insurance opportunities in the middle east -...

1

Insuranceopportunitiesin the Middle East

Cont

ents

Foreword

Introduction

• United Arab Emirates• Kingdom of Saudi Arabia• State of Qatar• Egypt• Kingdom of Bahrain• Kuwait• Sultanate of Oman

• GCC VAT• From outsourcing to “robosourcing” • Technology revolution • Cybersecurity • Digital redraws traditional structures• Dawn of a new world of reporting• Data analytics

Luca RussignanEY Global Insurance Analyst Team [email protected]

Zahir KachwallaEY Global Insurance Senior [email protected]

Nilabh KumarEY Global Insurance [email protected]

2 Insurance opportunities in the Middle East

Foreword

Shaun Crawford

EY Global Insurance Leader

Gordon Bennie

EY MENA Managing Partner Financial Services

Robert Abboud

EY MENA Financial Services Advisory Leader

Rohan Sachdev

EY Global Insurance Emerging Markets Leader

3Foreword

Insurance markets in the Middle East have remained resilient despite economic headwinds and lower oil prices. Two of the region’s largest markets, the United Arab Emirates (UAE) and the Kingdom of Saudi Arabia (KSA), are in excess of US$10b each in gross written premiums — underlining the region’s increasing significance to global insurance markets.

As Middle East markets continue to mature due to new regulatory requirements, mandatory lines of business (primarily, motor and health insurance) are driving overall growth. Profitability remains a key concern for insurers, as investment income is impacted by low interest rates, weak equity performance and a stagnant real estate market. Technical margins remain poorly governed by obsolete processes, outdated legacy systems, low productivity and high incidences of fraud, especially in motor and health lines.

In increasingly competitive markets with price and margin pressures, some insurers are cutting costs to maintain their bottom line. Despite these efforts, short-term financial results in some markets are impacted by regulatory change and the need for better reserving — leading some local insurers to actively look at consolidation.

Low levels of penetration are both a challenge and an opportunity. We believe that insurers willing to invest in innovation and digital technology in Middle East markets will reap significant benefits. Penetration levels will improve as insurance companies break the barriers of traditional distribution channels. This will require insurers to adopt robust actuarial modeling techniques to improve pricing sophistication, apply data analytics to reduce fraud, focus on customers and adopt advanced technology to revamp operations.

We expect economic activity in the region to revive, though at a slower rate than in the last decade. The industry has many opportunities to capitalize on the economic revival, particularly with large-scale government spending on infrastructure and mega projects. We expect the life and savings culture to develop, as states look for ways to reduce subsidies and large government-funded social security schemes.

Exciting times lie ahead. We hope you will find this report interesting and a catalyst for further discussions. We look forward to your feedback and viewpoints on emerging opportunities in the growing Middle East insurance markets.

The Middle East region’s short-term economic outlook continues to mirror the diversity across the region. While the world has remained dependent on the Middle East for its energy needs since the 1970s, fiscal positions in most oil exporting countries are weakening because of sharp declines in oil prices in the last two to three years. Measures to reinforce fiscal positions are expected to limit economic mid-term growth, while deep-rooted sociopolitical strains continue to weigh on the outlook for some countries.

In this context, governments have been forced to explore options to diversify economies, limit expenditures, create new revenue streams such as value-added tax (VAT) and increase public-private sector participation.

Although insurance has grown at an impressive double-digit rate in the last five years, regional penetration remains lower than in most of the world’s emerging markets. Growth has primarily come from mandatory insurance coverage, i.e., third-party motor and health insurance. Life insurance and savings have made a negligible contribution, except for the UAE, Iran and Egypt. Commercial lines (i.e., property and engineering) have fared the worst due to poor economic conditions and receding growth in commerce and trade.

Low oil prices are hurting the industryOver the short term, the reduction in oil price is the key element affecting the region with significant effects on the insurance industry that are felt across the region:

• Reduced government spending is impacting engineering and energy sectors, as in-flight projects are delayed or canceled and new projects postponed; at the same time, government tenders for insurance have become more price driven.

• As liquidity dries up, payments are taking an increasingly long time to materialize. This has had a knock-on effect on several sectors, with insurance companies experiencing issues with timely collection of premiums.

• Consumers have become price sensitive, and costs has become an even more important buying consideration. Sales of optional/discretionary insurance products, such as home/travel insurance, have been affected as consumers prioritize spending. Motor customers opt for basic third-party liability (TPL) over comprehensive coverage.

• Investment income has come down because of reduced interest rates and poor performance across other asset classes (equity/real estate).

Macro outlook — oil vs. non-oil growth: What is in store for the Middle East in 2017 and beyond?

Introduction


Insurance penetration in Middle East is much lower than the rest of the world

Source: Swiss Re: World insurance reports

2015 insurance penetraion (%)

Life and takaful: questions remainUnlike global markets where the life insurance segment is often bigger or at least comparable in size to the non-life segment, MENA markets represent a stark contrast, with very few markets (e.g., the UAE, Iran and Egypt) having a significant life insurance segment. This trend is attributed to generous social welfare schemes, low customer awareness for mortality-based products and cultural beliefs that are incompatible with traditional concept life insurance.

Despite the region’s predominantly Islamic population, takaful insurance has struggled to establish a strong foothold — largely due to lack of product differentiation and competition with conventional players. Once a few of the key takaful players achieve the desired scale, the niche takaful market might be a good place to be in backed by newly introduced takaful legislation in some of the key MENA markets.

Product differentiation is generally low across the region and has led to price-based rather than product design or service-based competition. This has eroded margins in several markets, questioning the viability of players, especially those at lower ends of the spectrum.

Profitability is elusive in most marketsProfitability remains a key concern for MENA insurers. As investment income has not contributed significantly to shareholder returns, insurers have focused on technical profitability and cost reduction. With poor pricing and increased reserves (reflecting the new regulatory guidelines), technical profits have been under stress for most insurers. While cost-cutting measures may bring short-term relief, sustained results can only be achieved by well-executed operational transformation strategy, backed by robust technology and a customer-centric approach.

Introduction 5

“ Middle East insurance markets are growing toward increased maturity supported by enhanced regulations, as evidenced in the UAE’s 2016 GWP growth of 19%. Notwithstanding short-term economic headwinds, we are extremely excited on the long-term prospects for growth.”

Sanjay Jain EY MENA Insurance LeaderDubai, UAE

2.45% 2.35% 1.57% 1.54% 1.51% 0.90% 0.68%

7.29% 6.89% 6.23% 5.34%

2.90%

Insurance opportunities in the Middle East

Egypt

Kingdom ofSaudi Arabia

Oman

UAE

Qatar

Kuwait

Bahrain

Source: World Bank

GDP growth (%) Oil rent

(% of GDP)

Inflation rate (%) Population Median age

(years)

International migrant

stock (% of population)

2015 Avgerage 2010 -14 2014 2015 Avgerage

2010 -14 2015 (m)Avgerage

growth 2010-14 (%)

2014 2015

UAE 3.2% 4.5% 19.0% 4.1% 1.2% 9.2 2.2% 30.3 88.4%

Saudi Arabia 3.5% 5.3% 38.7% 2.2% 4.0% 31.5 2.4% 26.8 32.3%

Qatar 3.6% 9.3% 19.5% 1.9% 1.5% 2.2 5.3% 32.8 75.5%

Egypt 4.2% 2.7% 5.8% 10.4% 9.6% 91.5 2.2% 23.8 0.5%

Bahrain 2.9% 4.0% 15.3% 1.8% 2.1% 1.4 1.9% 32.1 51.1%

Kuwait -0.4% 2.7% 53.0% 3.3% 3.6% 3.9 5.2% 29.2 73.6%

Oman 3.5% 3.5% 28.0% 0.1% 2.5% 4.5 9.5% 25.1 41.1%

Middle East key macroeconomic parameters

Oil rents (% of GDP): Oil rents are the difference between the value of crude oil production at world prices and total costs of production


7

1EY Strength in unity: Making the GCC the sixth largest economy in the world, Growth Drivers 3, EYGM Limited, 2016.

3. Compulsory business lines, supported by health and motor regulations

4. A younger population, increasing life expectancy and high proportion of expatriates buying insurance

Regulators are focusing on improving market conduct and solvency-based capital controls to ensure insurers develop sustainable business models. With the introduction of new insurance regulations, most recently in Qatar and the UAE, the industry is grappling with enhanced regulatory and corporate governance standards. In an unprecedented move in November 2016, SAMA suspended a number of significant KSA motor insurers from issuing new motor policies until customer complaints and claims management issues were addressed by the insurers — clear example of regional regulators clamping down hard on conduct of business and consumer protection aspects. In the first-of-its-kind move in the Saudi insurance sector, Sanad Cooperative Insurance Co. (Sanad) applied for voluntary liquidation after losing more than 50% of its capital, in March 2017. A number of KSA insurers have filed regulatory disclosures in the recent weeks stating their intent to merge with other insurers.

In a move to improve customer centricity, UAE Insurance Authority introduced a consultation paper in November 2016 for all the life insurers in the UAE. Once implemented, these new life regulations are expected to change the way the industry operates currently, something that has been witnessed in developed countries (e.g., UK and Asia-Pacific) in the past decade. UAE Insurance Authority also introduced new motor regulations in December 2016. While these may inflict short-term pains, from our experience, these are crucially beneficial for the long-term development of a mature insurance market.

In summary, regulators and insurers are expected to exhibit increased agility in addressing emerging opportunities such as digital and challenges such as low oil prices. Regulatory changes, including the introduction of VAT/IFRS and higher customer expectations, will be key drivers of change and an opportunity for insurers to revamp their operating models.

In this report, we present an EY point of view on seven key Middle East markets and region-specific trends that will profoundly affect insurance dynamics in the coming years.

Given the current competitive environment — strained profitability and increasing regulatory requirements — a key outcome is likely to be increased pressure on small insurers leading to consolidation opportunities, which is already evident in the KSA market. This could ultimately be positive for the market as a whole, as a small number of strong players would result in a more robust market.

Customer centricity will drive innovationDigital disruption is around the corner for the region and given the young and connected population, insurers need to take notice and explore opportunities to deploy technology and automation. Another priority is to embed analytical tools for precise decision-making, not only on the front end with customer analytics but also to support profitability, through claims and fraud analytics. Today’s customer is demanding and is armed with the power of social media. While some companies are responding with new products and services, the sector as a whole does not seem to be doing enough.

