When the Middle Eastern crème de la crème of insurance professionals gathered in Bahrain earlier this year for the biennial convention of the regional industry body, the General Arab Insurance Federation (GAIF), the chosen topic was convergence of the industry on a regional level. No topic could have been timelier for an industry that by wide consensus is entering a period where it has the best chances ever to accomplish its long overdue mandate of becoming a real wheel in the regional economy.
The performance of insurance companies across the Middle East region in recent years was undeniably, and for the first time ever, marked by significant growth rates in gross premiums and net profits. In comparison to the late 1990s, less than a decade ago, the premiums collected by leading insurance companies in the Gulf region have multiplied: some companies threefold, some fivefold, and some, close to tenfold.
Regions biggest continue growing
These meteoric risers were not upstart companies with extraordinary growth rates in the early days of doing business — these growth rates were achieved by insurers that were among the region’s largest providers of insurance services and the most sophisticated and developed players in the market. To name one example, Oman Insurance, the UAE’s prominent private sector insurer, grew its gross premiums from $44 million in 1999 to more than $373 million in 2007.
However, exponential growth in premiums aside, the Middle East still trails globally in the contribution and the role of insurance in local economies. Countries like Syria and Saudi Arabia rank among the least insured nations in the world, as measured by the share of GDP invested in insurance (insurance penetration). Their expenditure on general insurance is much less than 1% of GDP and their expenditure on life and wealth creation policies — the bigger business in the global insurance industry — is barely measurable.
Secondly, all MENA economies greatly need to grow their insurance sector as their insurance penetration rates lag behind global and emerging markets averages. The growth and the concentration of insurance power in Arab countries entering the 21st century has been dichotomous, and quite unlike any program of regional convergence.
In the Levant markets, the Syrian opening to private sector insurance is still in its early stages while the long established Lebanese insurance sector has struggled with the ups and downs the national economy experienced mainly because of security and political challenges.
In Jordan, the high number of listed insurance providers betrays the sector’s fragmentation, whereas Egypt has just seen the formation of one state-backed mega-provider through the merger of Misr Insurance and Al Chark into an entity with 75% domestic market share and the largest asset base of all insurers in the MENA. Nonetheless, Egypt affords much less insurance than neighboring Mediterraneancountries.
The hype of new growth and catchy annual premiums increases have thus been reserved largely for the booming petro-producing countries of the Gulf Cooperation Council (GCC). Among the Gulf economies, the largest premiums are in the United Arab Emirates, where the insurance industry recently claimed to have underwritten more than 40% of the GCC’s combined premiums in 2007.
Although the UAE and Qatar grew their annual per capita expenditure on insurance (insurance density), the increases is relative to their larger economic expansion where nominal GDP growth was spurred by the realm’s ample blessings of liquidity and even more liquidity. This has curbed the role of insurance development in the past five years when measured relative to the expansion of GCC economies generally.
At a reported total premiums volume of $3.5 billion in 2007 — a $700 million increase over 2006, or 25% — the share of insurance in UAE GDP shy of 2%. At the end of the 1990s, the UAE had an insurance density of 1.4%, according to by multinational reinsurer, Swiss Re.
In the GCC, the impression is not one of impeccable growth. While underwriting performance in the form of gross premiums was sensational for some companies, the rates of ceding business to reinsurance firms were surprisingly high.
With regulations on financial reporting and compliance with internationally respected accounting standards slowly coming into effect, the acceptance of risk and the role of underwriting profits of insurance providers have not been very transparent across the region. But it is obvious from the profit developments of the past two years that insurance companies have been hit by their dependence on investment income from fickle regional financial markets.
Oil bubble
2006 was a correction year in the GCC stock markets that started with the rise in oil revenues from 2002/03. 2006 insurance company balance sheets were clearly negative and, by contrast positive in 2007. With 2008’s first-quarter results not yet on the table, analytics of 2007 reflected the bourse trends of 2007-06.
Zawya’s insurance industry research shows movement in gross premiums of listed insurers last year in line with the overall positive market for premiums. Of the UAE’s 23 insurers, 20 released gross and net premiums figures indicative of a 31.8 % average increase, with Abu Dhabi based providers coming in ahead of their Dubai peers.
In Qatar, gross premiums growth of the four listed conventional insurers averaged 28.5%, situating the DSM insurers behind the ADSM and ahead of the DFM players. This underscores that the UAE and Qatar are currently leading insurance growth in the GCC, outpacing Kuwait and Bahrain. Saudi Arabia is in a special situation of new company formations in 2007 where performance results are not yet available. A noted exception is the former monopoly state insurer, Tawuniya, which reported a drop in 2008 first-quarter earnings because of weaker investment income.
The listed Kuwaiti insurers reported a mixed development in gross premiums where increases by three firms were juxtaposed with contractions by two companies for a meager average growth of 0.2%. In Manama, three out of four firms showed single-digit gross premiums growth and the average was boosted to 17.8% only because of a 50% jump in premiums at ARIG.
For gauging of meaningful industry trends in the markets with less than ten reporting companies apiece, the data blankets for the Kuwaiti, Bahrain, and Qatari insurance sectors are still rather flimsy. However, when eyeing GCC financial markets wholesale, notable correlations are undeniable when drawing comparisons between net profits and underwriting developments.
All but one insurance firm with posted results in the UAE in 2007 could improve their net profits over the preceding year. The growth in net profits for two thirds of the companies exceeded their growth rates in both gross and net premiums, and most of the 15 companies in this group achieved net profit growth that was a multiple of their premiums growth, gross or net. Nine companies which had shown net losses, a black zero, or profits of maximum $3 million in 2006 jumped back into positive territory with 2007 net profits that ranged from $11 million to $33 million.
While underwriting growth was significant and exceeded 50% for three listed UAE insurers, it paled against the profits derived from investments. Median year-on-year profit growth for UAE insurance firms in 2007 was 73%, and profit increases for 70% of firms ranged above 40%. Only one insurer filed negative results development: Islamic provider SALAMA whose profits contracted by 15%.
Contrasting to the strong profit gains which companies reported from 2006 to 2007 is a comparison of profit trends over two years. Between 2005 and 2007, UAE insurers achieved only in very few cases two subsequent years of profits improvement. Most firms in the industry saw their profits smashed in 2006 due to the intense correction of regional securities markets and 2007 was a year of partial recovery from profit evaporations. On the balance, aggregate profits reported by the UAE’s listed insurance companies in 2005 were significantly higher than profits in either 2006 or 2007.
While investment income is crucial for the insurance sector anywhere, the vast dependency on stock market gains by regional insurance firms, in combination with their comparison to the region’s banks small size, and the not quite so sensational underwriting growth in relation to GDP and inflation developments create an impression of an insurance industry that is still in the process of covering all its bases, an industry which probably is not quite yet in a position of resting on laurels as catalyst of safeguarding Middle Eastern societies. Despite the industry’s strong steps forward, these laurels are yet to be earned.
