Expanding Qatar’s insurance sector

Aided by legislation, ambitious national plans that include huge investments in infrastructure and a general increase in the awareness of risk management, the insurance sector is expected to grow both in Qatar and the region, according to experts. Insurance penetration in the GCC is expected to grow from 1.1 percent in 2012, to 2 percent in 2017, according to Alpen Capital’s GCC Insurance Industry Report 2013. Qatar’s insurance industry was worth USD1.3 billion (QAR4.7 billion) in 2012, much of it being driven by non-life, a general trend in the Middle East and North Africa (MENA) region. The economic growth, increase in population and insurance regulation is further expected to grow the non-life sector in Qatar. It is, however, not without its challenges. 

Competition

In the MENA region as a whole, the largest perceived weakness of the market has been the excess capacity that has created fierce competition and, in some cases, led to unsustainable levels of pricing. However, this might not apply to countries such as Qatar even though it is a small country with many insurers operating within it. Bassam Hussein, the chief executive officer of Doha Insurance Company tells The Edge that a better gauge of the market, is the size of the projects in the pipeline for Qatar, which creates the capacity for growth. MEED Projects in 2013 reported that over a USD100 billion (QAR364 billion) worth of projects were underway in Qatar, and this number is expected to vastly increase in the lead up to the 2022 World Cup. “So no matter how many companies are here, as long as you have the premium income base and as long as you have projects in the pipeline, it is always going to be a very interesting market for insurance carriers,” says Hussein.

The chief operating officer at SEIB Insurance, Elias Chedid, agrees, telling The Edge that despite tough market conditions, the company has managed to perform well last year, increasing their new business by over 31 percent.

Hussein points out that profitability is always a challenge, and that smaller accounts provide for the highest profit margins. Big accounts, because of competition and the premiums involved, usually have lower profit yields. When asked how Doha Insurance Company seeks to differentiate themselves in the market, Hussein says candidly, “We would like to think that our customers get better service, they get better day-to-day attention. But, overall it seems that in this market, price is the number one factor in most of the cases.”

Ali Saleh Al Fadala, the senior deputy group CEO of Qatar Insurance Company which holds 50 percent of the local market share, says they are instead choosing to focus on customer service which is reflected in their higher prices, “we are not going into price battles with other insurance companies who try to cut prices,“ he says. The higher prices are part of a long-term strategy of investing in technology to streamline their claims and better interaction with customers.

Opportunities and challenges

In QFC’s MENA Reinsurance Barometer from 2013, most of those interviewed identified the low penetration of insurance in the MENA markets as the biggest opportunity. The region’s premiums, which account for 1.3 percent of gross domestic product (GDP) is a fifth of the global average, even though the MENA GDP per capita matches the global average, states the report, making it the number one market opportunity, replacing infrastructure projects. “This penetration gap is believed to be a major long-term and structural driver of insurance and reinsurance market growth in the region,” further states the report.

When looking at short-term growth in penetration, SEIB’s Chedid is of the opinion that looking at growth by line of business is a better measure of the market. In Qatar, Chedid expects the overall short-term growth to be moderately positive. He adds that, “[this] can only achieve visible levels by applying mandatory insurance of certain lines such as fire and liability. Those are essential to both improve premium penetration and protect the economy.”

An ignored area when discussing insurance penetration in Qatar, according to Hussein, is the level of penetration along personal lines, “This is where the market here lacks. So in our opinion the local penetration will always grow but at the same time I don’t see it becoming a major issue.”

Hussein also brings up an interesting point about measuring the ‘real’ growth of insurance in the country, “It’s not just that we need higher penetration [in the] market. The most important thing for me is how much of that penetration is actually retained within the country?” He further explains this idea by saying that if the insurance penetration was to grow by a number of percentage points, it is important to look at where that growth has come from. If it is going to markets outside Qatar and not retained by insurance companies in Qatar, “then it is a false penetration in my opinion,” says Hussein. “We need to focus on how much of the premiums are actually retained in Qatar and not how much penetration is in the insurance market.”

Among the most serious threats to the market according to the reinsurance barometer is the further erosion of market discipline through competition.  “This long-standing concern is further exacerbated by a continued influx of frequently ‘naïve’ capacity in search of instant diversification benefits,” the QFC report states.

Excessive reinsurance?

While there are significant differences in reinsurance purchasing behaviour in the region, cession rates in the GCC countries are among the highest, at an average of 40 percent. Qatar is slightly above this average with 44 percent. 

Another problem identified by some in the industry is domestic insurers engaging in what is known as facultative inward reinsurance. This is where insurers purchase cover for risks to individual policies that are not covered by their reinsurance treaties, either for amounts that are more than the limits of their reinsurance treaties or for unusual risks. Mahmoed Akoob the managing director of Hannover Re Takaful, was quoted in the QFC reinsurance barometer as saying, “Inward facultative reinsurance among ceding companies is a major risk to market stability and discipline.” The QFC report also states the practice has reduced the market’s transparency and heightened its vulnerability to accumulation risk.

