Insurance in the Gulf Cooperation Council - Assignment Example

?Running Head: INSURANCE IN THE GCC Insurance in the GCC (Gulf Cooperation Council) Introduction: The insurance industry in the Gulf Cooperation Council (GCC) has shown a steady growth on the basis of different factors such as economic development, population growth, improvement in the regulatory environment, and most importantly, on the basis increased product awareness. Another key factor associated with the growth in the insurance sector in GCC is low penetration rate. This low insurance infiltration, despite the presence of strong primary growth drivers, continues to offer enough opportunities to insurers in the GCC. According to Ashcroft (2013), due to the presence of strong growth opportunity, the insurance sector in the Gulf region will go up to US $28billion by 2015, and by 2017, it is expected to reach up to US $ 44 billion. Although economic growth in this region is very high, the insurance sector has fallen behind drastically. According to him, the opportunities for different local and international insurance company are very high, which will be accounted for increased competition, and also a challenging business environment (Ashcroft, 2013). There is also an expectation that the region’s insurance sector will also mature structurally in way of going forwards. Apart from this, in line with positive regulatory developments, there are constant efforts by some of the key insurance players towards achieving greater operational scale and functional efficiency. These companies want to take the first mover advantage. There are huge amount of opportunity in the GCC Insurance sector with the bigger organizations in the insurance market getting more and larger in terms of operational volume as well as the penetration in different parts of the world, and in that way leading to the marginalization of smaller companies. The GCC Insurance Industry Outlook: With the untapped open market in place many leading insurance sectors are now looking forward for setting up their business unit in GCC. The opportunity of untapped market is huge and therefore every organization is looking for taking the “first mover advantage”. According to the report published by Alpen Capital (2013), the projective growth rate of the insurance industry in the Gulf region is 18.1% (CAGR) between the time periods of 2012-2017. According to their estimation the market value of the insurance industry in the gulf region will reach up to us $ 37.5 billion. Out of this, the life insurance segment will contribute US $ 2.4 billion and non life will account for US $ 35.1 billion. The growth in the non life part is more due to strong impetus of construction and infrastructure industries. An enormous portion of oil revenues in the GCC countries is being moved to the development of the non-oil segment in order to support the economic diversification of the sector. As a result, there is strong momentum in the construction sector. This momentum will help the region’s non-life insurance segment. Moreover, higher infiltrations of medical insurance and constant growth in the new vehicle sales are also likely to help the growth in the motor insurance sector which in turn will aid the segment’s growth. The rate of insurance penetration in GCC is also likely to go up from 1.1% in 2012 to 2% by the end of 2017. The industry growth rate is comfortably exceeds the pace of GDP expansion in this sector, Non-life insurance growth in the line of increasing infrastructure development and more vehicle sales, is likely to surge from 0.9% to 1.9% during the period, and will be the key behind the growth of this sector in the GCC region. UAE (United Arab Emirates) and Saudi Arabia are the two largest insurance market at present in GCC; the trend is such that there is every possibility that Saudi Arabia may overtake the United Arab Emirates (UAE) as the largest insurance market in GCC with coming years. (Alpen Capital, 2013). Key Growth factor of Insurance Industry in GCC: There are several factors associated with the growing business perspective of the insurance sector in GCC. According to Alpen Capitals report (2012), different demographic factors like increasing population base, , large percentage of foreigners present in the area, increasing life expectancy are the key points which play an important role in the growth of the insurance sector. Continuous economic growth ad also increasing GDP and per capita at purchasing power parity (PPP), also in the upwards move which help the resident of those country to spend more in automobiles and residential properties. As a result the opportunity of non life insurance is more. Another key factor is the implementation of the compulsory health insurance program, which is likely to create strong growth opportunities for insurers. (Alpen Capital, 2013). The Concept of Indemnity: Indemnity is the major controlling principle of insurance law. Indemnity can be considered as exact financial compensation, which the insurance company has to pay to the individual or the organization to put him in the same