As population and legislative change drives GCC insurance market growth, Michael Kortbawi and Amira Janine El Masry of Bin Shabib & Associates look at the current regulatory position.
What is happening and why?
“According to a report by A.M Best on insurance market growth in emerging markets, this market experienced 21% growth in the GCC between 2002 and 2012. This has been mainly driven by the UAE and Saudi Arabia, where growth of 26% is expected up until 2017,” Michael Kortbawi explains.
“Unlike more developed countries, where insurance is a saturated market focusing more on niche products, firms in the GCC have a broad line of
segments they can operate in. Although a report by Alpen Capital showed life insurance made up about 14% of the GCC insurance market in 2012 and non-life insurance business accounted for 86%."
“There’s also an emerging and rapidly growing Takaful or Islamic Insurance market in the region, where products have become popular because they provide religious based protection. In Saudi Arabia, $4.3 billion has been generated from Takaful products or over half of the total GCC estimate for 2010. We have also seen Al Madina insurance company in Oman convert from a conventional insurer into a Takaful one.
New regulatory frameworks are being put in place to regulate these Islamic insurance activities.”
“This rapid growth can be traced back to compulsory insurance coverage enactments for residents, like medical insurance in Abu Dhabi (2006), Dubai (2014) and Saudi Arabia (2004), and motor insurance which is compulsory in all GCC countries. Regional population growth is also having an impact, as are increasing numbers of people under 30, increases in GDP and more consumerism which also results in higher demand for insurance related to liabilities created by more purchasing of products like houses and cars. In fact, the 2010 GCC Insurance Barometer statistics showed property, miscellaneous insurance and motor insurance were the fastest growing segments.”
“Another impacting factor has been the financial crisis. After construction projects were abandoned investors started to become more aware of the risks associated with real estate developments and large scale infrastructure projects. As a result, this non-life segment is expected to grow further, while the life insurance sector, is largely dependent on expatriates, since the local population has religious inhibitions towards it. Non-compulsory insurance products have also become more sought after because of political instability in the region which has increased risk awareness of property and personnel losses businesses may incur. However, there is a risk growth in this industry might be limited by regulatory gaps, insurance professionals’ lack of technical knowledge, insufficient corporate governance provisions, a local aversion to risk-taking and an inability to underwrite large risk which will continue to be transferred to foreign reinsurers. Local insurers also tend to lack the financial resources to underwrite large amounts and know-how which foreign insurers may bring as a result of long experience in a range of segments. One other area which is being discussed in the motor insurance sector, is insurance unification or the wish to create a unified system. Currently, a unified system, the ‘orange card’, includes other countries in the MENA region, such as Jordan and Egypt and provides cross-border third party liability motor insurance. The intention is to also have a system only for the GCC, which is to be more extensive than what is currently offered by the 'orange card',” Kortbawi explains.
“Qatar has a very outdated insurance law (Qatar Decree-Law No. 1/1966). Although progress was made when the Central Bank enacted Qatar Law
No. 13/2012, which regulates financial institutions, including insurance and reinsurance companies, as well as Takaful and Islamic finance providers. This law extended its reach to financial institutions in the Qatar Financial Centre (QFC), although it is a financial free zone. In Qatar, the two regulators (the state and the Qatar Financial Centre Regulatory Authority (QFCRA)) are integrated under one regulation. However, there are rumours Qatar may unite these two regulators with the Business and Trade Ministry and the QFCRA uniting. As insurance providers in the QFC are allowed to sell insurance products to all except state entities, this unification may open the market to local insurance providers. The fact the insurance sector has not been actively regulated or supervised can partly be attributed to the establishment of the QFC in 2005, which has become the country’s hub for insurance retail and wholesale businesses,” Amira Janine El Masry says.
“However, we may see this start to change with Qatar’s introduction of its Social Insurance Law (Qatar Law No. 7/2013) which has created a national health insurance scheme for nationals, residents and visitors. Saudi, Abu Dhabi and Dubai enacted compulsory health insurance
in 2006 and 2014 respectively, and Qatar arguably issued this law in response to these other countries setting the standard. It was enacted very recently and for now mainly Qatari women are covered, but all other nationals are expected to follow and the law will be fully implemented by
2015. The state will then provide health cover for all Qatari nationals and employers will cover employees and their families. Insurance providers will only be able to provide 'Additional Health Services' and the National Health Insurance Company (NHIC) a fully owned government entity will provide all 'Basic Health Services'. The NHIC will be responsible for Qatari nationals’ health insurance, employers will be liable for that of expatriates and their dependants and visitors will need their own travel health insurance,” El Masry adds.
“The QFC and the DIFC have similar regulations. However, the DIFC’s main insurance business is reinsurance, rather than retail and wholesale activities permitted by the QFC. In the QFC, companies must set out written details in the policy of how a policyholders’ deficit is to be treated and the QFCRA Rulebook prohibits loans from one fund to another, preventing the use of surpluses from one fund to cover the deficit of another. This gives policyholders transparency in how the fund and all monies are to be handled in line with Islamic principles.”
