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Jan 10 2011

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UAE insurance market set to experience strong growth

Table: UAE Insurance premiums forecast (AED mn.)

Source: Business Monitor International, 2010.

Important drivers of growth

The study points out at important drivers of growth for the insurance sub-sector including the level of Gross Domestic Product (GDP), GDP per capita levels and penetration of life and non-life insurance market. It states that the growing penetration levels coupled by rising GDP and per-capita income levels could indicate an insurance sub-sector set for high growth. Rising income levels could lead to increase in demand for insurance, as people have more disposable income to spend on protecting themselves, while low penetration means that there could be substantial potential for UAE companies to grow from a low base.

It further says that in the case of UAE, as per-capita income, nominal GDP and penetration levels for the non-life insurance market, which makes up a majority of the premiums in UAE, are expected to grow (table 1). These conditions can therefore be expected to drive the future growth of the insurance industry in the UAE.

Table 1: Forecast for drivers of growth of UAE insurance

Source: Business Monitor International 2010, IMF and Economist Intelligence Unit.

Population is another growth driver and is expected to increase in the UAE. The number of companies in the insurance sub-sector is an indication of the level of competition. The Insurance Authority of the UAE reported that in 2006, there were 24 national and 27 foreign insurance companies operating in the UAE. Given a total of 51 companies, this makes for a competitive insurance environment, with customers having an adequate number of choices.

Also in the non-life insurance segment, the UAE's penetration as percentage of GDP ratio is generally higher than several other countries in the Middle-East and North Africa region, implying a more competitive operating environment. However, UAE insurance companies also need to achieve economies of scale to become more stable partners for their customers.

Future consolidation and mergers in this sub-sector could create these economies of scale. This could hold long-term benefits for customers, if part of the cost-savings is passed on to customers. A breakdown of premiums by type of insurance in 2008 is shown in table 2. As shown in the table a large majority, about 85% of the premium amount, comes from non-life insurance while the remainder share of 15% comes from the life insurance category.

Table 2: Important insurable risks

Source: PWC, ZFS, SOA, BMI, Chartered Insurance Institute (CII)

The UAE Insurance sub-sector is an important part of the UAE financial sector. The economic significance of the insurance sub-sector is that it seeks to cover losses and minimize risk exposure of the individuals and companies. By pooling the risks across the economy, the insurance sub-sector therefore serves as an important intermediary and helps in more efficient sharing and management of risks.

Prospects for the UAE insurance market

Islamic insurance know as takaful is also expected to be an important growth area. Takaful involves the voluntary provision of mutual assistance where all clients enter into a cooperative agreement to insure one another. Economic growth and rising incomes among the GCC and other developing Muslim countries, such as Indonesia and Malaysia, could result in an increase in demand for takaful. The demand for such Islamic insurance products seems to have high potential for growth but is currently at a low base, creating the possibility of rapid growth in volumes.

Challenges for the UAE insurance market

The study says that improvement in the legal framework could help make the environment more amenable for insurance companies. For takaful, one major challenge is that there is a lack of assets compliant with Islamic provisions against usury and excessive risk, which companies can invest in. Finding suitable staff is another challenge. Takaful operators are generally smaller, which means they are still not able to take advantage of economies of scale and achieve a high level of profitability.

Standardization of laws relating to takaful is another challenge which if resolved could help aid the growth of this market. The insurance sub-sector in the UAE can therefore look forward to a period of robust growth. Increase in demand for insurance products due to greater awareness of this area coupled with increasing incomes could increase the customer base and the amount of premium. From the insurance industry perspective, further growth depends on the ability of companies to realize economies of scale so that they are more profitable and able to survive any economic downturn and be more stable long-term partners for their customers.

Globally, strong growth can also be expected in takaful, which is emerging from a small base. The study further says that Dubai and UAE can make themselves the hub of this important growing centre by issuing specific takaful laws and standardizing takaful regulations. The government can further help the conventional insurance companies too by making the legal framework more amenable to the operation of insurance companies. Different areas of the financial sector are inter-linked, as insurance companies need to manage their liquid assets and attain a suitable rate of return. Therefore, policy measures aimed at making Dubai a hub for the securitization and the asset management industry can also be conducive to making it a centre for the insurance industry. This will help make Dubai and UAE the financial centre of the entire Middle-East and North Africa (MENA) region.

-Ends-

Established in 1965, the Dubai Chamber of Commerce & Industry is a non-profit public entity, whose mission is to represent, support and protect the interests of the business community in Dubai by creating a favorable business environment, supporting the development of business, and by promoting Dubai as an international business hub.

© Press Release 2011

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