For a country with Egypt’s economic profile, its insurance penetration has been surprisingly low. All this is set to change with a comprehensive law that encompasses conventional insurance, Takaful (Islamic mutual insurance), agri-insurance, and a universal health insurance system. Mushtak Parker has the details.
If 2018 was, in the words of Mohammed Omran, Chairman of the Financial Regulatory Authority (FRA), ‘the year for the insurance industry in Egypt’, he can be excused for indulging in the rhetoric of aspiration.
After all, the country has a very low insurance penetration rate – a miniscule 1%. This is partly due to cultural reasons and partly because of government and regulatory policy inertia and legislative fragmentation on matters relating to insurance.
To his credit, come 2019, Omran and his colleagues have been busy helping and advising the Egyptian government in tabling a Comprehensive Unified Insurance Law, complete with its 233 Articles, which consolidates four separate previous laws.
The first draft was published at the end of 2018 and the final law was completed at the end of July 2019, and at the time of writing, was awaiting final parliamentary ratification.
The law is part of a Five-Year Plan (2018-22) aimed at forging a Capital Market Master Plan for Egypt; including development of the Non-Banking Financial Sector, especially the insurance industry.
Omran is convinced there is a huge potential given the current very low market penetration and base. The law is also designed to support the administration of Prime Minister Mostafa Madbouly achieve its stated policy on financial inclusion, especially through microinsurance.
According to FRA data, Egyptian insurance/Takaful operators issued microinsurance policies in FH2019 totalling E£281.9m ($17.28m), for which E£1.4m in premiums were collected from 2,049 policyholders.
The new law encompasses conventional insurance, Takaful (Islamic mutual insurance), agri-insurance, and a universal health insurance system.
It adopts a risk-based supervision of the industry complete with international best practice in recapitalisation, corporate governance, solvency standards, dispute resolution and digitisation – including the cashless payment of premiums online and through mobile telephony.
Work in progress
In some respects, the new law is still a work in progress given the number of current and pending add-ons, as both the regulators and the market come to term with its provisions. As such, its full implementation and impact will take time to work through.
In September 2019, for instance, the Egyptian Ministry of Health rolled out its pilot national health insurance scheme in Port Said, with the aim of extending the plan to all the governorates in the country by 2032.
Similarly, the Ministry of Education is working on a roll-out of education insurance for both secular and Islamic educational institutions and their students.
Despite its low penetration, insurance is probably the most important non-banking financial activity in Egypt. It contributed 0.91% to GDP in 2018, a tiny rise over 2017.
Given a breakdown, Mohammed Omran said: “During 2018, the growth rate of insurance premiums was 23.4% compared to 2017. The total number of companies operating in this sector is 37. The total premiums amounted to E£30bn at end June 2018, compared to E£24bn for the same period in 2017.”
On the other hand, he said, insurance companies paid out total claims amounting to E£15.4bn compared to E£12.9bn for the same period in 2017. The net investments of insurance companies increased by 16% for the same period to E£99.4bn underlining the importance of the sector to the economy.
Main provisions of new law
The three stand-out provisions of the new insurance law are: the new capital requirements for insurance operators; the promotion of Takaful and mandatory classes of insurance.
A major issue for all insurance firms is capital – the higher the firm’s capital, the more it can underwrite new business, which in turn translates into more policyholders, contributions, premiums and reinsurance capacity in the international market.
According to S&P Global Ratings, minimum capital requirements can lead to consolidation in the insurance industry. However, in a report published in September, S&P warned that the flow of ‘convergence capital’ – funds from non-traditional third party investors – into the global reinsurance industry for instance, slowed down over the last year, partly due to the increase in catastrophe-insured losses in 2019.
The new Egyptian insurance law, for instance, proposes an E£150m minimum capital for life and general insurance/Takaful operators. This is more than double the existing requirement of E£60m.
The biggest leap is for re-insurers, where a minimum limit is set at E£1bn compared to the previous limit of a mere E£60m. The minimum for insurance and reinsurance brokerage firms similarly is set at E£5m, and for medical insurance firms at E£60m.
The mandatory classes for insurance include inter alia professional liability insurance, education services, electronic risk in non-banking financial institutions, motor insurance and even ‘houses of worship and their users’.
