In terms of gross written premium (GWP), the UAE’s insurance market has ranked first within the MENA region since 2008. In 2018 it had the highest insurance penetration and density levels in the GCC, at 2.9% of GDP and $1195, respectively. Abu Dhabi’s insurers play an important role in the sector, but as of 2020 they faced a number of changes to the domestic business environment, including new regulations and accountancy standards considered essential to the industry’s long-term sustainability.
Market Structure
The federal nature of the UAE means that Abu Dhabi’s insurers sit within a wider national market, which was made up of 62 insurance companies in 2019. Of these, 35 were national companies. The five largest operators in terms of GWP were Orient Insurance, Oman Insurance Company, Abu Dhabi National Insurance Company (ADNIC), Al Ain Ahlia Insurance Company and Islamic Arab Insurance Company. In 2018 foreign subsidiaries operating in the UAE accounted for 37% of GWP, or around Dh16bn ($4.4bn), while national companies made up the remaining 63%, at Dh27.7bn ($7.5bn). The 27 branches of foreign insurance companies with licensed onshore operations include brands from some of the world’s biggest insurance markets, such as United Fidelity Insurance Company, American Life Insurance Company, Zurich Insurance Group and Tokio Marine. National companies account for the majority of market premium in all areas, with the exception of life coverage where they account for around 25%.
Most insurance activity in Abu Dhabi and the wider UAE is carried out along conventional lines, but in recent years a vibrant sharia-compliant segment has emerged, and in 2018 it accounted for around 10% of GWP, up from 9.5% in 2017. Meanwhile, health insurance makes up the largest share of aggregate GWP in the takaful (Islamic insurance) segment, at Dh1.7bn ($462.7m) out of Dh4.4bn ($1.2bn) in 2018.
Regulation
The UAE Insurance Authority (IA) is responsible for the licensing and regulation of onshore insurers and related professions in the UAE. For those firms based in the Abu Dhabi Global Market (ADGM) – an offshore financial zone situated on Maryah Island – the Financial Services Regulatory Authority (FSRA) maintains a regime closely aligned with international standards and best practice.
The next regulatory milestone will be implementation of the International Financial Reporting Standards (IFRS) 17, which is set to replace IFRS 4. The revised framework alters the way insurers classify their assets, requiring them to group their insurance contracts into separate portfolios according to their perceived risk. After assessing the readiness of the industry in October 2018, the IA postponed application of the standards until early January 2022.
Offshore
ADGM’s core responsibility is wealth and asset management. It has its own regulatory structure, legal system and independent registrar, with its own rules for insurance business. Although still in the early stages of development, ADGM’s insurance segment includes management companies like Aon and Marsh Management Services, in addition to captive insurers and reinsurers such as Mubadala Reinsurance and ADNOC Reinsurance.
Consolidation
With the high number of insurance companies found in the country, some consider the UAE’s insurance market to be in need of consolidation. Although the possibility of consolidation has been a topic in the industry for a number of years, the full implementation of new financial regulations in 2018 has given fresh impetus to the prospect of mergers and acquisitions. Indeed, the IA is encouraging such moves, with the aim of creating more competitive and resilient insurance entities, and boosting international competitiveness. In 2019 the regulator told OBG that it was studying a request for a merger between two insurance companies.
Recent action taken by the government may also increase the level of foreign participation in the sector, either through acquisitions or via new entrants. In May 2017 a nationwide Cabinet resolution amended Resolution No. 42 of 2009, concerning minimum capital regulations, to lower the share of capital held in a company incorporated in the state owned by “natural persons of the UAE or GCC nationals” from 75% to 51%.
Local Giants
Abu Dhabi-based insurers play an important role within the wider UAE market. In 2018 the emirate accounted for the nation’s second-largest share of total GWP after Dubai, with Dh11.9bn ($3.2bn). In the engineering, construction and energy segment it posted the largest GWP of all emirates, with Dh865.1m ($235.5m).
Three of the UAE’s top-five insurers by assets are headquartered in Abu Dhabi. ADNIC, which is 23.8% state-owned, has been a market leader since its creation in 1972. By end-2019 ADNIC’s total assets reached Dh7.9bn ($2.2bn), up from Dh7.3bn ($2bn) in 2018 and ahead of Al Ain Ahlia, Abu Dhabi’s second-largest insurer, which held assets of Dh4.5bn ($1.2bn). Established in 1975, Al Ain Ahlia has followed a trajectory similar to that of ADNIC, diversifying away from large commercial projects to a wider array of business lines. Abu Dhabi’s government retains a 19.7% interest in Al Ain Ahlia through the Abu Dhabi Investment Council. Rounding out Abu Dhabi’s top-three insurers is Emirates Insurance Company, a non-life firm, in which the government holds a 12% stake. The company was established in 1983 and held Dh2.8bn ($762.2m) in total assets at the end of 2019. Meanwhile, a number of the UAE’s most prominent takaful players are also headquartered in Abu Dhabi, including Abu Dhabi National Takaful Company, Methaq Takaful Insurance Company, Al Hilal Takaful, Insurance House and Watania.
Retention & Reinsurance
The UAE’s insurance market shows relatively high cession rates, as a result of which around one-third of the premium gathered in the country is passed to reinsurance companies based in Europe, Asia or the US. According to the most recent data published by the IA, in 2018 the domestic insurance market – including both local and foreign companies – retained 62.8% of its premium, compared to the OECD’s average retention ratio of 85%. In 2018 the aggregate retention rate in property and liability business for national companies stood at 41.9%, while in health coverage 55.6% of premium was retained.