Invigorated reform agenda: an impetus to accelerated growthOnce the short-term impact of reduced oil prices is navigated, we expect the economic activity in the region to revive, even though rates may be slower than they were over the last decade. The insurance industry has many opportunities to capitalize on the economic revival, with large-scale government spending on infrastructure and mega projects, as governments focus on diversification (e.g., KSA vision 2030 and Abu Dhabi Vision 2030). If the GCC continues to grow at an average of just more than 3% for the next 15 years and overcomes its fragmentation, it could become the sixth-largest market in the world by 2030.1 The industry will be positively impacted by:

1. Economic diversification and government spending continuing to support new governments’ growth agendas and move away from traditional oil revenue

2. Stringent regulations that redefine the sector, as regulators address challenges such as poor pricing, leading to declining technical profits and solvency ratios

Introduction


United Arab Emirates01

9

As low oil prices weigh on consumer and business sentiment, the UAE’s economic growth has slowed considerably; the gross domestic product (GDP) growth declined from 6.9% in 2012 to a projected 2% in 2016. Like neighboring countries, the UAE Government has slowed outlays on non-essential projects, removed energy subsidies and is exploring diversification of income streams, including imposing a Gulf Cooperation Council (GCC)-wide VAT effective January 2018. Private sector lending, deposit growth, real estate transactions and stock markets have shown signs of weakness, indicating tight economic conditions.

Amid these conditions, the insurance industry has proven resilient, growing at a faster rate than the rest of the economy. Most of this growth has been on account of introduction of mandatory health insurance aided by recent policies and regulatory measures, which have improved penetration levels in both the life and the non-life segment.

As a result of this differential growth, insurance penetration in the UAE is now one of the highest in the region, though much lower than in most global markets. Although already well diversified, the UAE aims to move further toward a service-based economy by 2021, with oil contribution to GDP falling from circa 33% today to 20%. The UAE also ranks high for its ease of doing business and openness to investment and trade, and these will be the key enabling factors in this transition.

Although infrastructure spending is slowing, major projects such as Expo 2020 Dubai are expected to create large-scale employment opportunities and demand across sectors such as housing, tourism, travel and services, leading to a sustainable demand for insurance products.

In 2016, as part of the UAE’s plan to revamp its economy, which has been hit by low oil prices, the two largest banks in the region — National Bank of Abu Dhabi and First Gulf Bank — merged and created a regional powerhouse, with US$183b of assets and 26% of the UAE’s outstanding loans.

Resilience in the economy and insurance

1.6%

0.4%0.4% 0.3% 0.3% 0.4%

0.5% 0.5% 0.6%

2.1%1.8%

1.5% 1.5%

Life insurance penetration

Non-life insurance penetration

1.6%1.7%

1.8%

2008

2.5%

Sustained premium growth in a diminishing economic growth scenario has led to notable improvement in penetration

2.0%

1.5%

1.0%

0.5%

0.0%2009 2010 2011 2012 2013 2014 2015

3.2%

-5.2%

1.6%

5.2%4.3%

GDP growth(annual %)

6.9%

4.6%3.2%

2008

9.0%

6.0%

3.0%

0.0%

-3.0%

-6.0%

2009 2010 2011 2012 2013 2014 2015

United Arab Emirates

Source: Swiss Re Sigma: World insurance reports, World Bank

Mandatory Dubai health insurance to support premium growth

Overly competitive insurance market with too many players

Evolving regulatory landscape Profitability recently under stress


Insurance growth engineered by regulationAs in other Middle East markets, health insurance is the largest and fastest growing line of business in the UAE as well. The high growth in health insurance premiums (2011-15 CAGR: 23%) has been the key driver for the overall UAE market’s double-digit growth (2011-15 CAGR: 11%). Health insurance penetration has been on the rise on the back of the introduction of mandatory health insurance in Abu Dhabi nearly a decade ago and more recently in Dubai and a shift toward private health care.

The UAE insurance market GWP grew substantially at 19% in 2016, driven by the introduction of mandatory health insurance in Dubai overseen by Dubai Health Authority (DHA)

In January 2014, the Dubai Government started a three-phase implementation of a mandatory health insurance system, the Insurance System for Advancing Healthcare in Dubai (ISAHD). The system required all residents, including dependents (and domestic workers), and all employees (including blue-collared ones) to have health insurance in a phased manner:

• Phase 1: More than 1,000 employees till October 2014

• Phase 2: 100-999 employees till July 2015

• Phase 3: Below 100 employees till June 2016, penalty exemption till December 2016

fragmentation in the space and new insurance broking regulations announced in 2014 are pushing the sector toward further consolidation over the next few years. Increased activity is being seen in the bancassurance channel where new partnerships have been announced in recent years, especially in distribution of life products.

While digital does not have a significant presence in the market, with the exception of online motor policies, aggregators are strengthening their presence and may see increased interest from stakeholders in the coming years. Moreover, multiple insurers are now offering online quotes for key product segments.

Competitive landscape: considerable foreign presenceThe UAE’s market is overly competitive with 61 insurers and can be divided into three groups: large local or regional companies

Life insurance has also expanded rapidly (CAGR 19% during 2011-15), driven by growth in single premium investment products sold through banks and by increased demand from a large expatriate community. However, life insurance adoption continues to be plagued by adverse local beliefs and low awareness and lags behind global benchmarks. Also, the market for life products has recently declined because of a drop in demand for single premium products. In a strong move toward improving customer centricity, the UAE Insurance Authority introduced a consultation paper in November 2016 for all the life insurers in the UAE. Once implemented, these new life regulations are expected to change the way the industry operates currently, something that has been witnessed in some of the other advanced countries such as the UK and Asia-Pacific in the past decade. The key areas to be impacted include product structure, disclosures, customer communication and distributor remuneration. Restructured products, increased awareness, a possible rebound in oil prices and improved economic conditions can be expected to drive future growth in the life segment.

Other key segments have experienced flat to low growth. Motor insurance sales have faced unhealthy competition, leading to softer premium rates. Property and fire insurance sales were impacted by slower growth in infrastructure, commercial, industrial and residential construction.

Distribution landscape: channel dynamics linked to line of businessThe distribution space is dominated by insurance brokers, especially in non-life and corporate sales. A high degree of

Source: Timetric

2.0

4.0

6.0

8.0

10.0

12.0

Life

TotalCAGR

(2011-15)

Premium growth over the years (by line of business): 2011–15 (in US$b)

19%

23%

5%

-8%

-2%

4%

Medical

Others

Marine, aviation and inland transport

Fire

Accident and liability

2011 2012 2013 2014 2015

+11.5%

6.5

8.09.1

10.1

2.4

2.6

3.6

0.30.40.6

2.6

3.0

0.50.50.62.2

1.9

2.7

0.40.50.62.0

1.3

1.50.20.60.7

2.2

7.1

1.6

1.80.30.60.7

2.2

11

“ UAE’s insurance industry is likely to experience consolidation — and inbound interest from some non-Middle East markets.”

Mayur Pau EY MENA Financial Services TAS Leader, Dubai, UAE

United Arab Emirates

with sustainable business models, small local legacy players, and foreign insurers.

Lackluster financial results and recent regulatory changes introduced by the UAE Insurance Authority such as changes in reserving requirements, governance, controls, actuarial sign-offs and restrictions on equity investments are forcing insurers to take a hard look at their business models. As a result, the market is likely to witness an increase in capital raising from the secondary market and consolidation activity over the medium to long term.

Takaful insurance has seen some traction in recent years, although it still remains a comparatively small segment of the market. Of the current 10 takaful players, only the top 3 have noteworthy sales volume and most have remained unprofitable, leading to accumulated losses and capital solvency issues.

Profitability: focus on operating model as health continues to underperformProfitability in the UAE insurance sector has been weak with scale being one of the key issues and several small companies having higher expense ratios. The issue is particularly acute in health insurance as rising claims have led to a deterioration of the loss ratio (non-life, including health) from an already high of 81% in 2011 to 92% in 2015. Also, the investment income contribution, which for many years supported the UAE insurers’ financial results, has been under significant pressure because of poor performance of equity/real estate markets off late.

Some of the key differentiators for players that are displaying a stronger financial performance are a robust claims management system, adoption of efficient pricing models, prudent risk selection, lean operating models and use of technology (digital and analytics). Stable or recovering oil prices, combined with increased focus on operating model and regulatory scrutiny, are likely to help insurers improve their financials and move toward healthy profit margins.

Proactive stance toward regulationThe UAE Insurance Authority has increasingly shown its willingness to take bold steps to correct the course of the insurance sector’s evolution.

In early 2015, the UAE Insurance Authority introduced numerous measures, including enhanced financial reporting standards, reserving requirements, independent actuarial sign-offs, risk management and controls, and solvency requirements, for both conventional and takaful companies. The new regulations also set investment limits for insurers to optimize investment-related risk exposure and are expected to help insurers create an improved risk profile. The regulatory authority also introduced enhanced regulations for brokers through the New Insurance Broking Regulations (October 2013), which have increased capital requirement standards, unconditional bank guarantees and professional liability cover requirements for them. Further, the UAE Insurance Authority is driving composite insurers to operationally segregate their long-term life business from the non-life business, which should help in more effective regulation of the two distinct lines of business. It is also increasing public awareness and demand for insurance products through seminars, conferences and public relations campaigns. The introduction of a new life consultation paper (November 2016) and new motor regulations (December 2016) are further regulatory steps toward enhanced maturity.

Positive outlook despite challenging operating environmentBesides concerns around operating model and profitability, the sector currently faces low availability of skilled manpower. It is difficult for insurers to maintain a steady employee base, since attrition rates among expatriates are high. This is more acute in specialized areas such as pricing, underwriting and risk management.

Despite these factors, the insurance sector is expected to grow at a steady pace. Government expansion of non-oil revenue and planned investment in infrastructure projects, coupled with rising life expectancy and increasing oil prices, will support the industry’s growth in coming years.

11


Kingdom of Saudi Arabia 02

13

The world’s largest oil producer is under significant economic pressures resulting from weak oil prices since 2014. Construction projects dropped significantly in 2016. In addition, the Saudi economy is projected to expand at less than 1% in 2016, the lowest growth since 2002.

The insurance industry is under pressure, with commercial insurance lines experiencing a slowdown from reduced economic activity and infrastructure spending. Motor and health insurance lines have shown topline growth in recent quarters because of improvements in product pricing. However, life insurance penetration remains negligible because of the state’s strong role and cultural attitude limiting demand.

In this challenging environment, the Kingdom of Saudi Arabia (KSA) remains in a strong position thanks to the fourth largest foreign exchange reserves despite a sharp drop since the beginning of 2015. In 2016, the Kingdom announced “Saudi Vision 2030,” which aims to improve economic growth and reduce oil dependence by increasing non-oil revenue by nearly six times over the next 15 years and enhancing the role of SMEs. The plan will involve disinvesting from state-owned companies, introducing VAT, boosting investments in non-oil sectors and trimming Government expenditures.

