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Is the Qatari insurance market ready for take off?
August, 2013
 

Qatar is currently the choicest destination where most companies are looking to enter and operate from. Owing to its gas reserves, the country has gained the status of yet another powerhouse GCC state. The region is also experiencing robust growth with aggressive budgets being set by the Qatari government to be recognised as a global operator. ta’ameen Qatar speaks to Mahesh Mistry, Director, Analytics, at A.M. Best to know more about Qatar’s insurance market. Qatar, the third largest economy in the Gulf Cooperation Council (GCC), has dynamics that are very different to those of the two dominant members, Saudi Arabia and the United Arab Emirates (UAE). While most of the GCC benefits from vast oil reserves, Qatar is in the unique position of possessing one of the world’s largest gas reserves. However, as with its neighbours, the revenues generated from energy commodities are the key drivers for growth and consequently one the most important drivers for insurance products in the region.

Mahesh Mistry/Director, Analytics, A.M. Best


Exhibit 1 shows that Qatar has the third largest insurance market in the GCC, with Gross Premiums Written (GPW) close to USD 1 billion as of 2011. It is expected that premium growth is likely to be faster than the GCC average, which is forecasted to grow by approximately five percent in 2013 – at a similar rate to 2012. Penetration rates for Qatar remain on at par with its regional neighbours, at less than two percent of Gross Domestic Product (GDP). This illustrates the low awareness and take-up of insurance products; although conversely, it emphasises the magnitude and scale of opportunities that exist in the market.

Premium development:

The Qatar insurance market has developed at a steady pace over the past five years, with GPW increasing by over one-third from approximately QAR 2.5 billion in 2006 to QAR 3.5 billion in 2011, with an annual compound growth rate of approximately ten percent. While the GCC in general saw a material slowdown in insurance premiums in 2011, Qatar experienced growth of approximately ten percent and is expected to outpace the GCC over the next five years.

Qatar has taken a number of key initiatives over the past few years, with the development of the Qatar Financial Centre, encouraging regional and international insurance companies to set up onshore account (either through a subsidiary or a branch) within Qatar and which conform to sound regulatory practice and international standards. Additionally, the recent introduction of compulsory medical healthcare will further enhance premium growth. More importantly, energy prices are currently above budgets, fostering future infrastructure developments. Qatar has also secured the 2022 FIFA Football World Cup, creating further opportunities for both the local and international insurance markets.

We expect the Qatar market to grow between seven to ten percent over the next few years despite the backdrop of both regional instability and depressed financial markets. The development of compulsory lines and improved regulation leading to heightened insurance awareness in the market should also increase premium volumes and penetration rates.

Regulation:

The insurance sector in Qatar is governed by two jurisdictions; the Law No 1 of 1966 states that all insurance companies must be licensed by the Ministry and Business and Trade (MBT) and more recently (in 2005) by the rules and regulations of the Qatar Financial Centre Authority (QFC), an onshore centre.

In 1971, an amendment to the Insurance Law prohibited the licensing of foreign insurance companies and as a consequence this restricted the number of companies operating in the market. The MBT continues to supervise insurance companies that operate under the 1966 law; however, regulation appears to take a light touch.

The establishment of the QFC created an onshore centre with access to regional markets operating under the more robust QFC Regulatory Authority (QFCRA), which operates independently of the MBT.

The QFC competes in the same space as the DIFC in Dubai and the Central Bank of Bahrain. It is notable that many international and regional companies have established presence through subsidiaries and branches at the QFC.

Most recently, the Law of the Qatar Central Bank and Regulation of Financial Institutions (Law 13 of 2012) (enacted in December 2012) indicates the intention to harmonise the regulatory framework across Qatar to promote financial stability and enhanced financial regulation. This is viewed as a positive step by Qatar to create a unified insurance regulator in the country.



Competitive environment:

The Qatar market has seen a marked increase in market participants following the establishment of the Qatar Financial Centre Authority (QFC). The top market participants have a very good reputation and franchise, although given the pressure from not just regional participants, but large-scale specialty underwriters, it is likely that these participants will see their market share reduced to a certain degree.

Both the Conventional and Takaful markets have seen opportunities, with many insurance companies offering products for both market segments.

