Low penetration levels make the United Arab Emirates an attractive insurance market, as Shirish Nadkarni discovers

October 27, 2004, was a momentous day in the annals of the insurance industry in the United Arab Emirates (UAE). On that day, after a gap of 18 long years, the UAE re-opened its insurance sector to foreign entrants.

Economy and Commerce minister Sheikh Fahem bin Sultan al-Qassimi issued an order to grant licences to foreign insurance companies to provide coverage that was not until then available in the UAE domestic market.

The emirates had stopped issuing licences for foreign insurers to enter the market in 1986, due to market saturation. But the change of heart clearly means the sector is poised for a quantum growth in the Arabian Gulf, since most Western insurance companies consider the Middle East to be a major growth market.

The Gulf Co-operation Council (GCC) countries (Bahrain, Kuwait, Qatar, Oman, Saudi Arabia and the UAE) are all viewed as having great potential by the international re/insurance market. But it is the UAE, and specifically Dubai, which holds the key to unlocking that potential.

"The size of the domestic insurance market is not very large," says S P Saxena, general manager of India's Oriental Insurance Company, which has been operating in the UAE through a local agency.

"Although the volumes of business are very high, the general insurance premiums written in this market last year were Dh2.5bn. If you look at comparisons, each of the four public sector companies in India is writing more than the entire volume of general insurance business in the UAE."

However, Mr Saxena claims that the UAE is now geared to grow at an exponential rate, thanks mainly to the massive construction activity in and around Dubai.

"The volumes of business are increasing mainly due to the global nature of the business," he says. "There is no physical trading, as such. For example, there can be a direct transaction between Mexico and Malaysia through someone sitting in Dubai. Dubai plays a catalytic role, as a facilitator. Trading is now on the basis of the IT revolution."

Maritime boost

Another major catalyst to the growth of the insurance sector, particular marine, is the fact that, with the development of the container transhipment hub port of Jebel Ali, Dubai has become arguably the most important shipping centre in the Middle East.

The emirates has many advantages to offer the shipping world. Sandwiched between Europe and India and the Far East, a huge proportion of world shipping passes through the Arabian Gulf. Its time zone - three hours ahead of London, and only four hours behind Hong Kong - makes it an easy place to control shipping operations in the western and eastern hemispheres.

"Dubai's aim to be a world-class maritime centre makes pure commercial sense due to its geographic positioning, while the booming international shipping industry is an ideal vehicle for Arab capital investment and insurance," says David Taylor, vice-president, Maritime London and special adviser to the International Underwriting Association.

"The shipping markets are enjoying an unprecedented bull run across the tanker, dry and container sectors. Freight rates have hit unprecedented highs; for once, it has not been the sight of a stricken tanker which has made the headlines, but the news that owners of capesize vessels have been commanding rates of $100,000 per day. The insurance implications for the area are obvious."

The shipping industry had been quick to recognise recent trends and to develop Shari'a-compliant (ie, according to Muslim laws) products for it.

"In Dubai, our company has led the way in offering such Shari'a-compliant insurance products," says Jihad A Feitrouni, general manager of Dubai Islamic Insurance and Reinsurance Company, a subsidiary of the Dubai Islamic Bank.

Adds S F Qadri of Pioneer Insurance Brokers, which is co-owned by Bhagwandas Trading, one of the largest importers of readymade garments, "Top multinational banks like HSBC and Citibank have set up departments to exclusively deal with Islamic insurance.

"They are marketing Islamic insurance products. These products have been vetted by religious Islamic scholars from Egypt, Sudan and Pakistan, since, within the tenets of Islam, the acceptance of any form of interest is prohibited."

Encouraging innovation

The Dubai government now aims to allow free competition in the sector and attract foreign insurers with strong financial backgrounds and technical expertise to help boost the efficiency of the UAE insurance market.

"While opening the market will no doubt make it more crowded initially, it will prompt existing companies to be more innovative with their products," says Omer Hassan Elamin, managing director of Arab Orient Insurance Company, which is part of the Al Futtaim group.

"It is also likely that the entry of more foreign players to an already fragmented market will force some consolidation among the smaller companies in the medium term, but there is no reason why the sector should not remain profitable."

In terms of ownership of companies across the UAE, the Dubai Chamber of Commerce and Industry says 56% of them are nationally owned, 6.7% are Arab-owned, 16.2% are foreign-owned, and the rest are joint ventures between nationals and foreign or Arab companies.

The move to open the sector to foreign players allows licensed companies to open new branches, but there are criteria that firms must meet to gain a licence, including the introduction of new types of cover that are not provided by existing companies.

New companies are also bound to employ no less than 10% of UAE nationals in the first year of operation. The percentage rises to 15% in the second year, 20% in the third year and 25% in the fourth year.

Despite these restrictive regulations, most existing operators believe that the opening of the sector is an excellent move. The major shortcoming is that, with the industry being in its infancy, there is no mechanism or strict regulation to drive it. This has caused strange problems to crop up.

Tougher regulation

"We are growing as a company, as are most other insurance companies, but it is all in a haphazard manner," avers M Rajendran, deputy general manager - underwriting department of Dubai National Insurance & Reinsurance, part of the Al Habtoor group that is the UAE agent for several international vehicle brands.

"The authorities are looking at having a more stringent regulatory mechanism.

Recently, the International Monetary Fund had sent in a report on the local market to the UAE Ministry of Commerce and Economy, which is now working on it and trying to set up a proper regulator."

Against this background, it must be highlighted that, in June 2004, the Dubai Financial Services Authority (DFSA) announced that it had been accepted as a full member of the International Association of Insurance Supervisors (IAIS), the world's leading association of insurance supervisory authorities.

International companies looking at Dubai view the membership as a good sign and it has further enhanced the emirate's regulatory reputation.