Despite the oil slump, optimism flourishes

0.6%

0.0% 0.1% 0.1% 0.10%0.03.% 0.03.% 0.00.% 0.04.%

0.9%1.0%

0.80% 0.87%



0.72%

1.00%

1.47%

2008

Non-life penetration rises swiftly, life remains a laggard in a diminished growth scenario

2.0%

1.5%

1.0%

0.5%

0.0%2009 2010 2011 2012 2013 2014 2015

8.6%

1.8%

4.8%

10.0%

2.7%GDP growth(annual %)

5.4%3.6%

3.5%

2008

9.0%

12.0%

6.0%

3.0%

0.0%

-3.0%

-6.0%

2009 2010 2011 2012 2013 2014 2015

Source: Swiss Re Sigma: World Insurance Reports, World Bank database

Kingdom of Saudi Arabia

Mandatory insurance expected to continue fueling growth

Lower oil prices and Government’s austerity measures

Enabling regulatory framework Fragmented industry with low penetration rates

Hindered growth though mandatory products still thriveNon-life represents a vast majority of the market and has grown rapidly over the last decade. Health received an initial boost in 2006 when expatriates working in KSA were mandated to have employer-sponsored private insurance. In 2011, these regulations were extended to cover all private sector employees and their dependents as well as non-medical travelers. Health insurance now accounts for 52% of the insurance sector. Medical cost inflation, increased access to and use of health care services, and a high incidence of medical fraud continue to push prices higher.

Motor, which accounts for nearly 30% of premiums, also benefited from the regulations and received a lift in 2007 from changes to mandatory third-party insurance regulations, requiring each vehicle to be separately insured.

However, growth in the motor and health lines in the last three years has been mainly due to hardening of rates as a result of new regulations around prudent underwriting/actuarial reserving by the regulator — Saudi Arabian Monetary Agency (SAMA) — in 2013, instead of growth in demand for these lines.

With low awareness, lack of product innovation and high state involvement in the social security system, life insurance is one of the most under-developed segments in KSA’s insurance industry. Most life insurance exists as group schemes with negligible retail presence.


“ The Saudi insurance industry is expected to benefit from better governance, prudent underwriting, improved regulations, sustained premium growth and the Saudi National Transformation Program, which aims to establish a more diversified economy.”

Sanjay Jain EY MENA Insurance LeaderDubai, UAE

SAMA has reached further agreement with the Ministry of Commerce and Investment to enact a new company law that specifies that firms that incur losses of more than 50% of their capital have to rectify their financial status. This regulatory change was in response to the heavy price competition, which was significantly impacting the economic viability of several insurers.

Source: SAMA annual insurance report

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.09.0

10.0

Health

CAGR(2011-15)

Premium growth over the years (by line of business): 2011-15 (in US$b)

18%

29%

-1%

14%

3%

11%

Motor

Marine and aviation

Property

Protection and savings

Others

4.9

6.7

8.1

9.7

4.2

5.1

2.9

0.20.50.3

0.8

2.1

0.30.50.20.8

3.4

1.70.20.40.20.7

2.6

1.00.20.30.20.5

5.6

3.0

1.30.20.40.20.6

2011 2012 2013 2014 2015

+19%

The share of other non-life lines remains low (15.6% in 2015). Reduced infrastructure and commercial spending affected both engineering (YoY growth of -16% in 2015 over 2014) and property and fire lines (rate of growth decreasing from an average 18% during 2011–14 to just 2% in 2015).

Intermediate channels playing only a supporting roleDespite the presence of 80 insurance brokers and 84 corporate agents, tenders and direct insurance continue to be the largest channels, mainly because of the dominance of mandatory group health business.

While bulk deals are carried out through the direct route, brokers are the leading distribution channel for commercial general insurance. Direct branches and call centers have a major role in motor insurance distribution. Bancassurance and direct channels are the key channels within the retail segment. With most banks already having tie-ups with insurance companies, the industry is working with the regulator to explore more flexible bancassurance models.

Insurance opportunities in the Middle East14

A fragmented marketplace with few large playersWith more than 30 insurers, the KSA market is not as crowded as other similar sized markets. However, it is extremely fragmented at the lower end, with the bottom 26 players having a cumulative market share of 31%. More than half of the market is dominated by three players; these are the most profitable players because of economies of scale and relatively prudent underwriting practices.

Over the years, small insurers have been hit hard by market-driven pricing, poor quality risks and lack of scale resulting in accumulated losses and solvency issues and questioning the future of some of these insurers. Despite these issues, there has been very limited M&A activity in the last decade, mainly due to controlling stakeholders’ lack of appetite to relinquish control and big divergence in expected selling price versus market valuations.

Nonetheless, M&A activity is expected to accelerate as prices on the Saudi stock market (Tadawul) move to realistic levels

15

Profitability woes: opportunities and threatsWith the recent hardening of premiums, following SAMA’s underwriting and reserving regulations, technical underwriting results have improved moderately. As a result, the ratio of net earned claims to net earned premiums improved from 84% in 2013 to 71% in 2015.

The overall profitability of the sector has also improved, with 22 of the 34 insurers reporting profits in 2015, yet high incidences of fraudulent claims continue to plague the health and motor sectors. Insurers are looking at automation and IT transformation to reduce fraud and abuse, enhance process efficiency and improve customer experience as well as competitive positioning.

Source: Insurance companies filings, SAMA and Tadawul

Tawuniya: 21.2%

Bupa Arabia: 20.6%AXA-Cooperative:

3.2%

Other insurers: 31.1%

UCA: 3.6%

AL Rajhi Takaful: 3.8%

Malath Insurance: 5.2%

Medgulf: 11.3%

Market share distribution 2015 — GWP

After peaking in 2013, net claims to net premiums ratios have seen a gradual improvement across key lines

100%

66% 68%74%

88%71%

37% 34%

51%64%

84%72% 71%69%

49%37%

70%73%

89%83% 81%

80%

60%

40%

Motor2011 2012 2013 2014 2015

Health Other general Overall

20%0%

and SAMA increases regulatory pressure on insurers to review and restructure their businesses. The actuarial review of reserves enforced by SAMA, coupled with a renewed desire to improve profitability, is likely to generate further near-term pressure for consolidation. Moreover, with acquisitions being the only route to enter the market, in the long term, global players are likely to explore this route.

Baby steps in innovationKSA has high internet, social media and mobile penetration, with 1.8 mobile connections per person and 64% of the population having internet access. Yet, there is no notable online sales or use of virtual branches. Low oil prices and a challenging macroeconomic environment, coupled with solvency issues, are currently hindering investments in innovation.

Industry headed for a market consolidationSigns of market consolidation are already evident — in the first-of-its-kind move in the Saudi insurance sector, Sanad Cooperative Insurance Co. (Sanad) applied for voluntary liquidation after losing more than 50% of its capital, in March 2017. In addition, a number of KSA insurers have filed regulatory disclosures in February/March 2017, stating their intent to merge with other insurers.

Bright days ahead: evolving mindsets and regulationsThe Government’s bold steps to improve the economy will have significant implications for the insurance industry. Any potential withdrawal of the state’s role in providing health benefits to Saudi nationals and a further expansion of compulsory health insurance will drive notable growth in coming years.

KSA’s favorable demographic profile — large young population and rising life expectancies — will also be positive for the sector. With young Saudi nationals pursuing higher education abroad and increasingly experiencing other cultures, a greater acceptance and understanding of insurance products as a risk-management tool can be expected to fuel healthy demand for insurance products and position Saudi’s insurance industry for balanced growth in the years to come.

In August 2016, the Ministry of Health announced its decision to stop providing free medical treatment for victims of traffic accidents. As a result, either the person who has caused the accident or the insurer, if the vehicle is insured, would be responsible for the medical expenses of the victim. The decision will have significant implications for motor insurance. In the short-term, increased risks and potential losses for insurers may push up premiums, and in the mid-term, motor insurance penetration will likely increase and shift from third-party to comprehensive vehicle coverage. The net effect is yet to be determined and motor insurers will need to react swiftly to address this seismic market change.

Regulation: strengthening industry fundamentalsSAMA’s proactive measures on ensuring a robust pricing regime and prudent reserving in 2013 have helped the sector improve its financials over the last couple of years. SAMA continues to actively monitor the financial stability of insurers.In an unprecedented move in November 2016, SAMA suspended a number of significant KSA motor insurers from issuing new motor polices until customer complaints and claims management issues were addressed — a clear example of regional regulators clamping down hard on the conduct of business and consumer protection aspects. While SAMA is taking steps to holistically develop the sector, insurers need to be proactive in addressing process gaps and improving underwriting capabilities and service standards.

Source: SAMA annual insurance report

Kingdom of Saudi Arabia


Egypt03

17

Egypt has a large but struggling economy, with lower dependence on oil and gas exports, and very different economic conditions from the rest of the Middle East region. Since the breakout of the Arab Spring (2010) and the Egyptian Revolution (2011), Egypt has witnessed large-scale political turmoil and increased terrorist activities, which have halted growth in the once-flourishing tourism industry. Economic slowdown followed the civil unrest, with GDP growth falling to an average 2% (2011–14 CAGR). While the return of political stability led to a brief revival in GDP growth in 2015, the outlook remains weak, and economic growth is predicted to decline again to 3.2% in 2017 because of a sharp drop in the export volumes of natural gas and non-petroleum products.

A sustained weakness in the private sector (PMI index remained below 50, indicating contraction, for 13 consecutive months since October 2015), a drop in remittances and rising inflation point to a difficult macro-economic environment over the short to mid term.

To tide over this tough landscape, the Egyptian Government has received a US$12b bailout package from the International Monetary Fund (IMF) aimed at reviving its struggling economy, bringing down public debt and controlling inflation. As part of the agreement with IMF, Egypt has removed its currency peg of US$1=EGP8.8, which resulted in a massive devaluation of the

Restarting the Egyptian economic growth engine

Largest population in the Middle East region

Potential introduction of mandatory health insurance

Developed life market

Evolving regulatory framework

Currency devaluation

Market dominated by few players

Egyptian pound (by 51% between 3 and 9 November 2016). Additionally, the Government also implemented VAT in 2016 in an effort to boost the fiscal situation by improving tax collections.

These changes are likely to show results over the long term, helping foreign investments and tourists to come back to Egypt. In this context, the fact that the EGX index is the best performing Middle East market year to date (gained nearly 90% from June 2016 till early January 2017) confirms the positive view investors have taken on the stocks after the recent actions by the Government.