Takaful operators are in many cases in direct competition with their conventional counterparts. The lack of brand or reputation presents a significant hurdle, in addition to satisfying the shareholders’ Return On Equity (ROE) requirements to service their capital base. This leads invariably to pricing pressures, as companies aim to generate material volume to satisfy their expense base. Overall, this will mean competition will become even more pronounced, with technical profit margins coming increasingly under strain.

At present, Takaful operators have adopted prudent models and are making sound technical profits.

There has been a continued increase in retention levels, from approximately 35 percent in 2006 to over 50 percent in 2011.

This is indicative of the trend seen in the region as companies are gradually taking more responsibility for underwriting risks.

Non-Life insurance market:

The Qatar insurance market is largely driven by commercial risks, which are heavily reinsured into the international market, with most direct writers either fronting this line, or retaining less than ten percent of premiums. This is indicative of the region for commercial risks, whereby the risk is transferred to the reinsurance market with the cedant receiving reinsurance commission.

On a gross basis, most insurers tend to have a diversified portfolio, with the predominant lines being energy, property (including construction) and motor. However, given the low retention on commercial risks, on a net basis, the main line of business is motor. Motor allows insurers to generate sufficient cash flows and volumes, allowing companies to build a market presence.

Compulsory motor has tariffs set by the regulator, who monitors market performance and adjusts rates accordingly. Performance on motor third-party liability tends to be border-line for the market, with any losses largely absorbed by the open market motor comprehensive product.

Consequently, motor is the most competitive business line, which invariably produces low margins compared to other business lines that benefit from material inward reinsurance commissions.

While medical healthcare has seen material growth in recent years, Qatar’s market is much smaller in comparison to the UAE and Saudi Arabia. Medical healthcare is now compulsory, and should provide opportunities to those that can effectively underwrite this product. Despite the limited number of companies offering medical healthcare products, insurers may still struggle to break even. It remains a problematic product for insurers to control underwriting, given the high level of medical claims inflation in the market.

Market performance:

Exhibit 3 shows that overall (estimated) market performance remains strong with insurers producing very good combined ratios; with the market average being below 90 percent. While the combined ratio has seen gradual increases in recent years, this is mainly due to the result of increased expenditure on expenses and higher acquisition costs. Despite the increased competition in the market, the loss ratio remains below 70 percent, showing marginal improvement in recent years and illustrating the market’s prudent approach to underwriting.

While expenses had increased to 25 percent by 2011, these were offset by negative acquisition costs indicative of the high inward reinsurance commission and relatively low commission expenses due to direct business. Acquisition costs deteriorated marginally in 2011, as common with the region, reinsurers reduced commission payments and introduced sliding scale commissions related to profitability. There was also a general shift towards higher retention levels for local companies. It is likely that the combined ratio will increasingly be placed under pressure as competition intensifies.

Qatari investment markets have suffered, although not as materially as their GCC counterparts.

Nevertheless, investment performance has been restricted in recent years with depressed equity and real estate markets, compounded by low interest rates. This may make it difficult for some companies to achieve their ROE requirements and will reinforce the focus on prudent underwriting.

Impact of catastrophe:

Recent studies show that Qatar is generally viewed as a non-catastrophe prone country, though the increasing number of catastrophes in the region is of some concern. Of most importance for insurance companies is their ability to effectively manage the accumulation and the concentration of risks. Given the dominance of high value risks, it is important that companies understand their exposures and mitigate these risks effectively. More often, these risks will be placed into the international market and the direct writers must ensure they are supported by a strong level of reinsurers in order to reduce counter-party credit risk, particularly for facultative exposures which can be substantial and placed on a case-by-case basis.



Conclusion:

The Qatari economy is well positioned to create further growth in the insurance market, with many opportunities and initiatives in place.

These include the vast amounts of gas reserves for revenue reinvestment, improved insurance awareness and regulatory advances and the 2022 FIFA World Cup. Despite these opportunities and a rebound in growth rates over the short–to-medium term, the increasing number of new entrants is expected to further fragment the market through increasing competition. With low investment yields anticipated in the short-term, there is greater pressure on insurers to deliver improved underwriting results. Prudent underwriting is expected to be important in order to establish a sound franchise in the market.

 
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