With an oil driven economic boom giving rise to vast infrastructure investments, insurer Abu Dhabi and the region will benefit from the growing need to protect these assets, reports Anthony Richardson
Abu Dhabi insurance firms are expected to benefit from a grow ing "risk matrix" as the emirate invests vast sums of money in infrastructure development, said a new report from rating agency Standard and Poor (S&P).
The introduction this year of compulsory health insurance for all UAE residents gives the local insurance sector additional growth potential on top of that provided by the strong economy, says S&P's Gulf Cooperation Council Credit Survey.
Risk separations
In reference to Abu Dhabi's insurance market, the report states that the risk market of the UAE is divided into two sectors: risks with "national" status, and the wholly open, competitive risk market.
Risks with "national" status are "high risk value projects of state-owned enterprises", it says.
"Such risks are required to be shown to "national" insurers, which are local companies granted privileged access to such key risks.
"In the UAE, the emirate of Abu Dhabi dominates this risk market, in that it is the energy powerhouse of the country and is generously stocked with large-value risks that require good risk management skills from the insurance sector.
"The second insurance sector is the wholly open, competitive risk market. Risks in this sector are largely privately owned and both commercial and personal in nature. Insurance companies with national status also participate actively in this sector, and there is strong competition among the insurance community for this risk market." Abu Dhabi insurers have a history of sound earnings generated from their risk management skills, but this has been largely due to their role as risk handlers for the international market.
Reinsurance has been a key feature of the market, because the risk values involved are so great, and it would be impossible for a single global company to take on such a big risk line.
Leading Abu Dhabi based companies record financial performance
Strong fundamentals
"Market participants' earnings therefore derive strong income from commission and handling fees on the heavily reinsured national risk accounts," says S&P. "Overall underwriting performances are considered strong across most lines of accepted business, but the increasing competition across the country may begin to erode margins.
"Nevertheless, the growing risk market is expected to sustain earnings volume growth." Abu Dhabi insurance firms had a 41 per cent market share in the UAE at the end of September 2006 the end of a nine-month spell in which investor confidence suffered and the region's equity markets consequently collapsed.
However, their relative growth is lagging behind the market average, which is promoted by the exceptionally robust growth of premiums in Dubai.
Gross premiums written by Abu Dhabi companies accounted for about 45 per cent of the total UAE market in the nine months to September 30 last year, with Dubai trailing slightly on 43 per cent.
S&P says: "Abu Dhabi is expected to invest very significant sums in infrastructure developments in the near future, following the trends set by Dubai, and its insurance sector companies are fully expected to benefit from the growing risk matrix within this emirate.
"In addition, the introduction of mandatory health insurance for residents across the country in 2007 gives the local insurance sector added growth potential over and above the already strong advances promoted by the underlying economy.
"Abu Dhabi's insurance market appears to have suffered less asset volatility in 2006 than Dubai, with shareholders' funds falling in that period at a lower rate than the total UAE market (adjusted for capital increases).
"The stock markets suffered a very heavy price correction in the first half of 2006 Abu Dhabi equities were down 42 per cent in the year, and Dubai was down more than 44 per cent by the year-end but overall, Abu Dhabi insurers did not suffer to the same extent as some of their Dubai peers." The report points out "recent management upheavals" at Al Khazna Insurance Company and Emirates Insurance Company highlight some strains in the Abu Dhabi market.
Higher risk levels
S&P believes local insurance firms must move away from the historical "risk distribution" model, start to accept a higher level of risk and to invest in client relationships.
The report says: "The sheer scale of project development forecast for Abu Dhabi and its neighbours creates a substantial and healthy risk market for insurers to work within.
"However, the local firms must continue to adapt to challenges posed by some of the more aggressive Dubai companies." Across the whole GCC, it is accepted that the insurance market is underdeveloped. Insurance penetration is very low compared to Western and even Eastern Europe.
With the oil-driven economic boom giving rise to vast infrastructure investments, there is a corresponding need to insure these sizable risks, and there are established insurers in each GCC country capable of taking on the new risks.
Development of the non-life insurance market in the region is strong, with premium growth of about 10-15 per cent in the last three years.
But the proportion of personal lines cover, particularly life insurance, remains low, says S&P's study.
The underdeveloped insurance markets of the GCC are often blamed on cultural and religious reasons.
Takaful, a form of Islamic insurance, could therefore provide a new and viable insurance business model, says S&P in a separate chapter of its GCC Credit Survey.
The significant economic growth in the region coupled with a large, underinsured population means the opportunities for increased uptake of takaful are positive.
However, according to S&P, "the ability of the [takaful] industry to demonstrate the need for and benefits of insurance, as well as to successfully meet customer demands, remains unproven".
The report continues: "Over time, if the world average insurance premium of $550 (Dh2,020) per capita is achieved and applied to the Gulf states, the GCC insurance market has a potential size of $20 billion (Dh73.4 bn) - it is currently $4.6 bn (Dh16.9bn).
"How much actual premium the takaful sector generates and how quickly it will do so remains to be seen, however, and will depend on the industry's ability to deliver on policyholder expectations." S&P says takaful has "substantial" opportunity in the longer term as it reaches market segments that traditional insurance is unable to attract.
Takaful looks good
The GCC takaful market is currently growing at about 40 per cent, and gross contributions amounted to almost $170 million (Dh624m) in 2005, says S&P in its credit survey.
This level of growth should not be surprising, however, because takaful is a new segment of the market.
S&P says this growth is driven largely by general commercial lines and not purely personal lines which the ratings service believes is takaful? s natural market.
The report states: "The main challenge for takaful still remains: to increase awareness of the benefits [social as well as individual] of insurance among retail custom.
Factors behind rapid insurance growth tin GCC
S&P has identified three main factors behind this trend: Growing wealth is leading to a significant increase in insurable assets and activities in the region.
Authorities' commitment to stronger insurance regulation and the widespread introduction of compulsory insurance cover, particularly for motor and medical, is similarly entrenching risk and insurance concepts in the local psyche.
The practical development of an Islamic insurance alternative (takaful) to traditional covers is significantly boosting the appetite for insurance among elements of a community generally considered insurance averse.
Islamic finance comes of age
Worldwide Shariah-compliant assets currently total about $400 billion (Dh1.47trn).
S&P believes the potential market is closer to $4 trillion (Dh14.7trn), which means Islamic finance has only a 10 per cent share of the market among the world's Muslim population, and therefore "still a long way to go".
The concept of Shariah-compliant finance began to emerge in the 1970s in the Gulf as a result of the oil boom. Other Arab and non-Arab Muslim countries, particularly in Asia, are increasingly attracted by the principles of Islamic finance. "For the first time in the industry's history, several Islamic banks headquartered in the Gulf have recently set up business operations in Malaysia, while making clear that on the radar are Indonesia and China large and deep markets only a short hop away from the Malaysian platform," the report states.
"New horizons for Islamic finance are also emerging within the Arab universe: Lebanon, Syria, Egypt, Turkey, and North Africa, have been identified as potential engines for unlocking franchise value.
Emirates Today 2007
