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BETWEEN THEN AND NOW..
June, 2014
 

Akshay Randeva, Director, Strategic Development, Qatar Financial Centre Authority, presents a synopsis of the spectacular growth witnessed by the insurance sector in Qatar and the GCC


Qatar’s insurance industry has grown substantially over the past five years. From 2008 to 2012, the sector expanded by an annual average growth rate of 11.3 percent from USD 0.8 billion to USD 1.3 billion. The sector’s growth is mainly driven by the combined impact of rapid economic growth, low insurance penetration and a young and increasing population. Life insurance is still a largely untapped segment in Qatar, with a share of total premiums of approximately five percent. 

 

Qatar’s insurance growth is largely in line with the sector’s development across the GCC. According to Swiss Re, the Central Bank of Bahrain and BMI reports, the GCC insurance market more than doubled in annual premiums from USD 6.4 billion to USD 16.3 billion from 2006 to 2012, recording an annual average nominal growth rate of 16.3 percent. This spectacular increase compares to a meagre 0.5 percent growth over the same period in Europe and 3.7 percent worldwide. Premium growth recently slowed to 10 percent in 2012, with a further reduction to 7.5 percent expected for 2013 to 2015. On the basis of this projection, the GCC insurance sector would grow to almost USD 20 billion by 2015. Similar to Qatar, the GCC insurance market is still very much dominated by the non-life segment, which accounted for 87 percent of premiums in 2012, virtually unchanged from 2006. 

Akshay Randeva, Director, Strategic Development, Qatar Financial Centre Authority 

 

Opportunity-Low insurance penetration: 

Insurance penetration (premiums as a percentage of GDP) is on the rise, but it is still far below the global average. Over the past 12 years, penetration progressed from 0.7 percent in 2000 to 1.3 percent in 2012. However, in 2012, the global average stood at 6.5 percent. 

When comparing insurance penetration of the GCC-particularly Qatar with markets showing similar GDP, the growth potential becomes apparent. Qatar, which boasts of having the world’s highest GDP per capita of more than USD 100,000 annually, exhibits an insurance density (premiums per capita) of USD 708. In the developed and mature markets, annual premium spend per capita amounts to USD 3,677. 

Insurance penetration in Qatar declined from 2006 to 2012. Whilst non-life premiums grew at an impressive rate of 11.7 percent, GDP increased even faster at 21.4 percent. In the life sector, premiums grew disproportionately at 35.2 percent, well above GDP growth – albeit from a very low base. 

Poor uptake of Life Insurance: 

 

Life insurance is still of minor relevance in the GCC, which is in stark contrast to the rest of the world, where life insurance generally accounts for the biggest portion of the insurance market. Only 13 percent of premiums are spent on life cover when compared to 57 percent in Europe or 63 percent in Asia-Pacific (excluding Japan). One of the reasons for poor uptake of life insurance is cultural disinclination for this type of protection. This also becomes obvious when looking at the share of premiums to savings. While the average American devotes almost half of his savings to life insurance, the respective share in the GCC is a mere two percent. 


Minaret of Fanar Qatar Islamic Cultural Centre 

 

Qatar still dominated by large commercial risks: 

Product diversity in the GCC insurance market remains in its infancy as industrial risks such as marine, aviation and certain property classes continue to dominate the market and drive its growth. Given Qatar’s large hydrocarbon sector, energy, marine and construction are the dominant lines of business. 

Personal lines are still poorly developed and grow disproportionately where cover for motor third party liability or health insurance has become compulsory. Since third party motor insurance has been made compulsory, this line has increased to a market share of almost 20 percent and now represents the largest portion in the personal non-life segment. 

Reinsurance markets still enjoy significant growth: 

The growth dynamics of the region’s direct insurance markets are set to benefit reinsurers too due to high cession rates in the GCC. In 2012, 37 percent of premiums were ceded to reinsurers, well above the global average of about 10 percent. The heavy reliance on reinsurance reflects the dominance of a direct insurance business model, which is focused on commission and investment income. This is not expected to change dramatically for as long as reinsurance capacity is abundantly available and rates are low. 

