it continues to offer life insurance products.
Ratings agency A.M. Best, meanwhile, reported in May 2016 that ADNIC was taking steps to support solid rating fundamentals over the medium term. This included improvements to its governance structure and underwriting discipline, such as restructuring the company’s claims and reserving processes.
Reforms
Insurance companies have also been affected by sweeping regulatory reforms supporting the IA’s mandate to encourage consolidation among small and medium-sized players. In January 2015, after finishing a three-year review of new federal financial regulations, the IA released new regulations setting requirements related to investment limits, capital, solvency, technical provisions, records keeping and accountancy. Although stakeholders broadly welcomed the regulations as a strong step forward in developing and strengthening the sector, they also created short-term challenges for the industry. “The new IA regulations, including the financial regulations for conventional and takaful insurance companies, were tailored to meet the most advanced international standards and cope with the special characteristics of the Emirati insurance market,” Ebrahim Al Zaabi, director-general of the IA, told OBG. “Therefore, we believe that compliance with such regulations, which are risk based, represent an opportunity for insurance companies, regardless of their size. It is a step towards further excellence.” The new regulations include implementation of proper reserving, actuarial certifications, introduction of better governance and controls, and also highlight requirements for investment portfolio alignments. EY reported that Saudi Arabia had recorded positive results after implementing reserving and actuarial-led pricing reforms, with the market growing significantly as a result, and was expected to surpass the UAE as the largest insurance market in the GCC as a result.
Compliance
The first round of compliance deadlines passed on January 29, 2016, setting records keeping, financial reporting and audit functions mandates. The next deadline, on January 29, 2017, brought regulations regarding corporate governance, technical provisions, and section-one investment of policyholder rights and asset valuation. The final deadline, which is set for January 29, 2018, will bring into force regulations regarding solvency and minimum guarantee funds, investment of policyholder rights and insurer assets valuation for real estate and insurance. “These moves were prompted by the realisation that companies across the industry were not performing well, with the main reasons being poor pricing, and the way many were approaching underwriting,” Ahmad Idris, CEO of ADNIC, told OBG. “Most firms participated in price wars, so the authority’s measures ensure pricing is now based on actuarial analysis, a proper assessment of risk and reporting that is built on templates.”
UAE insurers struggled to meet the new regulations’ rolling deadlines, however, with a survey conducted jointly by EY and Munich Re in 2015 reporting that 40% of UAE respondents do not have a dedicated risk management department, which will play an essential role in bolstering compliance. Low capitalisation is also a challenge. In September 2015 S&P reported that a total of five UAE-listed insurers had employed capital below the regulatory minimum requirement of Dh100m ($27.2m), noting that those most in need of capital often had the worst earnings records.
Rebound
Despite the challenges, the insurance sector recorded a more positive performance in 2016, with listed companies reporting a return to profitability in terms of both net income and GWPs. Indeed, in November 2016 S&P reported that despite ongoing regulatory uncertainty, 2016 was a positive year for UAE insurers, with most experiencing strong premium growth during the first six months of the year. According to the agency, growth in technical reserves has kept pace with increases in premiums, despite a potential weakening of companies’ capital adequacy, while the market is expected to have returned to profitability in terms of underwriting and net income, following losses in 2015.
S&P data shows that the 29 listed insurers registered a Dh573m ($156m) profit during the first six months of the year, a 118% increase over Dh263m ($71.6m) during the first half of 2015. GWPs for conventional insurers rose by 10% during the first six months of 2016, compared to 5% in the same period in 2015, with growth more heavily weighted towards the larger players. S&P reported that should first-half profits remain sustainable for the rest of the year, it would mark a significant recovery for the sector over 2015, when listed companies recorded an aggregate loss of Dh123m ($33.5m).
Return To Growth
ADNIC stands as a useful case study for the sector’s recent recovery, returning to profit in 2016 following two years of losses, which many ratings agencies have attributed to a restructuring programme aimed at boosting capitalisation and underwriting performance. The company reported that net profits hit Dh205m ($55.8m) in 2016, compared to a net loss of Dh334.5m ($91.1m) in 2015. Net underwriting income rose to Dh343.6m ($93.5m), compared to a Dh228.9m ($62.3m) loss the previous year, and written premiums remained mostly flat at Dh2.4bn ($653.4m), up 4% year-onyear. Although retention rates worsened, from 48% in 2015 to 44% in 2016, cash balances increased by 54.4% to Dh1bn ($272.3m). The total assets of the company also rose by 15.8% to Dh6.5bn ($1.8bn).
