If some insurance executives are to be believed, the Middle East and North Africa (Mena)region is gearing up for a period of rapid expansion. Growth in premiums is outstripping economic growth and new personal lines are finding a greater reception in a market where insurance is still, relatively speaking, a novel financial concept.

Although insurers have as a whole traditionally struggled to turn a decent profit in the region, there are signs that better times may be on the way.

Some of the uplift is a result of greater efforts on the part of regulators. In Saudi Arabia, the central bank and sector regulator Saudi Arabian Monetary Agency (Sama) has been actively encouraging firms since last year to price cover at a rate that will enable them to make a profit. In the kingdom, at least, this is expected to lead to more realistic pricing.

Growth potential

The prize at stake for insurers is a chance to win market share in an underpenetrated industry that bears all the right demographic hallmarks for long-term expansion. With premiums accounting for just 1.3 per cent of gross domestic product – a fifth of the global average – there is huge potential for growth.

The market has been steadily expanding in recent years. According to Qatar Financial Centre Authority’s (QFCA’s) 2013 Mena insurance barometer, the region’s insurance market was worth about $42bn in annual premiums in 2011, up from $26bn in 2007. Non-life markets, which accounted for $35bn in 2011, are growing at an average annual growth rate of 7.5 per cent, the survey finds, while the life market, accounting for $6.6bn, is expanding by 10.1 per cent a year, adjusted for inflation.

Personal lines are showing the stronger growth prospects, as these benefit from the general increase in regional affluence levels.

“There are many reasons why we expect personal lines to continue to grow,” says Akshay Randeva, director of strategic development at the QFCA. “The first is that takaful [sharia-compliant insurance] is tackling the perception of insurance as not being culturally appropriate. The second is the favourable demographics – the average age of population in most Mena countries’ is below 30. The third is the growth in compulsory lines, such as motor and health. And finally, as the expatriate population grows, this [fuels growth in premiums] as there is a greater appreciation of the need for insurance among expats.”

For all the potential, however, the industry’s profitability is constrained by what the QFCA describes as fierce competition and an abundance of reinsurance capacity, which is putting pressure on technical results and driving up acquisition costs.

In the UAE, there are more than 60 insurance companies, while Saudi Arabia has 33. These are more than the market can justify in terms of its still limited premium levels. The coming year is unlikely to see moves towards consolidation, however. According to the QFCA, the majority of its survey participants do not expect merger and acquisition (M&A) activity to increase over next 12 months.

Although premium rates are low, especially in commercial lines, the profitability picture is brighter

Akshay Randeva, Qatar Financial Centre Authority

“The reason is the relatively comfortable capitalisation of domestic insurers and family owners’ general reluctance to engage in M&A activity,” says Randeva. “In fact, some market participants expect market concentration levels to decrease even further as small foreign insurers start to enter the market.”

Regional expansion

Another factor preventing faster consolidation is that, despite the competition, a large number of regional players are generating enough profits to not need to think about merging.

“Although premium rates are low, especially in commercial lines, the profitability picture is brighter as companies still generate decent underwriting income because of low loss ratios and generous commission income from reinsurers. By and large, Mena insurers are still profitable,” says Randeva.

Pressure for consolidation is perhaps greatest in Saudi Arabia, where of the 33 insurance firms in the market, 11 posted a loss in 2012.

There are some compelling drivers for consolidation, with regulators encouraging participants to price for quality, which will affect the smaller market participants and the regional expansion of pan-Arab insurance companies.

“We’re seeing the Saudi regulator requiring much greater actuarial analysis of premium rates and likewise in the UAE, we’re seeing some suggestion that regulations are moving in a similar direction,” says Peter Hodgins, an insurance specialist and partner at the Dubai office of international law firm Clyde & Co. “But across a lot of lines of business, it still remains quite a competitive market and rates are relatively soft compared with elsewhere in the world.”