Having said this, cession rates have steadily declined by almost 10 percentage points over the past six years, primarily due to introduction of compulsory insurance schemes in personal lines such as motor and health. These lines are the most rapidly growing segment of the market and typically display lower cession rates than the more volatile commercial parts of the business. The 2012 cession rate for Qatar amounted to 42 percent, slightly above the GCC average. This reflects the prevalence of large commercial risks and a limited scope for diversification within the country. 

Profitability still attractive: 

The GCC insurance sector is widely believed to be overcapitalized. For instance, in Qatar, for every dollar of capital USD 1.28 of net premiums are written. While the average for the region is slightly higher at USD 1.42, insurers in the OECD wrote an average of USD 4.02 in net premiums for every dollar of capital in 2012. The low ratio of net premiums to capital does not only reflect high capitalization, but also indicates a business model, which assigns a higher value to managing assets rather than insurance risks. 

The capacity available in the region is not solely driven by capitalization of the domestic insurance industry. The insurance sector in the GCC also exhibits a strong presence of international players, which have expanded into the region in recent years. Qatar alone exhibits the presence of six renowned international players. 

The multinationals are attracted to the GCC for its growth dynamics and low natural catastrophe exposure. The latter provides immediate diversification benefits to global players who write catastrophe businesses in other parts of the world. 

 

Despite the pressure on rates and the abundance of available capacity, the combined ratios (based on net premiums, i.e. after reinsurance) of non-life insurers in the GCC still indicate an attractive net profitability. For the past five years, with the sole exception of 2012, the region’s non-life insurers achieved combined ratios of around 80 percent. For each dollar of premium income, only 80 cents had to be paid out for claims, commissions and administrative expenses. Qatar’s insurers as well exhibited strong technical results, although the industry’s combined ratio swayed between 79 percent in 2008 to 106 percent the following year, and was back again to a low of 73 percent in 2012. 

Overall, the insurance sector has created significant economic value from 2008 to 2012. The Qatari insurance firms outperformed their GCC peers delivering Returns on Assets (RoA) of 8.7 percent and Returns on Equity (RoE) of 15.5 percent on average over the past five years, significantly above their estimated cost of capital. By comparison, their peers in the region achieved RoA of 4.4 percent and RoE of 9.3 percent. 

West Bay Area 

 

Heterogenic distribution landscape: 

The GCC exhibits striking differences in insurance distribution. In Qatar, agents and brokers are the least developed distribution channel. Only 30 percent of all non-life premiums are purchased through this channel. If motor is excluded, the relevance of the broker/agent channel declines to 14 percent. In Qatar, 75 percent of Group Life policies are sold directly, while in Bahrain or Oman, distribution is dominated by brokers and agent channel with 60 percent and 100 percent respectively. When it comes to individual life policies, agents and brokers are the main sales channel in the GCC. In Qatar, direct sales accounts for just 15 percent with the overwhelming majority of products being sold via agents. 

Takaful still not living up to expectations: 

The GCC is an important market for Takaful insurance. Since 2005, Takaful contributions have risen from USD 1.1 billion to USD 6.1 billion in 2011, with Saudi Arabia accounting for 80 percent of all Takaful contributions in the GCC. For 2012, contributions are estimated at USD 7.4 billion. By comparison, total insurance premiums amounted to 16.3 billion for the GCC region during that year. Qatar’s Takaful contributions were USD 300 million in 2011, which was more than 25 percent of the market’s total. 

The two most important markets for Takaful are Saudi Arabia and Malaysia. However, according to the 2014 MENA Insurance Barometer, Takaful is viewed with increasing scepticism. Profitability of the sector is considered poor and a consolidation wave is expected as current Takaful products generally do not seem to offer a genuine differentiation and fail to live up to the concept of mutuality. However, there seems to be a consensus among the executives who polled that the principle of Takaful, if applied properly, is valid and promising as demonstrated in markets such as Malaysia. 

 
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