The introduction of mandatory insurance legislation by regional governments is seen by many in the industry as the major driver of the regional insurance industry, especially in the GCC. “When you have mandatory insurance in a line of business coupled with first time buyers, they become accustomed to the idea of purchasing insurance and therefore this enhances insurance awareness and increases demand,” said Farid Chedid, managing director at Chedid Re.
Elie Nasnas, director general of AXA Middle East, agreed: “Mandatory insurance expands insurance awareness and this is a positive factor attributed to the growth of insurance penetration … I think the trend is here and insurance is becoming more and more a priority in people’s lives, especially in personal lines.”
Traditionally, the most prevalent forms of personal insurance in the region have been health and motor insurance and this is expected to continue. “The priorities in 2009 will definitely be medical and motor insurance,” said Nasnas.
Thomas Schellen, publishing editor at Zawya Dow Jones, concurred with this idea, saying “The major driver of the regional insurance growth is the phasing in of legal requirements for mandatory insurance in terms of health and motor.”
Health runs ahead
While mandatory motor insurance has been a staple of the regional insurance industry for some time, it is the introduction of mandatory health insurance schemes for expatriates in the GCC that have driven regional growth in 2008, a trend that looks set to continue in 2009.
In line with its role as the regional insurance leader in terms of insurance volume, the UAE began to impose mandatory health insurance legislation for expatriate workers — approximately 70% of the UAE population — in Abu Dhabi in 2006-2007. In June 2008, Dubai announced its plans for mandatory health insurance to be phased in, beginning on January 1, 2009.
“It will be compulsory for everyone and will be largely employer or sponsor funded,” said Qadhi Saeed al Murooshid, director general of the Dubai Health Authority (DHA), who announced the plan. In 2006 Saudi Arabia had already enacted legislation that imposed mandatory health insurance coverage for expatriate workers in companies employing over 500 people. The scope of this legislation was expanded in 2008 to include expatriate workers in companies that have less than 50 employees. Bahrain also looks set to enact similar legislation to that of Saudi Arabia in 2009 but is still working at streamlining the process. Moreover, the nature of expatriate immigration in itself is helping to increase awareness and penetration in the region.
“When there is an expatriate population in the region, they bring with them certain insurance awareness and expectations,” said Chedid. “Those that come from advanced economies have certain standards that they are used to, and will not really work without the satisfactions of those standards,” Schellen added.
The concept of mandatory insurance has also had a direct effect on the management and direction of regional companies in 2008. Companies in the region are increasingly positioning their resources and product models towards meeting the increased demands that come part and parcel with mandatory insurance. As Chedid pointed out, “When you have regulation that makes insurance compulsory, this automatically creates demand and makes it easier for insurance companies to sell and distribute their products.”
Yet, “[mandatory insurance] is moving in slower than expected because companies have had a certain resistance to it because of higher costs,” Schellen said. Add a global financial crisis that has had a direct effect on the leveraging of many core industries in the region such as real estate, and one is left with a situation where money is tighter and companies are less able to spend money on new expenses, such as insurance — a restriction that governments may take into consideration when the time comes to enact mandatory insurance requirements.
“Governments might postpone mandatory insurance due to the overall economic crisis but it will continue,” said Michael Bitzer, CEO of Daman. However, others disagree and say that, as the need for health insurance becomes greater, regional governments and companies are compelled to address the problem of low health insurance coverage in the region — even if it costs their economies during a global economic slowdown. “I think that mandatory insurance for healthcare is a must for regional governments to provide security for their populations, so I think they will not postpone it,” Nasnas claimed, “I think they will go ahead with it.”
Oil and insurance, not a natural mix
While mandatory health insurance is being enacted in the oil-rich countries of the Gulf, it is still not the case that these countries are most insured in terms of penetration rates and number of insurance operators. The correlation between oil revenues, higher disposable income, and penetration rates that applies to almost every industry in the region does not necessarily carry over into the insurance industry.
“The overall business growth will develop not necessarily as close to the oil price as some of the other economic indicators,” Schellen said. The best example of this scenario is Lebanon, a country with no direct oil revenues that touts over four dozen on-shore insurance providers, while Qatar had only six at the onset of 2008, according to Swiss Re and Zawya.