This growth came in the wake of a bold restructuring programme and measures to raise new capital, both of which won praise from S&P in March 2016, when the agency affirmed the company’s A- long-term insurer financial strength and counterparty ratings, with a stable outlook. S&P also removed ADNIC from the CreditWatch list it had been added to in August 2015. “We assess ADNIC’s financial risk profile as strong. Although its shareholders’ equity declined to Dh1.2bn ($326.7m) at year-end 2015 from Dh1.6bn (435.6m) in 2014 as a result of underwriting losses, the insurer has restored its capital adequacy by issuing a three-year mandatory convertible bond, valued at Dh390m ($106.2m). In our view, this is a substantial and permanent reinforcement of the company’s capital adequacy, which we now view as extremely strong,” the agency reported.
New Life Regulations
The industry is set for another shake-up, however, after the IA’s November 2016 issuance of a consultation paper, Circular No. 33/2016, or the Life Regulations. These bold reforms could significantly alter the way life products are priced and sold in Abu Dhabi, through the introduction of comprehensive consumer protection aimed at bringing the UAE’s insurance market in line with those of the UK and Hong Kong, both of which have introduced strong consumer-oriented changes in recent years.
The Life Regulations introduce a ban on indemnity commission, a cap on commissions available for savings, short-term and bancassurance life products, minimum death benefits for life policies, and a compulsory disclosure regime aimed at better-informing consumers of commission fees charged under the policy and a 20 working-day “free look period” following policy purchase. In a legal analysis of the Life Regulations, law firm Clyde & Co reported that proposed measures prescribing new commission caps will fundamentally affect the manner in which most life insurance in the UAE is sold. Upfront commissions would be banned outright, with the commission expected to be linked to the premium collected over time.
This is problematic, according to Clyde & Co, because the ability for a product manufacturer to pay large upfront fees has been one of the most important means for incentivising product sales.
Commission Caps Proposal
In addition to the ban on indemnity commissions, the IA has proposed a series of commission caps. The maximum commission for savings products with a periodic premium would be set at 4.5% of the premium, with an overall cap of 90% of the annual premium. Savings products with a single premium would be capped at 4.5% of the single premium, pro-rated over 12 months.
Term products’ commission caps would be set at 10% of periodic premium, with an overall cap of 160% of the annual premium. Short-term products commissions would be capped at 25%. In addition, the IA has also proposed introducing restrictions on insurers who cross-subsidise distribution channels, with the intent of exempting consumers from expenses not directly rising from their purchase. However, Clyde & Co reported that this is a particularly burdensome obligation on insurers owing to the additional records keeping entailed in tracking expenses on a per-distribution channel basis.
Despite these concerns, the firm praised the regulations, noting that the IA has, for the first time, explicitly recognised the investment focus of most modern life products – a welcome change for many stakeholders who argue that the standards around disclosure and advice of financial benefits of life products must be improved for the market to mature. “The measures proposed also serve to address the historical lack of certainty around the role brokers and financial advisers play in advising on the financial performance of life products, and introduce important and long overdue conduct of business rules,” Clyde & Co reported.
Outlook
Although Abu Dhabi’s insurance industry has grappled with the challenges of rising competition, significant regulatory reforms and a subdued business environment, the sector nonetheless remains well-positioned for steady growth over the medium term, with industry players remaining optimistic. “Penetration remains low by global standards, with lots of room for improvement,”Idris told OBG. “Furthermore, the performance of classes like medical and motor are improving, helping counteract the slowdown being experienced by others.”
Improvements to underwriting capacity should help reduce loss ratios and support profit growth, while ongoing regulatory reforms in both the general and life segment could dramatically change the face of the industry, bolstering consumer protection mechanisms and potentially prompting a long-awaited wave of consolidation, supporting a stable, long-term growth path.
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