Dubai: Early in the new year, the UAE's insurance sector is getting a lift from a quite unexpected quarter — the construction industry.
Project-related activity saw a slight pick up during the fourth quarter in Dubai with intimations of more to come in the coming months, and that was enough for local insurers to get excited.
In recent weeks, insurers have reported new contracts being entered into on underwriting construction-related risks. They remain expectant the upturn will have enough legs to continue through the rest of the year and even beyond.
"Rather than just insuring projects in Abu Dhabi, as was thought to be the case until quite recently, the steady return of construction activity in Dubai bodes well for the insurance sector this year," said a senior official at a leading local insurer.
"The return of project underwriting would fill a huge hole that has been there on our books since the second half of 2009. A very welcome return."
More so, as project underwriting represented anywhere between 20 to 30 per cent of an insurer's gross premiums written annually during the boom phase of the construction and real estate sectors. Now, any improvement that would generate premiums representing even 10-15 per cent of the gross would mark a major turnaround in the fortunes for the local insurance sector.
This would also provide some relief for insurers fighting it out for each premium that can be generated in non-life categories such as motor and health lines. Needless to say, with 51 insurers, operating margins continue to be under assault.
"Even then, the majority opinion would say that 2010 was in general not such a bad year for the industry as many feared it would be at the start, and actually represented a marked improvement over 2009," said Abdul Khader Panakkat, senior director for claims at Nasco Karaoglan Dubai. "Premium volumes cutting across all lines — except construction and marine cargo —definitely improved."
This thought is shared by a new report on the local insurance marketplace issued by the Dubai Chamber of Commerce and Industry, which places projected growth in non-life premium to put in compounded annual growth of 11 per cent.
Calls for consolidation
In actual numbers, that would place total non-life premium at Dh21.05 billion for this year compared with Dh19 billion in 2010. If the economy fundamentals return to a period of relatively stability, by end 2014 the premium generated in non-life would have swollen to Dh29 billion, the report added.
But headline numbers can only tell so much. Across the industry there is the constant worry that margins are being tamped down to a point that can be deemed unrealistic. This leads to the much repeated call for consolidation in an industry where having 51 players is considered a luxury.
"It's easy to get carried away by talk of premium volumes improving year on year — in a market where the population is growing steadily no one need expect otherwise," said the insurer. "There will always be need for new vehicles and increased healthcare coverage, and this immediately translates into higher insured volumes."
But the rates continue to be stuck in a rut and show no inclination of any near-term improvement. While for the insured that means having to pay lower premiums, for the insurers that does not make for sound business.
With the financial reporting season starting, the coming weeks will reveal how well — or otherwise — local insurers have fared on their "technical" profits in what is still a soft market for them. More so as their investment income is unlikely to record any major gains during 2010, what with the stock and real estate markets being in the state they are.
"Even on the recent underwriting that took place on projects, the rates did not show much of an improvement — the emphasis remains on winning the business at any cost, and not at the "right" cost," said the insurer.
This requires a revisit to the theme of "industry consolidation" that has been repeated without fail at some point or another over the last ten years and more. But shares of insurance companies are closely held and, in an uncertain economic climate, arriving at a fair value for a possible acquisition would be difficult.
The Dubai Chamber of Commerce and Industry report records why a consolidation would be a good thing. "UAE insurance companies need to achieve economies of scale to become more stable partners for their customers," it said.
Life policies lag behind
"Future consolidation and mergers in this sector could create these economies of scale. This could hold long-term benefits for customers, if part of the cost-savings is passed on."
No one in the insurance sector disputes the underlying good sense consolidation would lead to. But the moot point is that none of the companies — there are 24 UAE-headquartered insurers — seem interested in doing anything about it.
"If the sole intention is to win a business by quoting the lowest rate possible, that's fine," Mustafa Vazayil, who heads Gargash Insurance, the brokerage firm. "But at those rates, the insurer cannot afford to provide a quality of service that a customer should be entitled to.
"Currently, customers too do not seem to place a premium on the quality of service. But the moment they do there will be a flight to quality. That's what the UAE insurance sector needs as a priority."
Ironically, for an industry which traditionally seeks the wider picture and the longer term, the local players are more caught up in the here and now. It will not be any different this year, and the insurers will not mind it.
"A UAE insurance penetration rate of around 2 per cent (based on gross premiums as a percentage of GDP) compared with the global average of 7.1 per cent suggests that there is plenty of room for expansion in the sector," said a report issued by Oxford Business Group.
"Unable to rely on volatile capital markets to boost their balance-sheets, insurance companies… have been encouraged to push into the underserved life insurance segment to mitigate declines in traditional revenue streams."
Life insurance trails non-life by some distance, with estimates suggesting the former would represent just over Dh3.2 billion in premium written during 2010 and expected to be just under Dh3.5 billion this year.
Sources at some of the leading insurers do confirm that selling more life policies would be a priority, though the "cost and time involved in doing so are more." There's also the steep hurdle of trying to sell long-term life policies to a highly transient population base.
But with lower yields being realised from other lines, "go for life" may well be the rallying cry for the insurance sector going forward. It remains to be seen how many insurers would take up the call.
Abu Dhabi offers new opportunities
With all the changes that have taken place in recent years, Abu Dhabi's insurance sector looks much more streamlined than its counterpart in Dubai.
"While 2009 will not be remembered as a vintage year by the global insurance industry, Abu Dhabi's insurers have emerged from the economic turmoil… better than many in the sector had expected," said Oxford Business Group in a new report.
"There have been some important developments in the regulatory structure that underpins the market. This process of reform, combined with expectations for Abu Dhabi's economic performance going forward and a nascent recovery in global markets, accounts for the general sense of optimism in the sector."
On the technical side, making health insurance mandatory in the emirate has opened up a trove of new opportunities for insurers, principally those headquartered in Abu Dhabi.
"In addition, Abu Dhabi's planned spending on large hydrocarbons, water, energy and transportation projects over the coming years will continue to drive growth, with most estimates seeing double-digit increases in premium income up to at least 2012."
With all of that going around, the historic advantage that Dubai has had over its neighbour in terms of premium written — it was 47 per cent and 38 per cent in 2009 — looks likely to shrink.
Challenge
Takaful faces heat
The battle lines are drawn in the campaign pitching conventional insurers against the Takaful operators.
"The pressure on premium rates and operating margins has exacerbated in the local insurance because Takaful companies are putting intense pressure on such high-volume lines as medical and motor," said a senior insurance industry source.
Local Takaful insurers have also had to face criticism from their conventional counterparts that they are not fully compliant with all Sharia requirements in the way they do business.
The Dubai Chamber of Commerce and Industry report reckoned that Takaful companies need to get on a faster learning curve. "Standardisation of laws relating to Takaful is another challenge which if resolved could help aid growth of this market," the report said, which also called for the authorities to consider specific laws related to Takaful insurance.
"Increase in demand for insurance products due to greater awareness of this area coupled with increased incomes could raise the customer base and the amount of premium. From an insurance industry perspective, further growth depends on the ability of companies to realise economies of scale so that they are more profitable and be more stable long-term partners for their customers."