Real growth is a major industry challengeIn a weak economic scenario, the Egyptian insurance market has the lowest insurance penetration among key Middle East markets (0.68% in 2015). Despite sustained nominal growth in recent years, a high inflationary environment has dampened real growth.

While most other markets in the Middle East report health or motor lines expanding at the fastest rate, Egypt has seen life insurance taking the lead. Growth in life insurance was bolstered by group life insurance (18% CAGR in 2010-15) and a lower level of social security than other oil-rich countries. Population growth, increasing consumer awareness, new investment products and the reintroduction of bancassurance as a distribution channel are driving organic growth.

11.3%

5.1%

1.8% 2.2% 2.2%4.2%

3.0%2.1%

10.1%7.1%

9.4% 10.1% 10.4%

12.3%

2010 2011 2012 2013 2014 2015 2016F

Inflation, CPI (annual %)

Real GDP growth (annual %)

Source: Oxford Economics, World Bank

Egypt

Recent terrorist activities destabilizing the economy


The Egyptian Government has earmarked multiple large construction projects in recent years, including:• Developing new cities around Cairo

• Plans for 1m new affordable homes

• US$8.2b expansion of the Suez Canal

• Industry development of 75,000 sq. km. of land on either side of the canal

Personal accident, 5%

Life, 45%

Motor, 16%

Property, 15%

Liability, 6%

Health, 7%

Marine, aviationand transit, 6%

Egyptian insurance market — product mix (basis 2015 gross premiums)

“ Egypt remains an interesting insurance market, given its population size and potential for growth. However, in the short term, much will depend on the outcome of the IMF financial assistance package, stabilizing the recent currency volatility, and implementation of reforms in the health care and financial services sectors.”

Jonathan Matchett Director, EY AIM Insurance AdvisoryManama, Bahrain

The non-life (45% share in total insurance premiums in 2015) market is almost as large as life market (45% in 2015) , while health and personal accident lines account for the remaining market. Within non-life, motor is the largest line with property growing rapidly, primarily driven by the Government’s investments in infrastructure and demand from the construction sector.

Source: Timetric


19

Traditional channels dominate but disruption on the horizonOver-the-counter distribution models such as branches, brokers and agencies are the primary insurance distribution channels, especially in the motor line, as people prefer to negotiate their premiums, have face-to-face interactions and often pay premiums in cash. Although branches continue to be the main source of business, bancassurance, postal services and e-commerce are emerging.

The Central Bank of Egypt imposed a ban on bancassurance in 2007 following reports of malpractice and operational disputes. After the ban was lifted in 2013, as many as 17 bancassurance deals were approved by the EFSA, positively impacting life insurance growth in 2015 (official figures not available).

Misr Insurance Co. 54.4%Bupa Egypt,5.5%

Suez Canal,5.4%

Arab Misr,4.9%

Takaful non-lifeinsurance, 9.2%

Others,20.6%

Non-life insurance marketshare (2015 GWP)

Misr Life37.0%

Allianz Life,18.7%

MetLifeAlico, 14.9%

CommercialInternational,13.3%

Takaful lifeinsurers, 5.0%

Others,11.0%

Life insurance market share (2015 GWP)

• Overall size of the market: US$2.16b GWP (2015)

• Five-year compounded annual growth rate: 14% (2010–15)

• Industry regulated by: Egyptian Financial Supervisory Authority (EFSA)

Public sector giant dominating; takaful insurers gaining shareThe Egyptian insurance market is heavily concentrated, with Misr Insurance Co. (MIC) leading the non-life segment (54% share in 2015). The remaining 18 non-life insurers have a share of less than 6% each. The life segment, too, is concentrated, with the top four players accounting for 84% of the premiums. Misr Life Insurance Co., a sister company of MIC, leads with a 37% share, with the remaining 10 life insurers having a share of 4% or less.

Source: Timetric

Emirates NBD (61 branches in Egypt) extended its bancassurance agreement with Allianz Egypt in January 2016 by an additional five years.

Bank of Alexandria (170 branches) signed a bancassurance agreement with MetLife Alico to distribute insurance products to 1.6m customers in 2015.

In 2014, EFSA permitted Egyptian Post, Egypt’s national postal service, to sell insurance products through its branches. This is likely to drive growth in microinsurance and boost insurance penetration in the country, where only 14% of the adult population owns or shares a bank account, according to a 2014 survey by the World Bank and Gallup.

Egypt


In September 2016, Egypt’s biggest insurance group, Misr Insurance Holding, received preliminary approval from EFSA to set up a takaful company Misr Takaful Insurance, the first state—owned Islamic insurer in the country.

Profitability and innovation: a long way to goExpense ratios have deteriorated in recent years because of sustained high inflation. Being relatively low on both maturity and scale, the sector has observed issues around operational efficiency. Adoption of technology is in the early stages, with most processes being handled manually. While key profitability measures have improved for both life (incurred losses to gross premium: 63%, 2009 to 55%, 2015) and non-life (loss ratio: 93%, 2009 to 55%, 2015), there is still a long way to go.

Overhauling regulations and breaking traditionsIn recent years, EFSA has been seeking to address gaps in governance, distribution, products and the overall insurance adoption in the country. Recent measures include:

• Online distribution: In November 2015, EFSA passed a resolution that allows policies to be issued and distributed electronically. This allows insurers to issue compulsory motor, travel and temporary life insurance policies online, provided EFSA’s disclosure requirements are met.

• Bancassurance: EFSA, in conjunction with the Central Bank, relaxed bancassurance rules in April 2016 to allow banks to have dedicated tie-ups with one general takaful operator and one family takaful company, in addition to the existing one life and one general insurer.

The Egyptian Government has allowed 100% foreign ownership in the Egyptian market since 1998. However, some foreign insurers have exited the market in light of adverse socio-political developments and economic headwinds.

While takaful remains a small category for both life and non-life lines of business, it is showing promise and has gained notable market share in the last six years (from 0.3% in 2010 to 5.0% in 2015 in case of life insurance and from 4.9% in 2010 to 9.2% in 2015 for non-life). This is supported by increasing awareness of Sharia-compliant policies among Egypt’s conservative rural population. Currently, there are eight takaful insurers and 23 conventional players.

Reinsurers have been hit hard by significant payouts related to security, terrorism and fire covers. While insurers have made good on their promises in the aftermath of the revolution, enhancing their image, profitability has been hampered.

Also weighing on profitability is the sharp deterioration of the Egyptian pound, which has made reinsurance premiums more expensive in local currency and led to the rapid rise in inflation, thus impacting general and administration expenses. The magnitude of insurance payouts, primarily in motor and health, has been increasing as the cost of imported goods — such as automobiles and automobile spare parts — and medical expenses have risen significantly despite limited increases in premium rates.

This environment necessitates leading insurers and foreign players to focus on areas traditionally neglected, including innovation, automation and efficiency.


Evolving marketplace and regulations provide growth opportunitiesWhile rising inflation and limited Government investment act as growth inhibitors, recent EFSA transformational measures are expected to support healthy industry growth. Egypt is a highly educated country with high levels of technology adoption, but financial services have not yet penetrated this market. Egypt might actually leapfrog the traditional distribution channels and move toward technology-enabled payment and distribution, which could open the door to further innovation. To tap this opportunity, insurers need to find ways to leverage technology while acknowledging Egyptians’ preference for face-to-face interaction.

In September 2016, the Egyptian Government announced plans to implement a comprehensive health insurance law aiming to provide coverage to low-income households.

• Governance: EFSA introduced a new draft bill for insurance supervision, regulation and control in August 2016, establishing norms for mutual guarantee, micro and medical insurance as well as governance laws.

• Reinsurance: Reinsurance rules for foreign reinsurers changed in 2015 to cover minimum limits for capital, credit ratings, solvency margins and other reserve requirements.

• Investment rules: Investment rules were relaxed in 2014, enabling insurers to offer previously restricted professionally managed investment funds, which provide customers with a wide range of high-return yielding products.

In addition, a self-regulatory body for brokers, the Regional Insurance Brokers Congress (RIBC), was formed in 2015 as the official body of Egypt’s insurance brokers to bring order in a relatively unregulated market.

As a conservative Islamic society with a large rural population and minimal social security, Egypt provides excellent potential for takaful. With rising awareness of Sharia-compliant products, takaful is expected to build upon the high growth of recent years (CAGR 32% during 2010-15).

Health is another potential opportunity for the sector. The Government has had little success in increasing private insurance company participation, because of the presence of key barriers such as the lack of a unified infrastructure and poor health care facilities. Most of the population is covered by social insurance administered by the Health Insurance Organization (HIO) and funded by salary contributions from employees and employers. Government reforms to facilitate increased private insurer participation could significantly impact the size of the health insurance sector as seen in KSA and more recently the UAE.

21Egypt


Qatar04

23

Within the Middle East, Qatar is one of the most remarkable economic success stories. It was the world’s fastest growing economy from 2006 to 2011, backed by high natural gas production — Qatar is the third-largest producer globally — and rich oil reserves. Backed by rapid economic expansion and high infrastructure investments, Qatar now has one of the world’s highest per capita income (on a PPP basis). While Qatar’s rate of GDP growth has moderated because of low global energy prices, it still remains one of the fastest-growing economies in the region.

Currently, Qatar is the third largest insurance market in the GCC, with total premiums of US$2.8b in 2015, despite a relatively low penetration (1.1% of GDP in 2015). Although the market is sizeable, growing (CAGR 24.8% between 2009 and 2014) and profitable, it is still in a developmental phase, as a significant proportion of the reported premiums comes from international operations of its largest national insurers.

Expected privatization of health insurance coverage to boost health insurance premiums

Reduced Government spending due to reduced energy prices

Implementation of recently introduced Qatar Central Bank (QCB) regulations

Relatively small life segment

Economy transitioning from a sprint to a steeplechase

Poised for solid growth despite economic headwinds

17.7%

11.9%

19.6%

13.4%

4.9%4.6% 4.2%

3.6%

GDP growth(Annual %)

2008

After a phenomenal run, GDP growth (annual %) has moderated to mid to lower single digits

19.0%

24.0%

14.0%

9.0%

4.0%

-1.0% 2009 2010 2011 2012 2013 2014 2015



2008

Non-life insurance penetration has picked up rapidly; life penetration remains negligible2.0%

NA

NA

0.8%

0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

0.8%

0.5%

0.6%

1.0% 1.0%

1.5%

1.5%

1.0%

0.5%

0.0%2009 2010 2011 2012 2013 2014 2015

Source: Swiss Re Sigma: World Insurance Reports, World Bank database

Fire and engineering are the dominant lines of business, which have benefited significantly from the rapid growth of Qatar’s energy sector. The presence of the world’s largest liquefied natural gas reserves in Qatar has been driving demand for marine and aviation insurance, the next major lines of business. Motor is third, backed by compulsory third-party motor insurance and growing vehicle sales. Due to a strong social security system, demand for life products is low and typically confined to expatriates.

