The UAE's buoyant performance also represented a 45% share of the GCC's USD 14.7 billion combined gross insurance premiums, placing it well ahead of its neighbor Saudi Arabia, which accounted for less than 34% of the market, according to the world insurance report compiled by the Sigma research unit of global reinsurance group, Swiss Re.
Since 2006, UAE's insurance market has doubled in volume and managed to achieve a CAGR of 21% through to 2010. The market, however, remains relatively small by global standards and dominated by non-life insurance, which still accounts for 85% of total premiums. The Swiss Re annual report likewise mentioned that a total of 61 insurers operated in the country in 2011 - 34 of which were national companies while the rest were foreign.
The rise in premiums highlights the country's consistent growth potential and confirms its significant capacity for further expansion. This impressive growth, which is forecasted to continue at a consistent pace for years to come, was driven by a number of factors including the expansion of the non-oil sector, the introduction of compulsory health insurance amid a rising young population, a booming infrastructure development and real estate market as well as an increased awareness on protection needs. Rising income levels have also boosted demand for insurance, as people have more disposable income to spend on protecting themselves and their assets.
Takaful, a Shariah-compliant alternative to insurance, is based on mutual cooperation, responsibility, protection and assistance between groups of participants. Over the years, it has proven to be the fastest growing segment in the global insurance industry. In the UAE, it has been a significant growth factor for the insurance sector, especially in the life segment as conventional life insurance products remain unattractive to majority of the Muslim population.
According to the 2012 World Takaful Report by consultancy Ernst & Young, the general and family takaful contributions in the UAE stood at USD 818 million in 2010, the third largest market globally after Saudi Arabia and Malaysia.
Total insurance premiums per capita in the UAE are estimated at approximately USD 1,250 and within this, life premiums amount to an average of only USD 200 per head of population. From a general perspective, life insurance is modestly represented in the GCC with total premiums occupying a market share of below 20% in most countries.
As previously mentioned, the segment's lackluster performance can be attributed to the fact that most Muslims are still hesitant towards adopting conventional life protection, but some analysts predict an upward trend in the foreseeable future.
"Our forecasts show that life insurance density will grow at a CAGR of 22.2% from 2011 to 2015," according to the Alpen GCC Insurance 2011 report 2011.
Family takaful will certainly hold a significant share of the predicted life insurance potential especially since awareness and affinity towards Shariah-compliant products have been on the rise. Still at about 5% of total takaful premiums across the GCC, there are plenty of opportunities for operators to explore the family takaful segment, pensions, and wealth management solutions.
In the GCC, family takaful presents a distinct and untapped opportunity for structured savings and investment vehicles as residents have a higher propensity to save. According to the Alpen report, Gulf residents save about 37% of their earnings or USD 37 for every USD 100, as compared with the global average of 22% and North American average of 10%. An interesting contrast, however, is the observation that of the USD 37 saved, only 4% is directed towards insurance.
Insurers must adapt to consumer behavior
A global consumer insurance survey in 2012 by Ernst and Young suggested that there are significant variations in customer attitudes and behaviors around the globe, driven by the diverse economic, demographic, competitive and regulatory environments.
Technology, and in particular the emergence of online and social media, is driving a fundamental shift in customer expectations in terms of how products are marketed, priced, sold and serviced, and how companies are perceived. New standards for customer-centricity and engagement are raising the performance bar for players in every sector. At the same time, new geographic markets are growing in significance as well as the pace of economic development, creating an increasingly large and affluent middle class with money to invest and assets that require protection.
"To seize the opportunity that these changes present, we believe that insurers can no longer rely on received wisdom about what consumers think and how they behave. The challenge is to really understand what drives customer behavior today, not yesterday, in all the geographies, sectors and channels where they operate" suggests the same survey.
The traditional perception of insurance as a means of protection has changed. It is now embedded within the whole theme of financial planning and wealth management. New product strategies are putting consumer life cycle needs at the very heart of product development, and offering innovative solutions that not only match consumer needs, but also evolve with them as they grow to different stages in life. These strategies enable a more proactive and targeted approach to different segments, from salaried middle income to high-net-worth individuals.
Consequently, more personalized products are being introduced, for instance, Abu Dhabi Islamic Bank (ADIB) offers a pioneering breast cancer takaful coverage to all its Dana Women's Banking customers. Dubai Islamic Bank, which pioneered the first ladies banking service (Johara), developed a range of products that caters to the specific financial needs of women in the country.
Diversifying Islamic investment options
Shariah-compliant investments remain limited for takaful operators - a major challenge to industry players looking for alternatives to equity and real estate investment instruments, which are vital to reducing volatility.
The Shariah-compliant investment climate is slowly evolving and has expanded away from equity to new asset classes, including Islamic money market, commodities, real estate and alternative investments. There has also been significant growth in sukuk funds, a justified growth as investors search for higher returns and become more sophisticated in their asset allocation.
