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UAE insurance market set to grow on demand

DUBAI — UAE insurance market is expected to grow on rising demand, but finding suitable staff is one of the challenges, a study has found.

Pointing out other challenges the study found that improvement in the legal framework could help make the environment more amenable for insurance companies.

A recently released study by Dubai Chamber of Commerce and Industry focuses on the current trends and prospects in the UAE insurance market as highlighted by Business Monitor International (BMI) report, which indicates that the UAE insurance market is expected to experience strong growth as the demand for insurance products increases.

Future forecasts for the UAE insurance sub-sector, in which the non-life premium market is forecast to increase by a compound annual growth rate (CAGR) of 11 per cent, while the life premium market is forecast to grow by a CAGR of 8 per cent per year.

Growth drivers

The study points out at important drivers of growth for the insurance sub-sector including the level of Gross Domestic Product (GDP), GDP per capita levels and penetration of life and non-life insurance market. It states that the growing penetration levels coupled with rising GDP and per-capita income levels could indicate an insurance sub-sector set for high growth.

Rising income levels could lead to increase in demand for insurance, as people have more disposable income to spend on protecting themselves, while low penetration means that there could be substantial potential for UAE companies to grow from a low base.

It further said that in the case of UAE, as per-capita income, nominal GDP and penetration levels for the non-life insurance market, which makes up a majority of the premiums in UAE, are expected to grow. These conditions can therefore be expected to drive the future growth of the insurance industry in the UAE. Population is another growth driver and is expected to increase 
in the UAE.

Future consolidation and mergers in this sub-sector could create these economies of scale. This could hold long-term benefits for customers, if part of the cost-savings is passed on to customers. A large majority, about 85 per cent of the premium amount, comes from non-life insurance while the remainder share of 15 per cent comes from the life insurance category.

The UAE insurance sub-sector is an important part of the UAE financial sector. The economic significance of the insurance sub-sector is that it seeks to cover losses and minimise risk exposure of the individuals and companies. By pooling the risks across the economy, the insurance sub-sector therefore serves as an important intermediary and helps in more efficient sharing and management of risks.

Prospects

Islamic insurance, known as takaful, is also expected to be an important growth area.

Takaful involves the voluntary provision of mutual assistance where all clients enter into a cooperative agreement to insure one another. Economic growth and rising incomes among the GCC and other developing Muslim countries, such as Indonesia and Malaysia, could result in an increase in demand for takaful. The demand for such Islamic insurance products seems to have high potential for growth but is currently at a low base, creating the possibility of rapid growth in volumes.

Challenges

The study said that improvement in the legal framework could help make the environment more amenable for insurance companies. For takaful, one major challenge is that there is a lack of assets compliant with Islamic provisions against usury and excessive risk, which companies can invest in. Finding suitable staff is another challenge. Takaful operators are generally smaller, which means they are still not able to take advantage of economies of scale and achieve a high level of profitability.

Standardisation of laws relating to takaful is another challenge which if resolved could help aid the growth of this market.

The insurance sub-sector in the UAE can therefore look forward to a period of robust growth.

Increase in demand for insurance products due to greater awareness of this area coupled with increasing incomes could increase the customer base and the amount of premium.

From the insurance industry perspective, further growth depends on the ability of companies to realise economies of scale so that they are more profitable and able to survive any economic downturn and be more stable long-term partners for 
their customers.

· abdulbasit@khaleejtimes.com