With a major portion of the insurance business being driven by energy and infrastructure projects, direct channel is the biggest distribution channel in the sector. Brokers have also been able to match the fast growth seen by the overall sector, as major global brokers have entered the market.

Though bancassurance’s market share remains low, national insurers have tied-up with local banks for insurance distribution. The online channel, though in its nascent stages, has begun witnessing limited activity on the distribution front. Over the mid to long term, brokers and online channels are expected to be the fastest growing, as these will be best placed to tap into the evolving demographics and young consumers’ needs.

Qatar


“ Qatar has emerged as an important insurance market within GCC, with robust growth expected in the medium to long term driven by harmonization of onshore and offshore regulations, infrastructure investments and expected introduction of mandatory health insurance scheme for locals and expatriates.”

Robert Abboud EY MENA Financial Services Advisory LeaderDoha, Qatar

Qatar has 14 insurers operating in the Federal State of Qatar and 12 in the Qatar Financial Centre (QFC), a special economic business and financial center in Doha, offering tax rebates, 100% foreign ownership and flexibility to operate in the currency of choice. Qatar Insurance Company (QIC) is the dominant player with nearly 60% market share; however, a large portion is sourced from QIC’s regional and international operations.

The five large local/ listed insurers (big five) — QIC, Qatar General Insurance and Reinsurance Company, Doha Insurance Company, Qatar Islamic Insurance Company, and Al Khaleej Takaful Group — dominate with nearly 80% market share. The remaining market remains extremely fragmented.

Onshore and offshore insurers competing in the same market

In 2016, QIC Insured, the retail arm of QIC, launched an automated online motor claims management service. With this new service, customers can register and track their motor claims at qic-insured.com. It also launched a pay-how-you-drive (PHYD) car insurance product based on a platform developed together with Qatar Mobility Innovations Center (QMIC).

QIC has also introduced the nation’s-first loyalty program (U-Club) for the policyholders of the company’s comprehensive car insurance policies. U-Club offers discounts and other benefits from a variety of different partners. These benefits are centered around the car and the people owning or using the car.

Within the takaful space, five onshore and three offshore players constitute less than one-fifth of the market. Al-Khaleej Takaful, which enjoys a 25% market share of the Qatari takaful segment, converted from a conventional to a takaful insurance company in 2010 to tap emerging opportunities from Sharia-compliant businesses. However, takaful growth has been slower than in other regional markets.

While foreign insurers have a minimal presence, some local Qatari insurers have ramped up their overseas operations.


25

QIC acquired Antares Holdings Ltd., a Bermuda-based specialty insurance and reinsurance group operating in the Lloyd’s market, in 2014. It also established a fully owned, Malta-based European Union (EU) subsidiary, QIC Europe Ltd (QEL), to expand in the EU and other non-EU jurisdictions.

Maintaining market conduct and enhancing growthIn December 2012, QCB assumed the responsibility for licensing and supervising insurance companies, reinsurers and intermediaries. As a result, insurance entities operating onshore are now regulated by the QCB and offshore entities that are currently authorized by the Qatar Financial Centre Regulatory Authority (QFCRA) will come under QCB regulatory supervision in the future. This change will reduce the disparity between onshore and offshore regulations and create a more competitive market. The Insurance Law introduced in April 2016 by the QCB specifies the minimum capital requirements, actuarial reviews, governance rules, reporting, reserving and investment limits, risk management and other controls. While these regulations may bring insurers short-term pains, the long-term effect should be positive and support industry growth.

Qatari insurance industry outlookOver the years, the insurance sector’s growth has moved in tandem with Qatar’s economy and is expected to moderate from the high double-digit growth seen so far. However, the level of moderation will depend on the Government’s measures to rationalize public spending and promote the role of the private sector and SMEs in light of Qatar’s first fiscal deficit in 15 years. The Ministry of Development Planning and Statistics forecasts a fiscal deficit of 7.8% of GDP in 2016 as the Qatari economy diversifies away from oil and gas.

In 2015, the Government cancelled “Seha” — the mandatory health insurance scheme — administered by the National Health Insurance Company (NHIC). The Ministry of Public Health, Ministry of Finance and QCB have formed a committee to consider the introduction of a new mandatory health insurance scheme that would be managed by the insurance industry. This could significantly increase Qatar’s health insurance market, which is much smaller than that of most countries in the region, through increased privatization and the anticipated mandatory nationwide insurance scheme in 2017.

The insurance sector will be favorably affected by Qatar’s ambitious infrastructure programs under the Qatar National Vision 2030 program (projected £140b investment), which will focus on economic, social, human and environmental development. Additionally, Qatar will be the first Arab state to host the FIFA World Cup in 2022 and as preparation progresses the insurance sector, particularly the property line, should be favorably influenced.

A favorable policy and regulatory environment, robust economic fundamentals and strong economic drivers are expected to ensure that the insurance sector makes significant progress. However, insurers will also need to contribute effectively to make the best use of the opportunities, by investing in technology, people and processes.

• Overall market size (including international operations): US$2.8b GWP (2015)

• Five-year CAGR (excluding life): 24.8% (2009-14)

• Industry regulated by Qatar Central Bank (QCB) and Qatar Financial Centre Regulatory Authority (QFCRA)

• Top players: Qatar Insurance Company (QIC), Qatar General Insurance and Reinsurance Co. and Doha Insurance Company2

Qatar

Profitability and scale matter. While the big five insurers are well placed with an average combined ratio below 100% and stable income from investments, much of the market is struggling because of weak underwriting performance. Margin pressures are higher for companies underwriting motor policies as this line is less profitable than others key lines.

2Timetric.


Bahrain05

27

Bahrain’s economic fundamentals have weakened in recent years because of the sharp drop in oil prices and rise in debt levels (from 12.6% of GDP in 2008 to 60% in 2015) due to an adverse fiscal deficit since 2011. The country’s GDP growth has declined from 4.5% (2014) to 1.6% (2016) as both oil revenue and Government expenditure are contracting. Despite sustained diversification efforts over the last three decades and recent fiscal measures such as subsidy cuts, increased Government fees and general cost cutting, Bahrain’s economy was downgraded by all key rating agencies (Standard & Poor’s, Fitch and Moody’s) in March 2016.

Bahrain’s relatively well-established insurance sector has experienced stable growth in recent years (CAGR 5.3% during 2010–15) despite weak macroeconomic dynamics. However, the sector’s medium-term growth will depend on the fiscal and policy measures adopted by the Government. While Bahrain boasts of the highest insurance penetration in the Middle East region (2.45% in 2015), it is still well below the global average (6.23%). Motor is the largest segment (28% of GWP) driven by mandatory third-party motor insurance. Life (20%) and medical (20%) insurance are the other notable lines.

The rapid growth in the medical segment (CAGR 11% during 2010-15) can be attributed to rising medical costs and the participation of expatriates (expatriates constitute 52% of the overall population) who are not covered under the public health care system. The sector is expected to experience healthy growth because of the anticipated new regulatory requirements by the CBB that will make it mandatory for companies to provide private health coverage to local and expatriate workers.

Fire, property and liability lines (18% product mix) grew at a CAGR 6% during 2010-15, supported by rising demand for energy. Despite recent Government spending cuts, ambitious projects such as Bahrain Economic Vision 2030, which will create a more balanced growth environment and increase investments in manufacturing, transport, information communication technology, services and tourism, are expected to maintain the growth momentum over the medium to long term.

Takaful insurance has established a strong foothold in Bahrain’s insurance market. Its share has grown from a marginal 3% (2001) to 23% (2015). Its contribution to gross premiums is particularly high in medical (27% of 2015 GWP) and motor (30% of 2015 GWP). Despite a relative slowdown in recent years, the growth rate for takaful insurance has remained at a CAGR of 12% (2010-15). Over the long term, takaful is expected to be a key growth driver for the insurance sector, actively supported by the Central Bank of Bahrain (CBB).

Bahrain’s distribution landscape is dominated by brokers, followed by direct channel and agencies, particularly in the non-life business. However, bancassurance and e-commerce are growing in importance as insurers are partnering with banks to cross-sell life products as a security against loans and reduce costs.

Bahrain has one of the lowest tax rates in the Gulf, allowing free movement of capital, and 100% FDI. This has ensured strong participation from foreign insurers in the market. In 2014, the domestic market comprised 11 overseas insurers (foreign branches) and 25 local players underwriting insurance, reinsurance, takaful and retakaful. Of the locally incorporated companies, 14 are conventional insurers and 6 are takaful firms.

Unlike in other Middle Eastern markets, the insurance sector in Bahrain is not heavily concentrated at the top. No insurer operating in the country has a market share greater than 10%, with only seven insurers commanding a market share of 7%–10% each. Overseas insurers currently bring in nearly one-fifth of the sector’s total GWP (21% in 2015). While some global insurers (e.g., Legal & General) have withdrawn from Bahrain, other global insurers have shown willingness to stay invested for the long term.

Established regulatory regime Indirect impact of sustained drop in oil prices

Potential introduction of mandatory health insurance Small market size

Bahrain

Life Insurance Corporation of India (International) distributes products through branches of Bank of Bahrain and Kuwait.


“ Despite stressed economic conditions, the Bahrain insurance market continues its slow and steady growth at the back of an established regulatory regime and mature competitor profile.”

Gordon Bennie EY MENA Managing Partner Financial ServicesManama, Bahrain


Rising claims and expenses have been constricting profitability for insurers and the loss ratio for the sector has deteriorated from 50% (2010) to 67% (2015). This is primarily due to increased loss ratios in life, motor, medical and engineering.

Bahrain has one of the most mature regulatory frameworks in the region. It was also the first to introduce regulations for takaful companies that met the requirements of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). To improve insurance penetration in the market, the CBB works closely with the Bahrain Insurance Association (BIA) to promote awareness of insurance products and skill building by conducting targeted training.

Loss ratios in selected lines

25%

74%

Life Motor Medical Engineering

2011 2015

68%74%

65%70%

17%13%

Moreover, last year, CBB and BIA introduced the Motor Compensation Fund to compensate victims of motor accidents involving hit-and-run and uninsured vehicles, and emphasize on social responsibility among insurance companies. Insurers are required to pay 1% of gross motor premium income or at least BHD5,000 annually to the fund.