The FRA has already created, this year, the Compulsory Motor Insurance Group (CMIG), which has 18 members, including five Takaful operators and local and international giants such as Misr, Tokio Marine Egypt, AXA, Allianz and Delta.
The challenge is to tackle the high level of motor insurance fraud through cashless electronic collection of premiums. The CMIG in fact signed a cooperation agreement with Egyptian payments provider, Cashless Plus, and the Egyptian Traffic Information System Department to this effect.
Growth of Takaful needs handholding
There is no doubt that the stand-out feature of the new law is Takaful. Egypt and Sudan are the two pioneers of the contemporary Takaful industry, with the first policy written in 1964.
“However, the proliferation of Takaful has been late and slow. The authorities have not done much to assist its growth,” says Omar Gouda, Managing Director of Cairo-headquartered Africa ReTakaful.
“There is low insurance penetration in most markets and many jurisdictions simply do not have a Takaful regulatory framework in place. We are revisiting the proposition and there have been some encouraging developments in Egypt, Nigeria and Morocco,” he explained.
That said, the FRA has revealed that contributions collected by Egyptian Takaful operators increased by 141% year-on-year at end FH2019, reaching E£4.6bn ($281m) from E£1.9bn during the same period last year. This was the largest single increase in an insurance market segment by far in Egypt in 2019.
However, total insurance market contributions (conventional and Takaful) amounted to E£27.8bn for the same period – an increase of 34.8%. Takaful today accounts for just under 17% of contributions in FH2019 compared with about 10% in FH2018. According to the FRA, benefits and claims paid by Takaful operators amounted to E£666.5m in FH2019, compared to E£439.6m FH2018.
The FRA recognises that the local Takaful industry does need handholding to get it on a more secure footing. But it has adopted a carrot and stick approach. On the one hand, the authority, after meeting Takaful firm executives in September, gave them an extra six months “to adjust to the new rules until 24 February 2020, provided that Takaful companies committed to submit to the Authority a plan of action, that includes a timetable and measures taken to comply with the new regulations, by 30 September 2019.”
Adapting to local needs
Fitch Ratings sees the adoption and approval of Takaful governing laws and the introduction of new types of Islamic financing products (as in the cases of Morocco and Egypt), as important in the countries’ efforts to form a cohesive Islamic finance regulatory framework and architecture.
On the other hand, the stick that the FRA waves is that the new law prohibits the merger of a Takaful insurance company with a conventional insurance company. Mergers are only possible between insurance operators in the same category of business. A conventional insurer can merge with a Takaful firm only after it ‘converts’ into a Takaful operator before the merger, and this would be subject to regulatory approval.
The new Bill also states that Takaful operators have to reinsure their risk with Retakaful companies, but the FRA is allowing them to use conventional reinsurers while there is a lack of capacity in Retakaful companies, subject to its final approval.
The above moves are to pre-empt the co-mingling of conventional insurance funds with those of Takaful and to give Shariah-compliance certainty and comfort to those policyholders who choose to opt for Takaful, and to the market in general.
But like the Valley of the Kings, the new insurance law conjures up yet more surprises – for example, the proposal for compulsory ‘social’ insurance against divorce to be taken out by would-be bridegrooms. This comes against a background of escalating divorce rates, especially amongst the 30-35 age group, and rising living costs. The proposed law is also aimed at ensuring that men pay alimony to ex-wives in the event of divorce — whatever their economic circumstances.
The right measure at the right time
The pick-up of insurance in Africa, especially in Egypt and Nigeria, said Mahesh Mistry, Senior Director of Analytics at AM Best, the insurance market rating agency, at the recent International Takaful Summit in London, is very important, given its low base and growth potential.
AM Best’s latest country risk rating (CRT), which is not directly comparable to a sovereign debt rating, is not flattering of the Egyptian market. It gives the highest negative CRT of 5 for Egypt, including a High Economic Risk, a Very High Political Risk and a Very High Financial System Risk.
This however should be balanced against the huge potential for the industry in all its forms, including Islamic finance, in a country that has one of the largest populations in Africa. Egypt’s economy has also been growing apace, as has its SME sector, the traditional catalyst for job and wealth creation. A solid insurance infrastructure is essential for the health of this sector and the new law seems to be just the right measure at the right time.