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Abu Dhabi, UAEMonday 10 December 2018

Middle East insurers face headwinds yet opportunities abound amid low penetration, report says

Key challenges include regional conflicts, poverty and cultural aversion to insurance

Listed insurers net profit in 2017 rose 45 per cent, thanks to compulsory medical insurance, particularly in Dubai and the Unified Motor Insurance Policy. Silvia Razgova / The National
Listed insurers net profit in 2017 rose 45 per cent, thanks to compulsory medical insurance, particularly in Dubai and the Unified Motor Insurance Policy. Silvia Razgova / The National

Middle East and North Africa insurers face a number of challenges in the region, from a war in Yemen to the introduction of VAT , but opportunities abound due to the low penetration of insurance products and the introduction of compulsory coverage, a report said.

"Although the MENA insurance market remains extremely challenging with a diverse range of risks stemming from economic, political and insurance elements, there are also pockets of opportunities for the market participants," rating agency AM Best said in a report.

"Premium growth in the Gulf Cooperation Council countries remains robust compared to most mature markets, reflecting in part the GCC's faster economic growth and the introduction of compulsory insurance."

Insurance in the GCC has suffered from the economic slowdown in the aftermath of the 2014 oil crash and an overcrowded market that has tightened profitability with the possibility that the introduction of VAT in the UAE and Saudi Arabia may also dampen appetite for insurance.

Penetration of non-life and life insurance remains low in a number of MENA countries, hovering below 2 per cent in 2016, well below the global average of 6.3 per cent, according to the report, which cited statistics from the Swiss Re Institute. Morocco has the highest penetration at 3.5 per cent while Egypt had the lowest at 0.6 per cent. The rate of insurance penetration in Saudi Arabia is 1.6 per cent while in the UAE it's 2.9 per cent.

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The authors of the report said that the reason insurance penetration levels are low in the GCC is due to the fact that states in the region typically provide monetary support to its nationals, making the need for insurance redundant. Poverty in countries like Egypt and Algeria makes growth in insurance a challenge as does the perception that insurance is forbidden under Islam. Meanwhile Islamic insurance, or takaful, is not developed enough to take advantage of the potential demand for Sharia-compliant products.

"Purchasing traditional insurance is deemed haram (forbidden) and the takaful sector has been inadequately equipped to penetrate this segment," the report said.

"In North Africa, the life insurance industry has performed well as the middle class seek traditional life savings products; however the higher proportion of low-income individuals in this region as measured by GDP per capita hampers growth."

While the UAE has the highest penetration of insurance in the GCC and there has been a number of catalysts for the growth of the industry in recent years, such as the rollout of mandatory health insurance, its profitability has been weighed down by cut-throat competition. Many insurers have emerged over the past several years and a number of them are struggling to make money. That has made it difficult for some to stay afloat, especially those that made risky investments in the stock market and suffered heavy losses.

There are 61 registered insurance companies in the UAE, according to the Insurance Authority. While this is good for consumers, it has led to losses among many insurers as prices for insuring everything from cars to houses fell.

Some have quit the non-life insurance business altogether in the UAE, such as Zurich Insurance Middle East, which was acquired by US insurer Cigna last year.

The UAE's overcrowded market is expected to spur more mergers and acquisitions.

Sharia-compliant health and life insurer Takaful Emarat has also acquired Abu Dhabi-headquartered Al Hilal Bank's Islamic insurance entity to create the largest takaful group in the country.