While short-term economic conditions appear stressed, significant investments planned by the Government and a potential rebound

• Overall market size: US$0.72b GWP (2015)

• Five-year CAGR: 5.3% (2010-15)

• Industry regulated by CBB

• Major product lines in 2015: motor (28%), long-term life (20%), health (20%) and fire/property (17%)

• Top domestic players: Bahrain Kuwait Insurance Company B.S.C. (BKIC), Bahrain National Insurance and AXA-Gulf-Bahrain

in crude oil prices are expected to improve the economic climate in the country. The following key investments may drive long-term industry growth include:

• The Government plans to invest US$15b to improve rail infrastructure, build the Saudi-Bahrain Causeway and expand the Bahrain International Airport under the Bahrain Economic Vision 2030 plan.

• The Ministry of Housing (MOH) is taking multiple steps to drive growth in the residential construction market. These include ensuring mortgage availability to all income groups, introducing low-interest financing and tax incentives for low-income groups and entering into several public-private partnerships (PPPs) to develop affordable housing.

• The Government plans to invest US$6b by 2019 to ramp up existing energy infrastructure. Additionally, rising energy demand (at 7%–10% each year until 2020 according to World Bank projections) is expected to attract investment in energy infrastructure over the forecasted period.

Source: Insurance Market Review, Central Bank of Bahrain

Bahrain 29

Innovation at its core — developing the insurance sector of the future

• CBB is the only Middle East representative on the Executive Committee of the International Association of Insurance Supervisors (IAIS).

• Bahrain Institute for Banking and Finance and Gulf Insurance Institute are now recognized as premier specialist training institutes in the region.

• CBB mandates that all independent financial advisors attain internationally recognized qualifications — a first for the Middle East.


Oman06

31

Being a small and growing oil-dependent economy, Oman has been impacted by oil price corrections. With oil accounting for almost 75% of the Government’s revenue last year, Oman’s GDP growth was over 2% in 2016 after a high of 7.1% (2012) and 3.6% (2015). Accelerated fiscal austerity measures adopted by Oman brought down Government expenditures in 2016 by 7.5%, which are expected to decline further. Despite the robust cost reduction effort from the Government, the budget deficit has widened to an estimated 21% of GDP while the Government’s debt burden has jumped to more than 35% of GDP.

Despite volatile macroeconomic drivers, the insurance sector has shown relatively robust performance, growing at a CAGR of 11% since 2009. Much of this growth has been due to the sharp expansion in the health line (CAGR 32% in 2009–15), due to rising public awareness and Government initiatives to boost health care infrastructure. As a result, health insurance has grown from a market share of 8% (2009) to 23% (2015). Life and non-life segments (excluding health) grew at a relatively modest CAGR of 5% and 8%, respectively.

Bolstered by mandatory third-party motor insurance, the motor segment contributed 36% of GWP in 2015. This is expected to decrease in the medium-term, with the automobile industry experiencing slowing growth in new car sales. Property, the second-largest line at 23% of GWP, has been aided by a construction boom in the last decade. At just 10% of GWP, life

insurance remains comparatively small, with group business driving most of the volume (80%). In non-life, direct sales through extensive branch networks are is the key distribution channel for the motor segment, while most non-motor business is under written through brokers. Agents lead individual life insurance sales, whereas group life sales are led by brokers.

Insurers are increasingly entering into bancassurance agreements to utilize the relatively mature bank distribution network. Online sales and telesales are expected to gain importance in the medium term.

With 70% FDI allowed in the country, Oman has more than 20 insurance companies and a healthy participation from foreign players. The Oman insurance market is concentrated at the top: five players command 62% of the market share (2015). The sector also has two takaful insurers, which together account for 6% of the market.

Regulatory regime in developmental stage

Challenging macroeconomic outlook due to low oil prices

Potential introduction of mandatory health insurance

Small market size and low penetration

AXA Gulf and Bank Muscat, a leading financial services provider in Oman, signed a 10-year partnership agreement in 2015 to offer bancassurance products for life protection, investment and savings to Bank Muscat customers across 149 branches.

AIG and Bank Muscat also signed a 10-year strategic bancassurance agreement in 2015 under which AIG is the exclusive provider of non-life insurance products to Bank Muscat customers in Oman.

Oman

Al Madina Insurance Company SAOG, which was established as a conventional insurer in 2006, changed its strategy and converted all its insurance businesses to become Sharia-compliant in 2014.

Insurance opportunities in the Middle East32

“2017 is the year of regulatory changes resulting in enhanced capital and IPO requirements. We expect to see higher retentions arising from the capacity built as well as some consolidation. The recently introduced Omani taxation reforms and the upcoming VAT regime will also impact the sector.”

Sanjay Kawatra Partner, AuditMuscat, Oman

• A unified auto insurance policy, which aims to increase transparency by amending legal definitions to limit disputes arising from different interpretations

• A proposal to make health insurance compulsory and encourage growth of health insurance premiums

Although the Omani insurance market is facing challenges due to low oil prices and the resulting macroeconomic environment, it is poised for robust long-term growth, benefiting from favorable regulations, Government diversification policies to increase private participation and a strong pipeline of infrastructure investments. As per the Government’s 2016-20 plan, the oil and natural gas industry’s GDP contribution will be cut from around 48% to 22% approximately and 52% of total investment will come from the private sector (versus 42% in the last plan).

• Market size: US$1.16b GWP (2015)

• Five-year CAGR: 12% (2010–15)

• Industry regulated by: Capital Market Authority (CMA)

• Major product lines (2015): motor (36%), health (23%), property (23%) and life (12%)

• Top players: National Life & General Insurance Company SAOC (NLG), Dhofar Insurance Company S.A.O.G., Oman United Insurance Company S.A.O.G and Al Ahlia Insurance

Both non-life and health lines continue to have adverse combined ratios (average combined ratio during 2011–15: 106% and 101% for non-life and health, respectively) due to high claims experience. Investment income has been weak on account of large percentage of investments being held in bank deposit and recentchallenging capital market performance (including equity and securities). These factors have impacted the profitability of the sector.

Under the CMA new regulations, all insurance companies (excluding foreign branches) must convert to public joint stock companies, divesting a 25% stake owned by promoters, instead of the normal 40%, in initial public offerings, and increase their minimum paid-up capital from US$12.9m to UD$25.9m by August 2017. In the long-term, these regulations are expected to improve insurers’ access to funds, strengthen capital, increase transparency and enhance financial strength. This should result in market consolidation and help ease competitive pricing pressures.

In 2016, CMA and the Omani Government launched these other key initiatives:

• New disclosure requirements and minimum standards for investment-linked products

33Oman


Kuwait07

35

Potential introduction of mandatary health insurance

A fragmented and small insurance market

Underdeveloped insurance regulations

Home to one of the oldest insurance industries in the Gulf, Kuwait is one of the region’s smallest and least developed markets and has low insurance penetration. However, with the sector growth higher than the real rate of economic growth, insurance penetration improved from 0.5% of GDP in 2011 (non-life: 0.4% and life: 0.1%) to 0.9% in 2015.

With mandatory third-party motor insurance, motor remains the largest line of business (30% share of premiums in 2014), followed by health (22%) and life (17%). Like other neighboring markets, Kuwait’s life segment is a small contributor to overall GWP, as it is constrained by a strong social welfare system, relatively wealthy population and religious beliefs. Therefore, conventional life insurance has remained underdeveloped with limited product diversification. As a result, individual life contributes just 4% of GWP (group life contributes 13%).

Of the more than 30 insurance companies in Kuwait, most are composite insurers. The top players in the market are domestic firms, with Gulf Insurance & Reinsurance Company — a composite insurer — leading in both the life and non-life segments. As the top five insurance companies account for more than 56% of total premiums, intense competition is seen among smaller players. Being a small, fragmented market, implementation of any stringent capital adequacy requirements in the future may raise solvency risks for small companies, leading to consolidation over a medium to long term.

Kuwait-Qatar Insurance Company, a leading conventional and takaful insurer, launched an online retail platform in 2015, allowing customers to buy or renew personal insurance policies such as travel, home and motor online.

Kuwait is among the 10 wealthiest countries in the world in terms of per capita GDP. However, the global slump in oil prices has led to an economic contraction over the last two years. The current financial deficit is expected to grow to 6.1% of GDP in 2016 from a surplus of 5.3% in 2015. FDI declined by 68% in 2015, a trend that is likely to exacerbate in 2016. Turbulent economic factors have pushed the Government to introduce reforms focused on reducing fuel subsidies, increasing taxes, driving non-hydrocarbons diversification and enhancing private sector participation.

Although six Arab and four foreign players are in the market, domestic insurers continue to dominate. While expatriates prefer foreign insurers’ products, domestic insurers have increased their penetration among locals. Despite the Government allowing 100% FDI in the sector since 2001, the entry of foreign insurers was hampered by complex FDI laws. With the Government reforming the FDI law in 2013, it is now easier for foreign insurers to enter the market, though many have yet to take advantage of this regulatory reform.

The takaful segment has been active in Kuwait since the early 1990s, making it one of the oldest Sharia-compliant industries in the region. Nearly one-fourth of insurance premiums are sourced through takaful products (24.5% GWP in 2014). Growing awareness of Sharia-compliant policies has led to growth in takaful premiums, giving notable competition to conventional products, especially in the life segment. Takaful contributes about one-fifth of total insurance premiums, though its growth has been hindered by higher operating costs and lack of takaful-specific regulations.

Agencies are the top distribution channel for non-life and health segments in Kuwait. Within the life segment, brokers and agencies are the two largest channels, accounting for four out of every five policies sold. While direct marketing was the third-largest channel, e-commerce has seen rapid growth in recent times and will play a bigger role in the coming years.

Kuwait


Profitability for insurers has been affected by competitive pricing and volatile investment income. Large players generally are profitable because of economies of scale and have favorable combined ratios. However, intense competition has resulted in poor underwriting performance for small companies.

Kuwait’s insurance regulatory regime (regulated by the MoCI) has not evolved to the degree of that in the other countries in the GCC. Introduced in 1961, Kuwait’s Insurance Law No. 24 was the first piece of formal insurance regulation in the GCC and is is still in place today. The Government aims to introduce a New Insurance Law to replace Law No 24 and set up an autonomous regulatory body to regulate the sector. Other key initiatives include the following:

• In 2016, the Government introduced a law mandating health insurance coverage for visitors to reduce state health costs.

• In 2015, the Government eased regulations for foreign insurers. It is no longer mandatory for foreign insurers and reinsurers to establish a publiclyheld company with prescribed capital.