financial position after the loss which he enjoyed immediately before the incident occurred. Generally indemnity can be in form of cash, or replacement, or reinstallment or repair. Generally repair is associated with the motor insurance, replacement is associated with some product which have a tendency of breaking down (like glass particles, etc) (Pal & Garg, 2007, pp.54-55). Measurement of Indemnity: Generally in case of any kind of general insurance, the extent of loss can only be determined after it happens. According to Pal & Garg (2007) “A claim under a policy of indemnity has been said to be claim for un-liquidated damage” (p.55). In case of general insurance, principle of indemnity says that the measurement of the loss is the sole concerned of the insurance provider, and they will provide the compensation after measuring the same. It is not necessary to be 100% of the loss that occurred. But, for life insurance, and any insurance related to personal accident, the amount of money to be paid to the policy holder is liquidated and predefined. The amount to be paid in this case are decided before the insurance policy was taken by the customer and issued by the company (Pal & Garg, 2007, p.55). Condition related to Indemnity principle: There are certain conditions related to the indemnity principle. Pal & Garg (2007), in their books discussed about the conditions associated with the principle of indemnity. These are as follows: The insured individual has to prove that he or she may suffer loss on the matter which he or she want to insured if something happens, and that loss will be strictly a monetary loss. The amount associated with the compensation is equal to the amount of insurance, and most important condition related to indemnity is that the amount of compensation cannot be higher than the actual monetary loss at any circumstances An individual can not ask for the compensation from two different organization for same product loss/or any other kind of monetary loss. For life insurance, one have to declare his or her existing insurance detail while applying for a new one, otherwise it will be considered as a breach of contract which clearly say that insurance is a contract between two parties on good faith.( Pal & Garg , 2007, p.56). Advantages of the Indemnity Principles: Firstly, Principle of indemnity is a key part to measure the actual loss that happens to the insured person. In absence of the indemnity principle there is a chance that people may gain profit from the insurance contract and might end up getting more money as compensation than the actual loss. In order to avoid intentional loss the insurance companies used to pay the amount which is equal to the actual loss and not the sum assured. Secondly, the principle of indemnity helps to avoid the anti social act to some extent. If this principle is not in place, then there is maximum chance of people causing self destruction of their property to get financial benefit. Thirdly, Principle of indemnity is always helped to reduce the cost of insurance. By restricting the compensation amount and keeping it equivalent to the loss this principle helps the insurance companies to keep the premium within the reach of the general people, so that more and more people can be covered under the insurance scheme (Pal & Garg, 2007, p.55). Insurance Company in UAE: Business performance overview: There are few major factors associated with the growth of the insurance sector in UAE. These are population growth rate, increase in the personal income, investor friendly business climate as well as government policies, compulsory lines (such as, medical insurance is compulsory for the people in Dubai and Emirates) etc. The industry is expected to grow from US $ 7.2 billion to US $ 13.8 billion in a five year span of 2012-2017. Several industry friendly rules such as compulsion on the medical insurance, introducing fire safety standards for all the buildings, as well as continuous growth in the industrial and automobile sector help the general insurance to grow in a rapid pace. (GCC Insurance Industry Report, 2013, p. 66) Orient Insurance Company: Orient Insurance Company was established in the year 1982. It provides general insurance, life insurance and re-insurance services. The company is well known for its expertise in providing innovative insurance solutions for the commercial enterprises as well as for the individuals. The three operating segments are general insurance, life insurance and investment .General and life insurance provide 91.9% and 8.1% respectively to GWP in FY2012 for the company. There general insurance segment comprises of motor insurance, marine and aviation, fire, general accident and medical policies, liabilities, travel insurance etc. Life assurance business includes all the insurance products related to individual and group life insurance including endowment policies, term policies as well as unit link investment plans. Investment segment of the organization looks after the cash management as well as the investment part for the organization. The main strengths of the