The Gulf insurance industry is growing as government spending increases but the sector is suffering from overcapacity in certain markets, which threatens to drive the smaller insurance companies into financial turmoil.
Generally, the low level of penetration levels in the Gulf region has granted ample room for the insurance sector to flourish.  Insurance penetration in the Gulf was at 1.1 per cent in 2012, just under one-sixth of the global average, and is forecast to reach two per cent by 2017, according to an insurance report by Dubai-based investment bank Alpen Capital.
As more countries implement compulsory health and motor insurance, the non-life segment is expected to grow , increasing penetration levels. Also, as the Gulf governments diversify their oil income and invest in infrastructure, the project and property insurance sectors are expected to pick up.
“The compulsory health insurance, which has now become mandatory in a lot of the GCC countries, has brought about a big opportunity in the GCC insurance industry,” said Sanjay Vig, managing director of Alpen Capital.
“Because of the Arab spring there is now an increased awareness of the risk associated with projects, so project insurance is certainly going to pick up in a big way.”
Gross written premiums in 2012 rose 10.4 per cent year-on-year to reach $16.3 billion, split between $14.1 billion for non-life segment or general insurance, and $2.2 billion for life segment, based on Alpen Capital’s report.
The rising wealth of a young population, an increase in expatriate numbers and a growing awareness of insurance products are all helping to boost the industry.
“The distribution models being used by insurers are helping to increase awareness of insurance. We have seen a particular rise in banc-assurance in recent years, facilitated by the development of specific regulations, which helps generate customer contact,” said Peter Hodgins, a Dubai-based partner at law firm Clyde and Co.
The insurance sector is forecast to grow between 2012 and 2017 at a compound annual growth rate (CAGR) of 18 per cent to reach $37.5 billion in 2017, based on Alpen’s projections.
The UAE is currently the biggest insurance market in the Gulf, with over 60 firms offering conventional and Islamic insurance, also known as Takaful, operating in the country, and gross written premium accounting for 44 per cent of the region’s total in 2012, according to Alpen’s report.
But Saudi Arabia, the biggest Arab economy, could outgrow the UAE .
“Saudi Arabia has the biggest potential for insurance development in the region. It is a market that works on tawuniyah, a cooperative model which is not the same as the Takaful model commonly used in other Gulf countries,” said Kevin Willis, an analyst with rating agency Standard and Poor’s.
“The Saudi insurance market is still relatively new, but as that market starts to deliver some operational maturity, I think we can expect to see the companies there slowly look to expand outside that domicile.”
In countries such as the UAE, there is a need for mergers and acquisitions between insurance firms to help boost the sector, which has witnessed a weakening in underwriting profitability over the past six years, Willis added.
But mergers and acquisitions are rare, given regulatory hurdles and the inflated prices demanded by some shareholders.
“Having looked at potential acquisitions for a number of clients, I do think shareholder expectations of some of those companies is completely divorced from reality,” said Clyde’s Hodgins.
“Acquisitions of listed entities are inherently challenging in the region.”
International foreign players, though, are seeking to expand in the region, attracted by low penetration rates, especially for life insurance , and are entering the region through various means, including joint ventures. 
Japan’s Orix Corp said in June it had agreed to buy a 25.7 per cent stake in Bahrain-based Mediterranean and Gulf Insurance and Reinsurance Company (Medgulf) for around $200 million.
“There is a lot of interest from foreign insurers in establishing operations in the region specifically to target life products.
“For example, we are starting to see Indian life insurers exploring ways to enter the market in order to target the substantial Indian expatriate population here,” said Clyde’s Hodgins.
“Some international insurers are having to consider acquiring shares in UAE insurance companies or establishing carefully structured fronting arrangements because of the moratorium on the issuance of new insurance licenses in the UAE. However, the moratorium is also forcing international insurers to look outside the UAE as they seek to establish operations in the region. For example, we are also looking at markets like Qatar, Bahrain and Oman on behalf of a number of our clients.”
The emergence of international foreign insurers will help weed out the weaker and smaller insurance firms in a market, where a variety of local and international players are competing over a small pool of customers amid the low penetration levels. 
Such competition has driven some insurers to losses. For example, shareholders in UAE-listed Green Crescent Insurance agreed last year to reduce the company’s capital after the company posted losses.
The Takaful sector is particularly vulnerable to losses, given its small size and infancy in the Gulf region, and its poor record of luring customers away from conventional insurance through marketing its Islamic appeal.
“Underwriting earnings for the insurance markets do seem to be deteriorating, and low interest rates are not enabling insurers to compensate,” said Standard and Poor’s Willis.
“There is no natural flow of business from conventional companies to Islamic compliant insurance companies. They are all pitching in the same market for much the same sort of business. The volume insurance lines are commodity products where it is often the price that drives where that business goes to.”
The fact that customers in the region are fickle and flock to the lowest price rather than to quality insurance firms is not helping the industry.
Regulators can play a role by ensuring that local laws are developed enough to monitor both the conventional and Takaful sectors and by developing guidelines to further ensure both the financial strength of insurance firms and the protection of customers. “There are hopes that there will be a move to some more rational restriction of the insurance markets and that is an area where the regulators need to play a role,” added Willis.
By: Dania Saadi