• In 2014, the Kuwait Direct Investment Promotion Authority issued executive regulations to promote direct foreign investment by simplifying the process to obtain a license.

Insurance sector growth, penetration and product mix:• Size of the market: US$1.10b GWP (2015)

• Industry regulated by: Ministry of Commerce and Industry (MoCI)

• Major product lines (2014): motor (30%), health (22%) and life (17%)

• Top players (2014): Gulf Insurance and Reinsurance Co. (22%), Kuwait Insurance Co. (11%), Warba Insurance Co. (9%) and Al Ahleia Insurance Co.S.A.K.P (8%)

High disposable income, low insurance penetration and Government initiatives to develop the sector are likely to drive long-term growth for the Kuwaiti insurance sector and attract more foreign interest. The Government’s push to infrastructure projects will support non-life sales, and compulsory health insurance will boost the health segment. However, demand for life insurance products is likely to remain constrained.

Kuwait 37

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Key insurance themes

Key Insurance Themes


GCC VAT: a stable revenue source In response to somber macroeconomic determinants, the Middle East has seen multiple fiscal adjustments over the last few years. These range from spending reductions to new revenue measures such as increasing corporate income tax (Oman), hiking taxes on tobacco and alcohol (Bahrain), and reducing exemptions and tax administration reforms (Iran).

The initial phase of VAT will be implemented with a low standard rate of 5% and limited exemptions primarily on health care, education and social services. The 5 % rate is likely to be increased over the medium term. While VAT has immediate implications for the end consumer, who ultimately bears the tax burden, businesses also will incur costs:

• Implementation of VAT (or a similar tax regime) will increase short-term inflation and possibly push employee and operating costs a notch higher.

• As a pervasive tax on each entity transaction, VAT impacts multiple functions within an organization. Therefore, VAT implementation projects tend to be complex and lengthy, particularly in a sector such as insurance, which is likely to have supplies categorized as partially exempt and partially VAT chargeable.

• Businesses need to significantly invest in training people, upgrading technology, reviewing contracts, repricing products and revamping financial systems and other processes.

With the insurance sector being partly VATable and partly exempt, the challenge for businesses will be that not all input VAT on purchases will be recoverable against output VAT on premium income. The insurance sector will be within the scope of VAT and will have to comply with both the quarterly and annual VAT return pay and file obligation.

In this new environment, processes need to change to accommodate enhanced governance frameworks and systems. With VAT implementation expected in January 2018, GCC insurers will need to act fast, given the annualized nature of most insurance contracts.

1

The impact on the sector will vary and it will include:• An increase in the cost of doing business — irrecoverable VAT incurred on purchases attributable to exempted

products, leading to a requirement to revise contractual charges to consumers

• Requirement to implement VAT in the business where the entity undertakes partially exempt and partially VAT applicable purchases and complies with VAT compliance obligations once the legislation becomes effective — resulting in VAT implementation projects in the insurance sector often becoming more complex and lengthy compared with other industries

• Potential for business restructuring where current corporate and contractual structures give rise to VAT inefficiencies

Finbarr Sexton EY MENA Indirect Tax LeaderDoha, Qatar

David Stevens VAT Implementation Partner, TaxDubai, UAE

Jennifer O Sullivan Director, VAT Implementation Advisory Doha, Qatar

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From outsourcing to “robosourcing”: a major cost management opportunity waiting to be unleashed

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In the last 15 years, global insurance has seen a rapid increase in outsourcing in areas that can be managed easily by shared service providers. Sophistication levels have evolved, with highly specialized services (e.g., actuarial) outsourced or offshored to accomplished service providers or in-house captives in low-cost destinations.

However, globally, potential gains from traditional outsourcing appear to be peaking, as insurers are looking to leverage on new tools of cost minimization and improve customer centricity. Robotic process automation (RPA) is one such tool and is being touted as the next IT revolution driven by artificial intelligence (AI). It will allow enterprises to automate tasks such as policy administration, claims processing and underwriting across the value chain, thereby reducing costs and improving efficiencies. As RPA matures, solutions are being developed to build cognitive robots for simple signature comparisons and speech processing and more complex regulatory (and ethical) and decision-making processes.

With cost pressures, regulatory scrutiny and low oil prices, insurers in the Middle East are increasingly focusing on efficiencies in operations, underwriting, sales and marketing and, most notable, claims processing. RPA can improve productivity by automating mundane processes through robots at nearly one-third of the costs associated with offshore full-time employee (FTE) and digitized back office operations while improving quality, control and audit processes.

Automated business processing operations are expected to rise from 15% (2014) to 40% (year-end 2017). The major yardsticks for success will be reducing the number of FTEs to complete a job, improving cycle time and increasing cost efficiency.

RPA proof-of-concept by an international non-life and life insurer for its finance function3

• Robotics software implementation reduced time to run a report from 90 to 12 minutes

• Reports were delivered free from mistyping and formatting errors

• RPA software was installed locally, close to the end-user, making it flexible and easily manageable by users

While comprehensive RPA adoption in the region may be a few years away, insurers can approach it by:

• Staying conscious about maintaining business continuity while applying RPA techniques

• Preparing a robust roadmap for knowledge transfer from employees and service providers to automated systems and to employees managing these systems

• Partnering with service providers that are technologically sound and functionally adept, have a regulatory perspective and have a global implementation experience

• Establishing regular checkpoints and mandatory performance reviews

Gavin J Maxwell Partner, AIM Advisory Services Dubai, UAE

Ata Malik Director, AIM Finance Services Advisory Dubai, UAE

3Robotic process automation in the finance function of the future, EY, June 2016.



Technology revolution: rewriting insurance basics

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While most Middle East insurers have been relatively slow to adopt technology, those with strong global roots or financially sound business models are investing steadily in technology-driven innovation. Business models will be fundamentally altered by the coupling of digital, analytics, platform architecture and continuous delivery capabilities. This will impact the insurance value chain as key back-end systems such as claims and policy administration become nimble to allow strong business

collaboration, ensure seamless integration with other systems and improve customer response times. This agility will further enable intermediaries and agents to drive customer relationships at multiple touch points while minimizing channel conflicts.

With increased regulatory scrutiny, it is crucial for insurers to acquire flexible systems to the address ever-changing reporting and compliance requirements, while not compromising on data

However, the area where technology will create the biggest impact will be access to real-time information through new sensor-based tools popularly known as the internet of things (IoT). The following are some of the most promising technologies in this space:• Telematics leverages GPS and wireless communications to enable auto insurers to shift to more accurate

usage-based insurance. A major share of auto premiums is expected to be generated via this route in the future.

• Wearables help life and health insurers break from traditional business models and provide outcome-based customer services in marketing, underwriting, risk management, new product development and claims management.

• Almost every major auto manufacturer is planning an autonomous car initiative. Autonomous vehicle software start-up NuTonomy launched a basic version in August 2016, while Uber launched the first self-driving taxi fleet in the US in Pittsburgh, Pennsylvania, in September 2016. Driverless cars will change auto insurance from the personal to commercial lines, where liability will rest with auto manufacturers or service providers, and increase car sharing along with associated risk sharing and flexible premium pricing.

• Connected homes: In the foreseeable future, an entire home will be a single connected entity, both internally and with an ecosystem of service providers, including insurers. The insights generated from connected homes will not only generate more accurate pricing for home owners, but also reduce prices because of improved prevention of losses. We have already seen a major push in this direction with the launch of the HomeKit app by Apple in June 2016. This app provides a comprehensive home automation framework that will work seamlessly with multiple select smart accessories.

Paul A Sommerin Partner, MENA Financial Services, Technology & Transformation Dubai, UAE

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quality and security. Actuarial and enterprise risk management tools will reassess threats and confirm that new technologies address the right priorities. Technology is also a key enabler to deal with cost pressures — a key concern given low oil prices and unrest in the region.

The Middle East has been relatively immune to these technologies so far, but it is only a matter of time before these changes will completely alter the operating and competitive environment.

Insurers need to determine where to target their technology efforts:

• Develop an integrated claims-processing system to simplify processes and speed up claims resolution, reducing costs and enhancing customer fulfilment

• Partner with industries with a strong affinity for technology and data analytics to capitalize on business opportunities, and systematically reduce risks

• Achieve operational efficiencies and synergies through information system integration; manual processes, prolonged processing cycles and disparate systems act as barriers to the speed at which the industry conducts business

• Pre-empt changes that sensor-based technologies will bring in measuring risk and improving access to customer information

In 2016, Qatar insurance Company launched the GCC’s first telematics-enabled motor product, using pay-how-you-drive (PHYD) pricing models that offer discounts to safe drivers.



Cybersecurity: could hackers turn the lights out?Cyber attacks make headlines globally almost on a daily basis. Cyber criminals can be in the form of ideologically motivated hacktivists, insiders, vendors, political dissidents and organized criminals. With business interruption, intellectual property theft, data breaches and cyber extortion — both for financial and non-financial gain — risks are increasing exponentially for Middle East insurers.

Aside from the traditional form of data breaches, insurers in today’s increasingly digital world face major vulnerabilities from internal and external data and security breaches, large-scale denial-of-service-attacks, cyber espionage, intellectual property exposure and reputational damage. Cyber threats also put sovereign and corporate level ratings at risk, which could lead to significant restrictions on accessing capital.

The insurance industry continues to lag behind several other industries in terms of monitoring and managing cyber risks. In EY Global Information Security Survey 2015, 75% of insurers said they are unprepared for an attack. Even within the Middle East, industries such as energy and banking are at a more advanced stage of cybersecurity prevention than the insurance sector.

Key challenges for insurers include:

• Loss of intellectual property (IP) and client data: Financially motivated cyber intruders, and those pursuing corporate espionage, often seek to steal IP including product know-how and pricing, board books, business strategies, knowledge of inorganic plans and target pipelines. Timely identifying data breaches, maintaining integrity of electronic data and taking corrective measures become paramount to prevent large-scale distress.

• Risks from emerging technology and required competencies: New ways of developing and distributing products generally require new processes, systems, languages and cultures — all involving varying degrees of security risk and threats. Security and privacy measures are needed to protect insurers at each level of change. Moreover, as more applications and solutions are embedded in the cloud, insurers need to account for additional third-party exposures.

• Evolving regulatory pressure: As regulators around the globe crack down on cyber risks, insurers will be under significant pressure to increase cybersecurity measures, especially around demonstrating effectiveness of controls.

With high digital and social media penetration, most Middle East markets are at the cusp of digital disruption. For insurers, capitalizing on this opportunity requires establishing a robust security architecture. However, faced with comparatively less-evolved technical capabilities, weaker regulatory oversight and, above all, lack of budgetary allocations in light of players’ low profitability, adopting a comprehensive cyber risk management framework remains a steep challenge. Nonetheless, as cyber risk management becomes a necessity rather than a choice, insurers will have to embed it in their strategic decisions.

