Dubai: The UAE and Saudi insurance markets have remained resilient despite ongoing economic headwinds resulting from the persistent decline in oil prices over the past two years according to a recent study by EY and Oxford Economics.

“The UAE and KSA insurance markets have performed well despite difficult economic conditions. Both of these markets’ insurance sectors are going through structural evolution with the introduction of stronger regulations, aided by a welcome shift towards the right level of technical pricing,” said Sanjay Jain, EY Mena Insurance Leader.

Even though the drop in the price of oil has introduced new vulnerabilities across the wider region, analysts said in the long-term, rapid urbanisation, growth in the middle class, and the use of mobile technologies, offer the potential for faster growth for insurers. Enforcement of regulations to eradicate fraud, corruption and other abuses will also be critical for the increased growth of this sector, as will be enhanced efforts towards educating consumers.

In its study EY created a risk opportunity matrix to illustrate the most attractive markets for investment and those that pose the greatest risks. Based on this matrix, the UAE and Saudi insurance sectors remained resilient, securing 10th and 11th place respectively out of the 22 countries assessed, in terms of opportunity for ‘significant premium growth’. They also placed 6th and 7th in terms of ‘least amount of risk’. In the overall ranking, China was ranked the highest in the opportunity index, whilst Singapore topped the risk index with the lowest risk score.

Increased competition

The size of the insurance industry in the Gulf has more than tripled since 2006, and insurance premiums have increased with it. Premiums in the UAE are projected to grow by 12 per cent CAGR to 2020. However, this growth has also spurred increased competition and reduced overall profitability of the sector. A new law requiring compulsory health insurance for all Dubai residents, which is being implemented over two and a half years, is also expected to be a key driver for the industry. In addition, new regulations aimed at strengthening governance, compliance and risk management are expected to spur a round of consolidation.

Saudi Arabia’s insurance market is now one of the largest in the region, having grown to rival that of the UAE. The traditional prominence of corporate business in Saudi Arabia means that brokers and agents play a larger role in the Kingdom than in other more developed markets. While growth over the past half-decade has been vigorous, the penetration rate is just 1.1 per cent, meaning there is a high degree of untapped growth potential in the market. Premiums are projected to grow by 9 per cent CAGR through to 2020.

Additionally, because of a lack of product differentiation, insurers tend to compete on price rather than on value-add services or unique product features. Health insurance has been the primary generator of premiums. However, the potential of new legislation to require many public facilities like shopping malls, restaurants and schools to have insurance cover, could rapidly expand the size of the property and casualty market.

Factbox: UAE insurance profits rebound

Dubai: During the first six months of 2016, UAE insurers reported aggregate profits after aggregate losses in 2015, indicating a recovery is under way despite sizeable economic pressures and growth in the GCC following a prolonged slump in oil prices.

On aggregate, the listed insurers in the UAE market registered significant improvements in their net profits for first-half 2016 at Dh573 million ($156 million) compared with net profit of Dh263 million in first-half 2015, marking 118 per cent growth overall.

Return on average shareholder’s equity improved to 3.5 per cent in first-half 2016 from 1.6 per cent in first-half 2015. The first-half 2016 profits, if sustainable for the rest of the year, would mark a significant recovery from the overall market net loss of Dh123 million for 2015.

In aggregate, the UAE health insurance sector has seen a major boom since 2013, with medical premium growth averaging 30 per cent over this period.

There are currently 60 insurance companies in the UAE, out of which 29 are listed on one of the two stock exchanges (ADX and DFM). Listed insurers control almost half of the total UAE market premiums.

While the UAE’s GDP growth is estimated to be around 3 per cent over 2015-2016, the listed UAE insurers posted growth of 9 per cent in gross premiums for first-half 2016, similar to the 8 per cent growth seen in first-half 2015.

Within the industry, conventional insurers registered a 10 per cent increase in premiums in first-half 2016, compared with 5 per cent for the first half of 2015. Growth was more heavily weighted toward the larger players, although the majority of insurers registered some growth.

The takaful sector faced a slower pace of growth, at 4 per cent, compared with 30 per cent for the first half of 2015, owing to the dip in premium income in 2016 for four out of eight takaful insurers.