Regulatory influence

Regulation is a key driver in the insurance industry, with Saudi Arabia and Abu Dhabi’s promotion of compulsory medical lines seen as responsible for the faster growth rates seen in those markets.

Dubai is expected to follow Abu Dhabi with its own compulsory scheme, but its commencement was postponed from its original 2011 start date. The Dubai Health Authority announced then that the implementation of mandatory health insurance for local employers would be delayed by two more years due to the financial crisis and no new date has been set. 

Such delays represent a setback for the industry and are a reason why premium growth rates are failing to recapture their more aggressive levels of previous years.

“Five years ago, the main Middle Eastern markets were experiencing double-digit premium growth, but this was from a low base. It has petered out the past two years to about 5-6 per cent a year,” says Mahesh Mistry, director at AM Best, a US-headquartered credit rating agency to the global insurance industry. “It’s not grinding to a halt, but there has been a material slowdown in recent years, [such as] the delay of Dubai’s compulsory healthcare insurance.”

The main international insurance players are operating in the market in some form, so there’s a lot of interest

Mahesh Mistry, AM Best

But Qatar’s decision in December 2012 to repeal its old insurance law dating back to 1966, is a sign Gulf states have not lost sight of the need for effective regulation of the insurance market. The new law empowers Qatar Central Bank to act as the regulator for the insurance sector. Oman is also overhauling its insurance law, with new legislation expected imminently.

“The new law in Qatar will bring companies operating outside the Qatar Financial Centre under the QCB’s regulatory oversight,” says Randeva. “This is a very welcome development and is going to be extremely dynamic for the financial services industry as a whole and may even be a signalling factor for the region’s insurance market.”

Among the business lines experiencing strong growth in the Mena region, motor, personal accident and healthcare insurance are the fastest, reflecting the compulsory insurance regulations in key markets.

These lines comprise the bulk of the business of insurers. “Medical and motor are always the bulk of the lines and as a rule 65-70 per cent of premiums will come out of those two areas. And that business is largely written by local insurance companies,” says Hodgins. “However, when you look at the life side, which is far smaller, that is an area dominated by international insurance players.”

Expatriates are responsible for much of the growth in the region, with employers providing medical cover and their general greater understanding of the concept of insurance. And as economic growth accelerates, the numbers of expatriates in the region are expected to rise.

“The main international insurance players are operating in the market in some shape or form, so there’s a lot of interest,” says Mistry. “But if you look at the UAE, where premiums are about $6bn, compared to Kuwait where it’s less than $1bn, companies are likely to chase the larger markets.”

The QFCA insurance barometer notes that half the respondents expect foreign non-Mena based insurers to gain market share over the next 12 months, with their greater technical expertise, customer focus and distribution channels. 

In large markets such as the UAE and Saudi Arabia, there has been an increase in so-called “fronting arrangements”, whereby foreign insurers act as reinsurers of the local business. “The foreign partners will put in a lot of know-how and intellectual capital and try to work with the local players as a way of building market share here,” says Hodgins.

Some major life insurers, such as Sweden’s Skandia and the UK’s Standard Life, have entered the Dubai International Financial Centre as a way of getting a foothold. In Saudi Arabia, Japan’s Tokio Marine launched a joint venture with local development bank Alinma Bank that will focus on takaful motor, fire and other cover.

Islamic insurance

Takaful, however, has yet to regain the momentum it enjoyed five years ago in the Mena region. The QFCA Mena insurance barometer found that only 38 per cent of respondents expect takaful to outprice total insurance premiums, with business models for takaful insurance believed to be in need of thorough review.

“The industry’s on a learning curve and finding out there is more than one way to do takaful,” says Randeva. “One way takaful might enjoy better prospects is through family (life) takaful solutions distributed via Islamic banks.”

With greater regulatory activity on the agenda, the region’s strengths may assert themselves sufficiently to enable insurers to invest more in developing key products. If profitability can be strengthened, as premiums grow more competitive, the entry of foreign insurers should also provide for a greater product offering for consumers.