organization are: diversified product offerings in all the sectors of insurance as well as investment, strong capital reserve, high rating. The organization is the third largest insurance company in UAE in terms of GWP .The recent result published by the organization also represents a strong growth; GWP grew by 16.2% over last financial year to US $ 66.0 million. Net profit rose to US $ 10.3 million, a sharp rise of 27% over last year. The organization grabs the award for UAE Insurer of the Year 2013, in January 2013, for the second time. Their future plan is to launch business operation in Turkey and Libya by the last quarter in 2013 to capitalize on the untapped market. (GCC Insurance Industry Report, 2013, pp. 96-97). Insurance Company in Saudi Arabia: Business performance overview: Like UAE, in Saudi Arabia also, the growth in the insurance sector is very much on the higher side. The factors associated with this growth are larger population base with 2-3% increase every year, government policy of economic diversification which help to grow the non oil sector new mortgage law which is in place to support the real estate industry indirectly helping the insurance sector also(specially the general insurance part), compulsory lines taken by the government compulsion of third party motor insurance and health insurance etc. The country’s insurance sector is expected to grow up to US $ 17.7 billion by 2017 from US $ 5.5 billion in 2012, with a CAGR of 26.5 %.( GCC Insurance Industry Report, 2013, p.67) Company for Cooperative Insurance This company started its functioning in the year of 1986. Presently they have more than 100 regional and sales offices across Saudi Arabia. It started operation from Riyadh and focused mainly on cooperative insurance, re-insurance and agency activities. They provide insurance facilities for both individual as well as corporate groups. The market capitalization for the company is US $ 810.6 million. Three key business segments of this company are medical insurance, motor insurance and property & casualty insurance. Medical insurance is the main component of their business which contributed 62.5% of total revenue followed by Motor and property-casualty insurance with 20.7% and 16.8% respectively. The medical insurance part consisted of family health insurance, group medical scheme; motor insurance products are mainly designed keeping in mind third party insurance and the property and casualty segment consisted of products designed for engineering, marine, aviation , property insurance products. The key strength of this organization is its well distributed network and it is the leading insurance solution provider in the country with 25% market share. The financial performance of the organization was also very good as it announced a y-o-y growth of 12.2%; in GWP (Gross Written Premium). But the net profit fell by 27.2% y—o-y due to increase in the insurance claim and higher policy acquisition cost. The investment income increased significantly by 126.5% to reach us $ 29.5 million (GCC Insurance Industry Report, 2013, pp.79-80). Conclusion: From the above analysis, it is very clear that indemnity plays an important role in the insurance sector and governing the principle and claim process of the insurance. The basic principle associated with indemnity is same in all countries, where as there are certain modifications in terms of limitation in premium amount, sum assured for specific plans or clam process etc. In GCC also, there are various insurance companies working all across different countries in GCC. But, as the report suggested, the percentage of people cover under insurance scheme is very less in comparison to that of the world percentage. So there are large opportunities for the existing as well as the new companies to start operation and get rapid growth. Government policies in all the countries, like making health insurance mandatory, launching plans like providing insurance to the teachers, making third party insurance compulsory, promoting motor insurance; increase in the per capita income for the people as well as increase of expense power, constantly growing population-all these factors are there to help the insurance sector grow drastically in coming 5 years span. Different companies coming up with new ideas to capture the untapped market and take a decisive lead from their close competitors. References Ashcroft B. (2013), GCC Insurance industry to hit $44billion by 2017, Expat Health.org; retrieved on 24.10.2013, from http://expathealth.org/expatriate-insurance/gcc-insurance-industry-to-hit-44-billion-by-2017/ GCC Insurance Industry (2013), Alpen Capital Investment Banking, retrieved on 24.10.2013 from http://www.alpencapital.com/downloads/GCC%20Insurance%20Industry%20Report%202013_1%20July.pdf Pal K.B. & Garg, M.C.(2007), Insurance Management : Principles and Practices, Deep and Deep publications Robust growth potential for the GCC Insurance Sector; Alpen Capital (2013); Alpen capital Investment Banking, retrieved on 24.10.2013 from http://www.alpencapital.com/news-article-2013-1--july.htm Read More