One might think that the region that invented insurance would lead the world in mitigating risk and act as a model for others to follow. But almost 4,000 years after Mediterranean merchants first insured their cargo from the risk of piracy, the region suffers from a lack of insurance awareness and coverage across the board. Although information for all of 2008 and even for the third quarter has yet to be released by many insurers, what is available for analysis points to low penetration rates coupled with an increasingly caliginous financial sector. For example, the UAE registers a meager 1.7% penetration rate as a percent of GDP, trailed by Egypt (0.9%) and Saudi Arabia (0.6%), according to Business Monitor International’s (BMI) Q3 reports for the industry. That said, low penetration rates also constitute ample room for growth. With the industry expecting double digit growth (estimates vary between 12% and 15% annually) and a CAGR of up to 25% in some countries in the region over the next five years, the industry looks set to make its mark on the regional economic framework.
In a perfect world, such figures would have been heralded as early signs of the next regional industry boom. Assumptions of this nature, however, do not hold much water when the world is drowning in a global recession ushered in by a colossal financial crisis. Despite the anticipated fallout from the global financial crisis, the prognosis for the region in general remains more promising than that of many advanced economies expected to grow at an average of just 2%, according to adjusted IMF figures. Nevertheless, a widespread slowdown as a result of lower oil prices will undoubtedly have a sobering effect on the insurance industry as a whole. According to Michael Bitzer, CEO of Daman, “In general, on a regional level the global financial crisis, and now the global recession, as well as the decrease in oil prices will have a negative impact on the overall growth rate of economies and insurance in particular.”
The phenomenon of low penetration rates prevalent across the region is, however, regarded as more of an opportunity than a sign of a general unwillingness to embrace the concept of insurance. Yet the idea that double digit growth and the room for expansion provided by low penetration rates can compensate for many of the industry pitfalls in 2009 and beyond is rather simplistic. “There are great opportunities, but to say that everything is golden because we have double digit growth is just not the right picture,” said Thomas Schellen, publishing editor at Zawya Dow Jones. This sentiment is echoed by many in the industry who enjoyed the recent boom but will now have to weather the storm of the regional slowdown, even in territories like the UAE that are at the forefront of the regional insurance industry. This year “was characterized by extremely high growth for the whole of the UAE, but for next year I am expecting that growth rates will go more or less to 0%,” Bitzer averred.
The main reason for most analysts skepticism is that the industry is heavily dependent on the global and regional financial environment, which is currently in a state of disarray. “In 2008, the poor results are due to [losses in] investment income,” said Farid Chedid, managing director at Chedid Re. Moreover, the institutional framework and regulatory environment that operates on a regional scale has yet to be put in place as of 2008. “Standards that customers and insurers can rely on are not yet uniformly developed,” Schellen pointed out. However, there is a sense that regional governments have acknowledged that the region is relatively underinsured and have started to take some of the necessary steps required to begin to support the regional insurance environment in 2008 and into 2009. “Governments should continue what most of them have started [in 2008] and improve regulations as well strengthen the regulators”, said Bitzer.