Rules to benefit UAE insurers long-term
The UAE insurance industry is the largest in the region and produced over $9.1 billion of insurance revenues in 2014 , equating to approximately 41 per cent of the premiums written in the GCC.
Amid low oil prices, new reforms introduced for the UAE insurance industry may initially cause a shake-up but they are essential for the long-term benefit and development of the industry, experts say.
"The UAE insurance industry is going through some serious challenges. New regulations for the insurance sector were introduced in January 2015 by the UAE Insurance Authority, which may lead to short-term challenges for the industry as insurers adjust and adapt to the new regulations. While the new reforms may initially cause a shake-up, they are essential for the long-term benefit and development of the industry," said Sanjay Jain, Mena Insurance Advisory Leader, EY.
New UAE regulations will include the implementation of proper reserving, actuarial certifications, introduction of better governance and controls and re-alignment of investment portfolio.
Saudi Arabia recently implemented similar reforms such as the introduction of new guidelines around reserving and actuarial-led pricing, which initially resulted in less than ideal financial results and a strong reaction from the market. However, the Saudi market has grown significantly in the current financial year and is now expected to surpass the UAE in the near future to become the largest insurance market in the GCC, EY said in a report.
The UAE insurance industry is currently the largest in the region and produced over $9.1 billion of insurance revenues in 2014, equating to approximately 41 per cent of the premiums written in the GCC.
Saudi Arabia is the second largest insurance market in the GCC, with total premiums of $8.1 billion in 2014, and represented over 36 per cent of the GCC premiums written in 2014 with a compound annual growth rate of 20.3 per cent during 2006 to 2014. Arqaam Capital, a specialist emerging markets investment bank, has revealed that the Saudi insurance sector is set to maintain a strong yearly growth of 14 to 17 per cent during the next five years fuelled mainly by the enforcement of regulations.
Jaap Meijer, managing director and head of equity research at Arqaam Capital, said: "We expect the Saudi insurance sector to be the least affected by weaker oil prices, budget cuts and tightening liquidity as the enforcement of existing regulations will propel motor and medical premiums growth at a rate of 15 to 25 per cent and 14 to 16 per cent respectively. We estimate that Sama's enforcement of mandatory medical and third-party liability insurance would account for half of the growth during the next five years, adding 3.5 million medical policyholders and three million insured vehicles."
Insurance penetration within the GCC is well below two per cent of GDP (apart from the UAE and Bahrain), compared with 5.2 per cent in Austria, which has similar premium size to the GCC and much lower than that of advanced economies such as in the US (7.3 per cent) and UK (10.6 per cent).
At a recent event attended by market players in the UAE insurance industry, EY presented the results of the UAE insurance market risk management survey, jointly conducted with Munich Re earlier this year. The survey highlighted that a considerable amount of work remains to be done; 40 per cent of the responding insurance companies in the UAE said they do not have a dedicated risk management department.
The survey gauged the maturity of ERM practices in Saudi Arabia and the UAE, identifying risk management challenges that insurance companies face and take a view on the risk governance practices.
"While the global insurance sector is facing disruptive changes in the form of digital; aggregators; driverless cars; robotics, etc., Mena insurers are facing increased challenges due to oil price volatility. The situation in the UAE is further compounded by the changing regulatory regime, which will put additional pressure on insurers, particularly on the marginal players. However, these changes will be an opportunity for those insurers who have the vision, ability and financial resources to take advantage of potential market consolidation.