Establishing an insurance sector with the capacity to retain more of its premium is a priority for most regulators in the wider GCC market. To that end, the IA has formulated new regulations for the segment, of which draft proposals were first put to the industry in 2017. The goal of the new framework is to encourage the creation of national reinsurance companies and attract leading international reinsurance firms to establish operations within the UAE. Accordingly, the rules cover central functions such as licensing and regulation, branch operations, participation in reinsurance pools and the internal control of reinsurance business. Local insurers are required to provide the IA with forecasts of their reinsurance activity, which must be conducted with reinsurers that meet minimum classifications as issued by accredited bodies such as Moody’s and Standard & Poor’s. As of early 2020 there was no national reinsurer in the UAE, and only one reinsurer operated in the country’s onshore segment.
Performance
Insurers are working to overcome challenges that persist in the wake of the 2008 global economic crisis. Economic fallout from the crisis had an impact on underwriting and investment activity, ending an era in which insurance companies could rely on strong investment results to offset less robust technical performances. More than a decade later the industry faced similar pressures with lower oil prices and the Covid-19 outbreak, though as of mid-June 2020 the full impact of the virus on the economy was too early to assess.
The oil price decline that took place between mid-2014 and early-2016 disrupted regional growth and constricted both premium and investment income. The regulatory responses to these events, though vital for sector stability, have further challenged insurers. One notable reform came in 2015, when the IA issued rules that limited insurers’ exposure to real estate to a maximum of 30% of invested funds, while at the same time requiring them to maintain a minimum of 5% exposure to cash and deposits.
According to actuarial and consulting company Milliman, the industry’s average investment return fell from around 8.5% in 2017 to 7.1% in 2018. However, the net combined ratio showed a modest increase over the same period, rising from 83.7% in 2017 to 84.4% in 2018. This remains comfortably below 100%, above which level companies pay more money in claims than they receive in premium.
Despite the decrease in average investment return, the insurance industry in the UAE has maintained a steady rate of growth. According to preliminary figures from the IA, total GWP in the UAE reached Dh44bn ($12bn) in 2019, up nearly 1% from Dh43.7bn ($11.9bn) in 2018. Insurers have also remained profitable, in part due to regulatory boosts in the form of mandatory health coverage and an increase in the government-defined level of motor tariffs. In the first half of 2019 UAE-listed insurance companies posted an aggregate net profit of Dh1.02bn ($277.6m), up 2% from Dh1bn ($272.2m) over the same period in 2018.
While it remains to be seen how the spread of Covid-19 in early 2020 will affect the emirate’s insurance market and broader economic performance, a number of factors give cause for optimism. Health care services for internationally recognised pandemics are deemed to fall outside the scope of private insurance coverage in the UAE, with treatment being provided by the public sector. Furthermore, the federal government unveiled a Dh16bn ($4.4bn) economic stimulus package in early March 2020.
Lines
Insurers in Abu Dhabi are permitted to focus on life and non-life insurance, or to act as composite insurers covering both types of business. Health and motor insurance are currently the two major compulsory lines at the national level and form a significant proportion of the industry’s GWP. This is also true in the wider UAE market. In 2018 health insurance was the largest segment in the industry, accounting for approximately Dh19.1bn ($5.2bn) of the UAE’s total Dh43.7bn ($11.9bn) in GWP. In Abu Dhabi health insurance makes up Dh6.8bn ($1.9bn) of the total Dh11.9bn (3.2bn) in GWP. Employers in Abu Dhabi have been required to provide medical insurance to their employees since the emirate implemented Law No. 23 of 2005.
Motor insurance, meanwhile, is the largest component of the property and liability – or non-life – market, accounting for nearly Dh1.6bn ($435.5m) of Abu Dhabi’s total GWP in 2018. Other important non-life segments include fire, and engineering, construction and energy. Life insurance in the UAE, as with other markets in the region, remains relatively undeveloped, valued at just 8% of GWP at the regional level. According to the IA, in Abu Dhabi individual life insurance contributed Dh747.1m ($203.4m) to the emirate’s total GWP in 2018.
The IA has sought to boost the contribution of life coverage, and in late 2019 introduced its new financial regulations, which are aimed at strengthening the life and family takaful segments. The revised framework requires that commission payments be spread out across the product’s term, instead of being paid up front. This works to address the industry practise in which customers buy into long-term savings or lump-sum products sold by intermediaries – such as independent financial advisors – only to find that early gains are eroded by commission fees. The regulations also place caps on indemnity commissions and make it easier for customers to back out of product agreements in the early stages.
Outlook
Increased regulatory costs, the introduction of stricter accountancy standards and Covid-19 are likely to put pressure on profitability in 2020. However, the insurance industry’s long-term growth prospects remain strong. The UAE market, with its relatively low levels of penetration, has consistently outgrown more mature markets. Alpen Capital, a prominent financial adviser based in Dubai, forecast a compound annual growth rate of 4.2% between 2019 and 2024 for the country’s insurance market.
In terms of potential changes to the composition of GWP in Abu Dhabi and the wider UAE, any notable shifts are likely to be caused by the broadening of compulsory insurance. Beyond mandatory motor and medical coverage, compulsory insurance is currently limited to a small number of contractual insurance segments, such as professional indemnity insurance for international legal consultants and auditors.
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