“The Saudi Arabian Monetary Agency (SAMA) applies the Kingdom’s laws and regulations on conventional and Takaful insurance equally. As their insurance laws have to be Sharia compliant, many Takaful elements are found in conventional insurance. So by law policyholders receive 10% of the profit surplus, or a reduced premium the following year and 90% of the profit surplus goes to shareholders. Most insurance companies also offer Takaful insurance products (e.g. Family Takaful), but although the law doesn't provide for separation of Takaful funds and shareholder funds, qard Hassan (interest free loans which cover policyholders’ accounts’ deficits by shareholder funds), or for the appointment of a Sharia Board to oversee the compliance with Sharia law, most insurance companies apply these principles on their policies. The 2012 mortgage law is also likely to increase the availability of property and expand the demand for property insurance, impacting this non-life sector in the Kingdom,” Kortbawi says.
“In the UAE and Dubai International Financial Centre (DIFC), there are specific Takaful and Retakaful insurance regulations (the Takaful Regulations issued by Insurance Authority Board Resolution No. 4/2010 and Islamic Finance Rules (IFR) Instrument No. 125/2013 issued by the Dubai Financial Services Authority (DFSA)). Takaful insurance providers in the UAE must comply with Federal Law No. 6/2007 and Takaful Regulations simultaneously. However, the 2007 law doesn't address all insurance issues and so the Insurance Authority has been issuing resolutions, e.g. Cabinet Resolution No. 42/2009 and Federal Resolution No. 8/2011 to bridge these gaps. The Insurance Authority has also recently issued Administrative Decision No. 15/2013 to better cover the relationship between insurance companies and brokers and between brokers and their clients. It mainly covers insurance brokers' minimum capital and guarantee requirements. Brokers licensed in the UAE must now have a minimum paid up capital of three million AED and brokers operating as a foreign branch must sustain a minimum capital of 10 million AED. A minimum bank guarantee of three million AED for locally licensed brokers and five million AED for foreign branches has been implemented. An other regulation Administrative Decision No. 58/2013 has also been issued to cover qualifications for entry into the brokerage market. Brokers need a high solvency level (even higher for foreign companies or companies incorporated in the free zones). There are also additional professional education and practical experience standards needed for brokers under the Additional Regulations. These capital minimums and education standards for those in high positions in brokerage companies will aid consumer protection but may lead to smaller brokers either disappearing from the market or having to merge. The insolvency issue has also been addressed. Insurance beneficiaries under a policy have priority over other creditors. However, similar regulations have not been introduced or implemented in the QFC or Saudi Arabia. There has also be talk in the UAE of new bank assurance regulations to further liberalise the market and encourage the selling of insurance products in the country’s banks. The Central Bank has drafted a resolution, to regulate banks and insurers wishing to participate in these activities with their approval, but they may only be allowed to market these products."
OTHER GCC STATES
“Kuwait’s insurance sector has an underdeveloped regulatory system. Under its insurance law (Kuwait Law No. 24/1961), companies are regulated by the Commerce and Industry Ministry. New laws are being proposed, but major reform of the current system is not currently envisaged. Meanwhile in Oman, the Capital Market Authority acts in line with Oman Sultani Decree No. 12/1979. This is a very outdated law. However, the regulators intend to introduce developments to the conventional and Takaful insurance regime in the future. New laws are in the process of being drafted, but there is currently no detail on when these will be implemented. Previously the Takaful regime was non-existent in Oman, but since 2012, when the Sultanate introduced a vast framework for Islamic banking, it has been allowed. This was what led Al Madina to convert from a conventional insurer into a Takaful insurance provider. The insurance law addresses how policyholders and beneficiaries are prioritised, in line with similar DIFC and UAE provisions. There may also be more involvement in the sector from the Capital Market Authority and further regulatory changes, particularly to minimum paid-in capital requirements of composite insurance providers.
Like Oman, new regulations are also being looked at in Bahrain, where the Central Bank is planning on issuing a new regulatory Takaful insurance framework. These proposals are intended to restructure the calculation of capital, which should replace the existing regime (qard hassan). Previously, shareholders could administer money from their share capital to balance out any deficit in the policyholder’s fund, as is the usual GCC practice. The new law intends to require approval of the firm’s Sharia Board and Board of Directors to calculate any fund excess or deficit and replace it with capital injections. The Bank’s approval will also be required to distribute any capital to policyholder’s funds. Financial reporting will also be increased to an annual basis, instead of the current three year reporting system and performance fees will be abolished. The introduction of a special purpose sukuk vehicle had also been discussed between the Bank and the industry for the past two years and may happen by the end of the year,” Michael Kortbawi concludes.
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