UAE, Saudi Arabia Offer Opportunities For The Islamic Insurance Sector

According to the EY report Waves of change: The shifting insurance landscape in rapid-growth markets, significant opportunities for growth are present in emerging markets such as Saudi Arabia and the UAE.

Gordon Bennie, EY MENA Financial Services Leader, said, “Islamic Insurance market growth has accelerated in countries where penetration rates were once low, such as Saudi Arabia, where consistent and rapid premium growth has been observed. In their search for growth and revenue, insurers need to optimize capital and asset liability strategies and remain cost competitive, without losing sight of their customers’ needs. Adapting to evolving market and regulatory change will be a challenge that requires employing new technologies and building flexibility into all aspects of the industry.”

The report features a risk-opportunity matrix ranking 21 rapid-growth markets (RGMs) in terms of their future prospects for insurers. The rankings are based on projected economic and premium growth until 2020, financial stability, regulatory change, macroeconomic volatility, liquidity risk and other factors.

“Technology continues to shape the industry, with legacy systems restraining some carriers’ ability to embrace big data analytics or meet the expectations of digitally savvy customers. The need for strong digital operations and rich customer experiences will be an ongoing strategic theme across the industry for some time to come. Opportunities for global expansion into new markets represent a powerful force accelerating the growth in insurance premiums today, especially as economic performance struggles in much of the developed world,” added Bennie.

Growth in the UAE and Saudi Arabia

The UAE has been the fastest-growing islamic insurance market among the GCC states, with a compounded annual growth rate (CAGR) of 17% over the past six years. The environment in the UAE offers intriguing growth potential with modest risk.

Similarly, the CAGR in insurance premiums per capita in Saudi Arabia was in excess of 10% from 2008 through 2012. Most of this growth has been at the back of mandatory products such as Saudi Arabia’s adoption of a health insurance system and third-party motor insurance.

Challenges facing today’s insurance industry

Financial results around profitability and solvency pose concerns for the industry, especially in Saudi Arabia, where almost half of the industry participants reported underwriting losses in the first half of 2014 and many reporting shareholder’s equity that is less than the mandatory required capitalization from Saudi Arabian Monetary Agency (SAMA), the local insurance regulator.

Sanjay Jain, Director, MENA Insurance Advisory, EY, said, “Technical profitability, slowdown in premium growth and regulatory compliance are the top three challenges for MENA insurance CEOs. We are seeing evidence of much needed consolidation in the sector with a few M&A announcements in the last six months.”

Market fragmentation is often blamed for poor financial results. However there are other challenges, which once addressed, can provide significant opportunities for the better-managed insurers going forward.

Future is ripe for growth

There have been many regulatory developments across the GCC, with Saudi Arabia, the UAE and Qatar currently going through a period of regulatory transition. SAMA, for example, has been extremely active in issuing guidance notes and new regulations such as underwriting practices, reserving, actuarial backed pricing and solvency requirements.

From a bottom-line perspective, areas such as technology enabled transformation, cost efficiencies and process re-engineering can be looked at to improve profitability. From a top-line growth perspective, insurers can consider organic growth as well as M&A routes, strategy refresh, market segmentation and customer-centric distribution channel development.

“The active supervision approach supported by measured regulations from the insurance regulators, is expected to help develop the market over the longer term, even if it means experiencing some challenges in the short-term,” concluded Bennie.

Originally published on www.cpifinancial.com