"The IAIS is by far the biggest and most eminent international association of its kind, and the DFSA's membership will ensure that we can be on the cutting edge of international insurance regulation," DFSA chief executive Phillip Thorpe says.

"Gaining membership with the IAIS is a tangible example of our commitment to regulation to the highest global standards. The DFSA has stated that one of its objectives is to gain membership of internationally recognised bodies, and to put in place memoranda of understanding with other regulators."

However, insurance consultant Salah Al Halyan, managing director of tightly knit group Gulf Insurance Consulting, feels there are different factors which will affect the insurance industry in the foreseeable future and that the sheer opening up of the market is not the issue.

"The key issue is that the UAE is shortly to sign the Free Trade Agreement with the US; and by that, it will not be allowed to close any financial services sector," he says. "The insurance sector would need to meet European or American standards of the requirements, rules and regulations."

The main problem that the UAE faces is that the laws and regulations there are not considered up to international standards as yet. Put dispassionately, there is an absence of accountability. There is no proper supervision at the examinations for insurance agents. All of which results in substantial chaos in the market, with one-upmanship appearing to be of paramount interest to everyone.

"The main focus of people here is to be bigger than all the others, to be better than the Joneses," says Mr Rajendran. "This is hardly a healthy scenario. If companies grow in a solid way, so that they can give value back to their partners and shareholders, I would consider the growth healthy."

Clearly, Mr Rajendran is referring to the blatant undercutting in the pricing of policies by companies which do not even meet the solvency requirements.

"In our own scheme of things, sheer size has no meaning," he says. "Our strategy for the next five years is to be among the top companies, but in terms of bottom-line and service orientation. This strategy has been agreed to by the group's shareholders."

At the moment, the largest insurance outfit in the UAE is the Abu Dhabi-based, state-owned Abu Dhabi National Insurance Company (ADNIC), followed by Oman Insurance. Behind Oman Insurance in just Dubai alone are Arab Orient Insurance, followed by Alliance, Al Saqr and National General Insurance Company.

"We are quite happy with our growth pattern, which has been 25%-30% per annum for the last three years," says Dr Abdul Zahra Abdullah Ali, general manager of National General, which is part of the Emirates Bank group, and currently occupies the No 5 spot in Dubai.

"But I firmly believe that it is not sufficient to grow in size. We need to have a strong infrastructure and the right people on the staff. We need a good customer base, who are happy with the service we give them."

National as a company is well diversified, with 30% medical, 30% motor business, 25% fire, general accident and marine, and 15% which is life - group and individual. All classes of insurance are doing well.

"Our plan for 2005 is to take the company from its 2004 achievement of Dh90m to Dh150m," says Dr Ali. "It is a big jump, but we hope to achieve it. We started bancassurance with Emirates Bank and also launched individual life, which is bound to grow."

But the need of the hour, undoubtedly, is a proper insurance regulatory framework. Mr Al Halyan, who is the author of several articles on insurance in leading English and Arabic dailies and periodicals, says, "The authorities are working to amend the insurance laws.

"For example, at the moment, there is no requirement for insurance companies to be rated by international financial rating agencies like AM Best or Standard & Poor. This should be a mandatory requirement.

Reinsurance gaps

"The other area where there is a gap is reinsurance contracts; these are not mentioned in the regulations. There is a ministerial decree; that's all. We face problems in the courts here, because we have to explain to the judge what exactly a reinsurance contract is."

For the foreseeable future, Lloyd's and company market reinsurers will be satisfied that most contracts for marine, aviation and a host of other specialist risks will still make their way back to the London market to be underwritten.

However, there are many players in the insurance and reinsurance market who see great potential in having an office in Dubai.

Royal & Sun Alliance (RSA), Axa and Norwich Union are among the Western names that already have a significant presence in the Gulf, with RSA and Axa's regional bases being located in Dubai. Top brokers like Marsh and Aon are also present.

An interesting development among the foreign contingent of insurers operating in the UAE was the decision, in December 2004, of Axa and Norwich Union Middle East to merge their local operations across the GCC region.

The new joint venture, Axa Gulf, has a combined premium income of more than $100m region-wide, which makes the deal the largest international insurance merger ever seen in the Middle East.

The new entity will still operate under the Axa brand name, but as part of a joint venture with the Yusuf bin Ahmed Kanoo Group of companies, a private business conglomerate in the GCC with which Norwich Union and its parent Aviva have had an insurance partnership in the region for more than 50 years. Aviva is selling its shareholding in Norwich Union Middle East.

"In the immediate future, each company wil operate as normal, with integration taking place throughout 2005 once all legal and regulatory approvals have been completed," says Didier Boussemart, regional director of Axa Gulf.

"The company will maintain its network of offices in Bahrain, Oman, Saudi Arabia and the UAE."

In the reinsurance arena, there has been plenty of talk about GCC Re and other similar projects. Insurance experts opine that, in addition to solid capital, the establishment and success of such a reinsurance company will greatly depend on the commitment of its shareholders and the appointment of a highly qualified and internationally recognised management and underwriting team.

"Reinsurance is an international business, and if a regional player has to be established, then it has to be able to compete with the likes of the European giants, and not just play on the sidelines," says Fetooh Al Zayani, head of insurance and reinsurance at the Dubai International Financial Centre.

"I would give a credit to Arab Insurance Group (ARIG) for having been a good example for what an Arab reinsurance company could do in terms of creating a solid international image."

ARIG's own annual Arab insurance market report has forecast that privatisation and compulsory insurance schemes as well as growing penetration and government reforms will all help reshape the Arab world's insurance sector.

"Customer-driven retail insurance will enhance competition, which in turn will lead to more innovative products, increased demand and a boost in revenues," the report concludes.