Hussein, however explains that the issue is not so simple. The type of accounts available in Qatar by their nature do not allow local insurers to have a bigger retention, forcing them to go into the facultative market. “We definitely are endeavouring and trying our best to retain as much in the country,” he says. “But how much can we retain out of a massive gas project? Or how much can we retain out of Qatar Airways? We don’t have very specialised aviation insurance in the country, and it is difficult to see how you can have a specialised aviation capacity with only one account. Usually you have to have 10 to 20 major airlines to have a proper balance of the portfolio, to retain a little bit more.” Chedid from SEIB says that the risk is in uncalculated accumulation that can harm reinsurers the market needs. Hussein also concedes that many companies in Qatar are not retaining as much as they should. “because we are not seeing proper underwriting being done,” says Hussein, adding that, “the premium is very competitive, so we are not very keen to retain the risk because the premium that we get for it is not in the same line.” Therefore, local insurers prefer to sell on facultative basis abroad and get commission on it, passing on the risk.

Overall, cession rates – the percentage of premium transferred to a reinsurer – in the GCC have been declining but remain at much higher rates than around the world. The QFC reinsurance barometer puts GCC cession rates at around 40 percent while the European Union, was for example, around 12 percent. In the barometer, the declining cession rates are attributed to the above-average growth in personal lines such as medical and motor insurance, which are considered less volatile than commercial segments of business.

Growing personal lines

In an attempt to grow personal lines, Al Fadala of QIC says they are in the process of implementing e-machines similar to a bank ATM machine, that would allow customers to purchase policies immediately. Around 50 e-machines are expected to be installed in public areas such as malls.

However, the private sector, as it currently stands, will not benefit from one large section of personal line growth, medical insurance. It was predicted to be among the fastest-growing lines of business in the region, pushed on by government–mandated programmes to cover everyone under healthcare. Qatar is in the midst of rolling out its social health insurance scheme, and while it will expand the medical insurance market significantly, private companies are not expected to benefit. For now, the basic cover for insurance will have to be purchased through the government set-up National Health Insurance Company (NHIC).

Chedid opines that depriving private insurers from writing and servicing the health insurance market would deteriorate service standards in the medium- to long-run. “It may result in shutting down operations of insurers that depend on health insurance income,” he says. “It may lead to rate thinning in companies that write general lines in order to compensate for loss of revenue generated by this isolation, resulting in increased market loss ratio in the short- to medium-term.”

Malcolm Wright, is the executive director of Aetna International for Middle East and Africa, an insurer that focusses on health coverage. He is of the opinion that it is still too early to tell what the full coverage of the NHIC will include, and that overall increase in awareness will generate more supply and demand. “Clarification is yet to be made clear regarding the role of private insurers,” he told The Edge.

The acting-CEO of NHIC, Dr. Faleh Mohamed Hussain Ali, told The Edge last year, “Private health insurance companies will be able to address this expanded market for specific services, including services outside the basic package offered by the NHIS – and also coverage outside Qatar.” 

Wright says that as a health only insurer and with an international capacity, they will be able to meet the changing landscape with innovative products and offers.

It is, however, clear that many insurers who relied on medical insurance as a significant line of their business are not happy about their new role in the scheme.

“We will abide by whatever the government decides,” says Hussein. “Now, are we very happy with the way things are going or not? That is a different question. The only way that we can deal with it is by trying to discuss in a broader way through our key board members with government officials to find a compromise where we can both benefit.”

“If the law is not going to allow us to write medical insurance, it is very simple,” he continues, “We have to seek for other ways and means to boost our premium and we will just have to abide by the laws of Qatar.”

The future

In Alpen Capital’s GCC Insurance Industry Report 2013, takaful (shari’ah compliant insurance) is identified as among one of the key growth drivers in the region. Positive changes are expected in the regulatory framework and operation parameters of the takaful market which should affect the market positively, states the report. Hussein expects the Doha Insurance Company’s takaful branch to have a much higher growth rate than in conventional insurance. 

He is of the opinion that takaful should focus on personal lines, “If you look at the personal lines you will see that their (takaful) penetration is much higher than ours (conventional insurance).” The large infrastructure projects in the pipeline, increasing corporate governance and risk management standards and a relatively low penetration in the market will continue to attract business. Overall, a combination of factors is expected to fuel strong growth and a positive outlook in the insurance sector of not just Qatar, but the wider GCC.

Update: Here are the findings from the latest Qatar Financial Centre MENA Insurance Barometer