Furthermore, the highest regional penetration rates occur in countries located in the Levant and North Africa rather than the oil-rich Gulf, with Lebanon (3.4%), Morocco (3.4%) and Jordan (2.6%) leading the pack in insurance coverage in 2008. This phenomenon can be explained by the nature of oil and non-oil-rich economies in the region. To begin with, the economies of Lebanon, Jordan, and Morocco are much smaller than those of oil-rich nations and are not able to provide the same level of social security to their citizens that oil-rich nations do. This, in turn, creates a greater need for private insurance. “You cannot rely on the government. People have to take care of themselves,” Bitzer said. Moreover, due to the demographic nature of the Levantine and North African countries, there is a larger percentage of middle class citizens who are essential to retail insurance growth. “To have higher penetration, you have to have a larger middle-class society,” Nasnas explained. Indeed, higher disposable income in GCC countries has in many ways had an adverse effect on regional insurance penetration. “The level of wealth in these [oil-rich] countries is so high that many people don’t need insurance,” said Bitzer. This, however, looks set to change in the long run as a consequence of the natural growth of larger middle-class populations, which go hand-in-hand with the composition of emerging markets.
Another aspect of the regional insurance industry that is increasing penetration rates is the evolution of takaful as a viable option for many consumers in the region. The concept of takaful and family takaful as an alternative to conventional insurance models emerged about a decade ago and has allowed regional populations who previously shunned insurance — in particular life insurance — to enter the market without worrying about the ethical constraints associated with Islam.
“There is a concept that life insurance is against Islam and now with takaful there is a huge niche market and a lot of potential, which will re-enhance life insurance in the region,” Nasnas pointed out. “In some places in the region we have an extremely low penetration in life insurance, so there is a lot to be done in terms of takaful. If [takaful providers] concentrate on the virgin market, there is a huge amount of potential.”
This year, 2008 saw a huge increase in the number of takaful operators, as the industry of Islamic finance continues to become embedded in its natural environment. “The increase in the number of insurers in general and most specifically in takaful and Islamic insurance companies is really driving the demand for insurance — at least on the personal insurance level,” said Chedid. “Takaful companies are playing a major role in developing insurance penetration and improving insurance density throughout the region. It is increasing market awareness and improving the acceptance of insurance by local individuals.
Others are more reserved in their expectations for takaful as a real threat to conventional insurers or even a significant factor for increasing insurance penetration in the region. “People have not bought takaful as the big new thing that would make them buy insurance,” said Schellen. According to the analyst, many takaful consumers are already sold on the idea of insurance and are switch- over consumers as opposed to consumers who came around to the idea of insurance once takaful made it religiously acceptable for them to do so.
In the end, however, penetration rates will need to increase naturally due to the budding demographic nature of the region as a whole and the real needs that will eventually become the mainstay of the regional insurance industry. The need to maintain a long-term perspective is nothing new to many of the developing economies in the region. The Gulf states in particular have been keen to implement infrastructure projects across business sectors in order to ensure long term growth and sustainability.
Needs to address
The nature of the insurance industry in the region predicates a pressing and natural need to begin to address the low penetration rates before it is too late. According to the United Nations, the population of individuals in the MENA region who are over 60 years old will increase dramatically, reaching one-third of the population in some countries compared to single-digit percentages prevalent today. This shift in regional demographics logically necessitates life insurance penetration rates increase in countries such as Saudi Arabia, where they were as low as 0.0% as a percentage of GDP in the third quarter of 2008, according to BMI’s research.
“Right now we are the region of the world with the highest formation of families and one of the highest shares of youth as a percentage of total population. Thirty years down the road we won’t have that, so by 2040 or 2050 we will have significant portions of populations that are over 65 and now is the time to start preparing for this,” said Schellen. Indeed the ‘growing up’ of the region has already begun to take place and the feeling is that this will naturally cause an increase in demand for services like insurance. “We are not at the stage yet where the industry is booming, but we should expect a boom in coming years because of the demographics of the region,” Chedid predicted. Hopefully that boom will occur before it is too late to care for the increasing number of senior citizens who could become an economic burden, rather than a well-cared-for blessing.