The insurance market of the United Arab Emirates (UAE) has continued to demonstrate strong growth and exceptional profitability in 2017 as a consequence of 2015s regulatory reforms , however A.M. Best’s outlook for the sector remains negative with significant challenges lurking on the 2018 horizon.
Preliminary disclosures of the national insurers listed on the Abu Dhabi Securities Exchange and the Dubai Financial Market have shown that in 2017 “aggregate underwriting profits for UAE-listed insurers grew by an exceptional 69.8% to reach AED 1.7 billion while net profits rose 47.4% to AED 1.3 billion,” said A.M Best.
Salman Siddiqui, A.M Best associate director, analytics, said that against the volatile economic backdrop of low oil prices and reduced government spending, “the results appear all the more impressive.”
A.M. Best attributes the bulk of improvements to the active role played by the regulator, the Insurance Authority (IA).
The regulatory reforms on actuarial pricing and reserving have led to improvements in underwriting discipline, consequently easing pricing competition and boosting firms’ profitability due to an ensuing overall rate increase on key business lines of medical and motor insurance.
Mahesh Mistry, A.M Best senior director, analytics, added; “given that the deadline for compliance with DHA requirements has now passed, A.M. Best expects limited volume growth emanating from mandatory medical going forward.
“Additionally, continued low oil prices and reduced government spending will continue to affect equity and real estate asset prices, which will create volatility on the balance sheet and income statements of insurers with riskier investment strategies.”
Motor insurance benefited from the introduction of the Unified Motor Policy for third-party cover, which has reduced price-led competition and allowed for more realistic rates to be charged.
For comprehensive motor policies, A.M. Best has observed strong increases in prices as insurers have become increasingly compliant with the regulator’s requirement for actuarial-led pricing.
Medical insurance has also benefited from the IA’s requirements on actuarial-led pricing as well as the introduction of mandatory health insurance requirements by the Dubai Health Authority (DHA).
Despite these positive improvements in regulation and profitability, the rating agency’s outlook on the insurance markets of the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE) remains negative.
Effective from 1st January 2018, the implementation of Value Added Tax (VAT) is considered by the rating agency to be among key challenges facing insurers in the UAE market.
The VAT is likely to result in a one-off adaptation cost to insurers. and A.M. Best cited additional impacts of “a short-term out ow of paying VAT before reclaiming input VAT, as well as the pressure on companies to charge VAT on unearned premiums for policies incepting after October 2017.
“Some insurers have indicated that they will not pass on the VAT charge on unearned premium to retail customers, which could lead to temporary margin erosion.”
While 2017 was an above average growth year for the UAE insurance market as regulatory development led to significant premium and pricing gains, 2018 could be an entirely different ballgame for an industry left to juggle the Value Added Tax and economic volatility provoked by continued low oil prices and reduced government spending.