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Clinton M. FirthEY MENA Cybersecurity LeaderDubai, UAE

Narasinga Rao Executive Director, AIM Advisory Dubai, UAE

45

As cyber threats become increasingly sophisticated and cyber criminals more nimble, stealthy and persistent in exploiting system vulnerabilities, insurers should have a holistic cybersecurity management plan, which includes: • Customer education: Clear messaging related to customer obligations and behaviors to support secure use of

online channels and education of customers about known fraud mechanisms

• Governance framework: Security organizational structure, oversight and reporting mechanisms that drive security strategy, intelligence activities, risk appetite and operational security decisions

• Active defence: Deliberately planned and continuously executed campaign to identify and eradicate attacks and prevent likely threat scenarios targeting most critical assets

• Monitoring: Systems and organizational capability in place to monitor customer behaviors and transactions

• Incident response: People, processes and technology in place to coordinate business, IT and customer contact channels in order to manage online fraud and security incidents



Digital redraws traditional structuresInsurers and distributors who are able to differentiate their customer experience through a carefully designed, thoughtfully executed and agile digital strategy will win in the market.

Technology disruption is fundamentally reshaping customer expectations. Although other global emerging markets are in the midst of transformation, Middle East economies have remained largely untouched. Our view is that this is about to change. Customers are driving the need to change due to:

• Shifting preferences toward mobile as the preferred channel

• Expectation that experiences are personalized and relevant

• Expectation that service delivery is fast, easy and straight through

Insurers are looking at ways to address these needs and leapfrog time to market by partnering with technology start-ups to access these new capabilities.

With traditional operating models lacking the agility to meet changing market needs, insurers in the region will need to make digital a central component of their business strategy. The value that digital can deliver includes reducing costs, to sell and service, increasing customer engagement levels, improving persistency and enhancing process efficiency.

Key challenges for insurers in the Middle East:

• Business case for digital investments: Insurers across the region are struggling to understand how digital can drive profitable growth.

• Legacy process and system constraints: Most insurers are wired to operate with legacy technology and processes. Incremental changes to business-as-usual may not lead to notable digital progression.

• Cultural and manpower constraints: With limited know-how and low ability to attract the best talent, insurers often fail to develop a culture of innovation; implementing effective digital strategies will be difficult.

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Ross Maclean EY AIM Digital and Innovation LeaderDubai, UAE

Andreas Skopal EY MENA Digital - Financial Services LeaderDubai, UAE

Key components of a successful digital strategy:• Understand how digital can enable the achievement

of the business strategy

• Create the “art of the possible” in terms of what digital can deliver for customers, staff and partners

• Bring customers and partners into the design process to capture what they need and value

• Understand what digital assets can be leveraged versus what needs to be bought or partnered with to deliver the target end state

• Equip channel partners with digital tools to deepen customer engagement and supplement insurers’ own digital capabilities

• Embed digital into the organization’s DNA including collaboration, test and learn, product, pricing, underwriting and sales engagement

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Dawn of a new world of reporting: IFRS 9 Financial Instruments and IFRS 17 Insurance ContractsThe International Accounting Standards Board (IASB) has been working on improving the current accounting standards IFRS 9 Financial Instruments and IFRS 17 Insurance Contracts as weaknesses emerged, largely due to the complexity and lack of transparency of current rules.

The new standards aim to improve the comparability and transparency of accounting practices, especially through enhanced disclosure of risk information and the adoption of principles-based accounting frameworks. IFRS 9 applies to all entities and to all types of financial instruments and will be effective from 1 January 2018.

The implementation of these accounting changes will require significant effort by insurance companies, particularly to enhance the reporting and disclosure of risk information, adopt new performance indicators, implement new informative systems for managing the reporting flows and educate the internal and external stakeholders on the impact of the new principles.

IFRS 9 introduces improvements to the accounting treatment of financial instruments to address criticisms regarding weaknesses of the existing accounting standard on financial instruments — IAS 39 — especially in relation to the delayed recognition of credit losses on loans and other financial instruments, which has emerged during the financial crisis.

Insurance companies will have to adopt the forthcoming accounting standard on insurance contracts — IFRS 17, previously referred to as IFRS 4 Phase II — by 1 January 2021, i.e., three

years after IFRS 9’s effective date of implementation (i.e., 1 January 2018). The final version of IFRS 17 is expected in the first half of 2017.

The misaligned effective dates of IFRS 9 and IFRS 17 raised concerns in the insurance industry, as it will result, among other things, in additional accounting mismatches, temporary volatility in profit or loss and significant cost and effort for the implementation of two sets of major accounting change in a short period of time.

To address certain effects of applying IFRS 9 before IFRS 17 in September 2016, the IASB issued amendments to the current IFRS 4 standards.

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Dr. Sandeep Srivastava Partner, AIM Financial Advisory Services — RiskDubai, UAE

Muhammad Qaiser Executive Director, MENA Financial Accounting Advisory ServicesDoha, Qatar

The key changes introduced by IFRS 9 are:• Principle-based approach for the classification and

measurement of financial assets, which improves consistency of financial assets reporting

• Single forward-looking impairment model, which requires a timely recognition of both incurred and expected credit losses

• Substantially reformed hedge accounting model, which is more aligned to risk management and provides for enhanced disclosures as to the use of financial instruments in risk mitigating strategies



Insurers will welcome the possibility to defer the implementation of IFRS 9 until IFRS 17 becomes effective (1 January 2021). Insurance groups will need to finalize their analyses to determine whether they are eligible for the temporary exemption and what the impact of IFRS 9 will be at a group level. In addition, insurance groups will also need to evaluate whether the temporary

exemption will be available for individual financial statements of any subsidiaries within the group. The effective date of IFRS 9 (1 January 2018) is approaching rapidly; therefore, insurance companies need to decide as soon as possible which approach they will take toward applying IFRS 9 together with IFRS 17.4

With the effective date of IFRS 9 (1 January 2018) approaching rapidly, a key decision has to be made by entities issuing insurance contracts within the scope of IFRS 4, based on the options proposed in the amendments:• Opting for the temporary exemption allows eligible entities to defer the implementation date of IFRS 9 up until

the date of adoption of IFRS 17 (1 January 2021). The eligibility for the temporary exemption is assessed at the entity level; an entity meets the qualifying criteria if the ratio of total liabilities as on 31 December 2015 exceeds 80% (i.e., predominance of the insurance business); is automatically eligible if the ratio is more than 90%; and an additional qualitative and quantitative assessment is needed for eligibility if the ratio is between 80% and 89%.

• Overlay approach: The overlay approach allows an insurance entity to adjust its profit and loss account to exclude the impact of moving from IAS 39 to IFRS 9 for assets that are required to be measured at fair value through profit and loss (FVPL) under IFRS 9 but were not carried at FVPL under IAS 39. The overlay approach is applied at an instrument by instrument level for eligible assets. An entity may also decide to apply the deferral approach at the insurance entity level and apply the overlay approach at the group level when it does not pass the deferral eligibility criteria at the group level. The overlay approach may be utilized until IFRS 17 becomes effective on 1 January 2021.

4 Insurance Accounting Alert, EY, September 2016.

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Data analytics: shaping the future of insuranceWith insurers capturing customer data through social media, call centers and smart devices, it is only a short time before legacy systems and archaic processes will be replaced. Data will be leveraged analytically to create new opportunities and enhance risk management. With most global insurers significantly investing in recent years, it is only a matter of time before data analytics gains importance in Middle East markets.

In EY’s survey5 of 150 financial services firms globally, 84% respondents agreed that data will be a key source of competitive advantage.

The insurance markets in the region are at a stage where product portfolios are yet to mature. Developing a 360 degree single customer view will reshape marketing, sales and customer services around customers, not just products or policies. Analytics will provide the next level of intelligence. While some insurers are embedding analytics into their DNA, much of the remaining market is grappling with capital and structural issues.

With a more pervasive digital ecosystem and increasingly technology-enabled enterprises, insurers must look at the right approach to leverage analytics and digital into their future strategy. Analytical capability will be a must and a source of competitive differentiation, allowing insurers to:

The insurers that ultimately achieve competitive advantage will be those that are able to successfully integrate analytics into all aspects of their business, including risk management, financial planning, actuarial, distribution, underwriting and claims processing. Insurers who acknowledge this and plan accordingly will stay a step ahead of the competition.

7

A well-rounded approach for insurers to develop their analytics capability will include:

• Assessing their current state for levels of analytics literacy, skills and resources, and seizing opportunities for innovation

• Identifying the right goals for new or different products, change pricing, improved customer loyalty and operating efficiency

• Developing an iterative design process for data issues and new data sources

• Applying appropriate statistical and predictive techniques by selecting the right variables

• Generating “buy-in” from stakeholders (leadership, process stakeholders and users)

• Coordinating deployment of new processes with other business changes and infrastructure upgrades

• Establishing responsibilities, key performance indicators and supporting metrics to measure and define success

Ali Pirinccioglu Partner, AIM Advisory Services — CustomerDubai, UAE

Utku Sarioz Executive Director, AIM Advisory Services — CustomerDubai, UAE

• Trim acquisition costs by enhancing information, improving conversion rates, reducing duration to close a sale and driving upselling of products to existing customers

• Tailor services, products and premiums in an increasingly interconnected world

• Explore cross-sector collaboration opportunities by sharing intelligence with external entities, such as health care providers, banks and auto companies — turning customer behavioral aspects into selling opportunities

• Improve time-to-market for new services and products by assessing emerging trends that may impact future sales

• Develop a distribution strategy by targeting segments on the basis of purchase behavior

• Improve underwriting and minimize fraud by avoiding risky customer classes and improving customer selection

• Retain high-value customers, employees and distributors by identifying those at risk

• Reduce claims costs through more effective identification of fraud, waste and abuse

• Enhance risk and actuarial analysis by providing access to previously unavailable data — enabling the development of a robust risk management strategy

5The science of winning in financial services, EY, 2015.



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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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EY | Assurance | Tax | Transactions | Advisory ContactsShaun CrawfordEY Global Insurance Leader+44 207 951 [email protected]

Rohan SachdevEY Global Insurance Emerging Markets Leader+91 226 192 [email protected]

Gordon BennieEY MENA Managing Partner Financial Services +973 1751 [email protected]

Robert Abboud EY MENA Financial Services Advisory Leader [email protected]

Sanjay Jain EY MENA Insurance Leader+971 4 [email protected]

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