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05 March 2024

Insurance market must consolidate

By Anthony Harris

I recently returned from the 27th GAIF (General Arab Insurance Federation) Conference that was held in Bahrain and attended by more than 1,400 delegates.

It was a stimulating experience to meet so many experts from every part of the insurance industry, from local and international underwriters to re-insurers, brokers and loss adjusters. At the same time, amid the rush of meetings and discussions, there was chance to look at where insurance is heading in the Gulf region.
There is no doubt in other areas of the world that insurance is a key part of the financial services industry and closely linked to banking and investment.

However in the Middle East it is the poor cousin: it grows rapidly but even in countries where there is an economic boom, fuelled by high energy prices, the insurance market remains minute.

Figures may be disputed but the overall picture is clear. In terms of insurance penetration, defined as premiums as a percentage of GDP, the figure for the Mena region in 2006 was 1.03 per cent, compared to the international average of 7.5 per cent.

The average for the Levant was slightly higher, but for the oil-rich countries it stood at around 1 per cent, despite their per capita GDP being well over $10,000 and growing fast.

Put another way, the amount spent on insurance in the Mena region on a per capita basis in 2006 was $41, compared to the global average of $555. The GCC countries show a healthier figure of $171 per annum, compared to say, North Africa, where the average is $21.
It is worth noting that in the UAE, premium income has grown the fastest in the Arab world, and is up by around 300 per cent in this decade.

Delegates to GAIF were unanimous on the needs of the industry. There should be more consolidation: there are too many insurance companies in the region, many of them small and under-funded.

Secondly the industry needs more regulation: there are inconsistencies in the way insurance is structured. Governments need to iron these out. Here at least, the GCC, with its consultative machinery, could give a lead, and by making insurance better organised and more transparent, it will assist the modernisation of the industry.

Thirdly, insurance, given the speed at which it is growing, needs a steady stream of well-trained recruits able to provide the management of tomorrow.

To me, insurance is a real profession: one of its more interesting aspects is that its practitioners come to be members of a large club. It is a “people business”, where friendships last over a career and survive any number of job moves, even to rival companies.

If we look more closely at the weaknesses of the present insurance industry in the region, I see four areas of concern. First, insurance is not seen as relevant or necessary by many people: witness the fact that the penetration rate for home insurance and home contents insurance stands at less than 5 per cent in the UAE, which is one of the more insurance-conscious countries in the region.

As insurance companies often point out, you can buy Dh100,000 worth of cover for around Dh400 per year, so the cost is not likely to be a deterrent. The reason for the lack of insurance awareness is therefore a social matter, linked to people’s religious beliefs and the fact the Gulf has a largely benign climate in every sense of the word.

Another factor is that many local insurance companies have tended to concentrate on the more basic insurance products, like motor, which is now compulsory everywhere; medical, which will be compulsory for employers before long; and some property insurance. (Abu Dhabi has already made medical insurance compulsory for Government employees.)
Some have been reluctant to move into more complex areas like marine insurance. Aviation, energy and engineering are all complex sectors, expertise for which there is a real need in the local market.

One consequence is that local insurers tend to retain little of the risk in these areas, and pass it on, either directly or through reinsurance brokers, to larger companies abroad.

This means that most of the premiums are also passed to foreign reinsurers mainly in the European or US markets. Clearly properly managed local insurers should be able to retain more risk and therefore more income, and grow organically from within.

Two other areas of concern in this part of the world are the funding of the insurance industry and its management. The big international insurers are funded by big investors, like banks, pension funds and hedge funds.

These bring huge capacity to the industry, and exert pressure to keep it profitable. Funds will soon go elsewhere if it is not.

In many Arab countries however, insurance companies are smaller and are often run as family businesses. These are unlikely to attract large amounts of capital if they are not seen to be performing to international standards.

This connects to the second point about management: as mentioned above, there is a serious need of good management. It is very clear which companies in the local market are performing well. They grow while others languish.

With a push from Governments, there could be greater consolidation, improving standards and an inflow of funds. This would give greater capacity to the local market, and result in more of the profit remaining in the region too.
Things are improving: Governments are well aware of the need for better regulation and better-run companies in this sector. Many are working on new insurance directives.

They need to cooperate more. The resources are available to build a stronger insurance industry given that most countries in this region are experiencing an unparalleled economic boom.

The growth of takaful, or Shariah-based Islamic insurance, is a sign the industry is trying to present its products in a new light, and attract clients who might not previously have been conscious of the need for insurance.

Takaful is growing fast, but it must be said it still is not expanding as fast as it might. The takaful industry faces the same problems as the conventional companies: awareness is low and more needs to be done at all levels to bring home the service that insurance and takaful can provide.

One element, extreme weather, might assist in bringing home the need for everyone to consider taking out more insurance. Cyclone Gonu, which hit Oman last June, was one of the 10 largest storms in the world in 2007, with insured losses estimated at $650m, and total losses put as high as $3,900m.

Likewise the rains in the UAE in mid-January produced the highest rainfall ever recorded in a single day, 105mm (the previous record was 85mm). More than 1,300 traffic accidents occurred in a day as a result.

These conditions might be the biggest single factor to spur people on to buy more insurance products. Governments are doing their best: natural disasters might be a greater incentive.

(The author is former British ambassador to the UAE and currently head of DIFC-based Robert Fleming Insurance Brokers)