As a result, assets of sukuk mutual funds based in the Gulf grew to more than USD 500 million in 2011, posting an annual increase of 31%, according to Reuters calculations based on data from fund companies.
As the GCC sukuk market flourishes, it has seen complex and sophisticated structures being introduced by several financial institutions across the region. The number of issuance is expected to grow at an estimated 20% to 30% in 2013.
Sovereign-issued sukuks dominated the regional market in 2012 with USD 80.2 billion as against USD 58.9 billion in 2011, representing a 36% year-on-year hike, according to a report by Kuwait Finance House.
However in the UAE, the private sector accounted for the lion's share or USD 4.2 billion of the USD 6 billion total issuance. One of the most recent issues was the USD 400-million sukuk announced in January by Dubai-based Majid Al Futtaim Holding.
The increasing popularity of sukuk funds has also prompted major GCC banks such as HSBC, Al Hilal Bank and Rasmala Investment Bank to launch their own.
One of the interesting issues in the UAE in the first half of 2012 was the cross-border sukuk tranche issued by Abu Dhabi National Energy Company, or Taqa, under a MYR 3.5 billion program - an indication of GCC firm's increasing interest to tap the Malaysian market. Conducive regulatory environment
Standardization of laws relating to takaful is another challenge that, if resolved, could help aid the growth of this market. The UAE government has undergone significant regulatory reforms in the past few years, with the aim of creating an environment conducive to the growth of the insurance industry as whole.
The UAE Insurance Law (Federal Law 6 of 2007) was enacted in February 2007 and saw the establishment of a semi-autonomous Insurance Authority to regulate the insurance industry in the UAE, covering issues related to solvency, investments and technical research.
In 2010, the UAE Insurance Authority issued regulations designed to build on the framework of the 2007 insurance law. This included issuing a code of conduct and business ethics for insurance companies, which sets out the minimum guidelines of good practice that operators in the UAE should adhere to. Additionally, the Insurance Authority announced that more regulations will be issued relating to accounting rules for insurance companies, distribution, health administration, reserving, agents and brokers as well as regulations concerning investment guidelines and restrictions.
To keep up with the pace of growth that the takaful sector is experiencing in the UAE, the authority issued key regulations in 2010 such as prohibiting conventional insurance companies from offering takaful insurance. Another policy requires takaful companies to appoint 'Shariah observers' to monitor Islamic law compliance and utilize Re-takaful operators for their re-takaful requirements.
With regard to Bancassurance arrangements, the UAE Insurance Authority issued a circular in September 2011 to all insurance and takaful companies setting out clear guidelines on how they should distribute their products through banks.
Likewise, the recently issued law requiring health insurance for all UAE residents was a positive move for the insurance sector. As a result, medical insurance in the country is anticipated to grow at a CAGR of 41% during 2010-2013, as per the UAE Market Insurance Forecast published in 2012.
These active reforms indicate that the UAE government recognizes the vital role a comprehensive legal framework plays in expanding the insurance industry in its different forms.
Regulatory reform is expected to be an ongoing process in this young market. Flexibility is needed to keep up with the massive growth that the industry is predicted to witness in the coming years, whether it is in premium volumes, complexity and sophistication of product offerings or distribution channels.
Bright forecast ahead
The UAE market has proven to be a fertile ground for takaful and insurance growth due to its demographic mix dominated by expatriates with greater awareness of protection needs. The high disposable income of the mid-segment population, coupled with high information technology penetration rate and internet usage have also given a positive push for this viable sector.
Major developments have already been taken on different levels, from innovation of product offerings to efficiency in operational systems. In addition, Shariah-compliant investment options for takaful operators are becoming more diverse and efforts are being deployed to train and develop skilled talents for the segment.
Policy measures aimed at making Dubai a financial hub in the Middle East and North Africa (MENA) could also be conducive to making it a global center for Islamic finance. The UAE announced its ambition at the start of 2013, to turn Dubai into the world's Islamic capital.
In order to achieve this initiative, efforts must be made to create a Shariah council to oversee standards in Islamic finance, an arbitration center to resolve disputes in Islamic contracts, and a drive to boost production of halal food within Dubai.
This plan was confirmed by His Highness Sheikh Mohammed bin Rashid Al Maktoum, vice-president and prime minister of the UAE at a recent workshop organized by the higher committee for the development of Islamic economy sector.
"We have a clear vision for this vital sector and we want it to contribute significantly to our national economy and to help bolster our position as the world's capital for Islamic economy," said Sheikh Mohammed said.
Sohail Jaffer is deputy chief executive officer of FWU Global Takaful Solutions.
Sigma World Insurance Report, Swiss Re
GCC Insurance Industry Report, Alpen Capital
World Takaful Report, Ernst & Young
Global Sukuk Report, Kuwait Finance House
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