Page 1 of 21
Journal for Studies in Management and Planning
Available at http://internationaljournalofresearch.org/index.php/JSMaP
e-ISSN: 2395-0463
Volume 01 Issue 03
April 2015
Available online: http://internationaljournalofresearch.org/ P a g e | 18
Capital Modelling in the UAE Insurance Industry:
Pursuing Economic Sustainability through Financial Simulations
Dr. Ghassan Ossman,
Emeritus CEO, Professor,
Dean of the School of Business Administration
Al Dar University College, Dubai, UAE.
ossman_2001@hotmail.com, ghassan@aduc.ae.ac
Abstract
Enhancement of risk and capital
management capabilities became the
focus of insurance companies by
financial capital models in support of
business objectives and long-term
sustainability, as a result of tough
economic environment. Financial models
simulation-based approach used by
insurance companies to achieve
effectiveness in distribution and
determination of risks, and to control
and manage risks providing them the
ability to develop accurate pricing. The
UAE insurance industry reaffirms its
contribution to greater economic
sustainability in the era of rapid
evolution of risk landscape. Various
challenges identified beyond
organizational capabilities. Descriptive,
correlational and historical researches
used in the study to evaluate how capital
modeling in the UAE insurance industry
influenced the attainment of economic
sustainability. It focused on the capital
modelling variables of capital adequacy,
return on equity, asset pricing, and
insurance penetration. Findings show
that the insurance industry has
performed as a result of market recovery
in the midst of stifling competition and
played an important role in the economy
through its direct contribution to
economic sustainability and its support
to the operations of service firms. UAE
records the highest economic growth
rates in the GCC region attributed to the
on-going economic programs for
diversification. The increasing economic
sustainability trend in the past ten-year
period will continue over the
future period and in the long-term. The
current penetration rate reveals
opportunities for growth in the industry,
and is rising steadily. There is
significant relationship and degree of
association between capital modelling
variables and economic sustainability.
Capital adequacy and penetration rate
in the insurance industry are not
predictors of economic sustainability,
whereas return on equity and asset
pricing, singly, or in combination,
predict such sustainability.
Key Terms: Economic Sustainability,
Capital Modelling, Capital Adequacy,
Return on Equity, Asset Pricing,
Penetration Rate, Insurance.
1. Introduction
To achieve organizational
objectives and long-term sustainability
of the business, insurance companies
focused on enhancing capabilities of
capital management during times of
tough economic environment. Strategies
developed by insurers highlighted the
importance of capital models to develop
insights into the risk profile of the
organization and in the provision of
support for managerial decision making.
Risks that will have impact on
organizational success are continuously
identified which strengthen capital
management capabilities. In the
insurance industry, capital models are
used to measure the required capital
based on government regulations and
requirements from rating agencies.
Capital modelling requires appropriate
Page 2 of 21
Journal for Studies in Management and Planning
Available at http://internationaljournalofresearch.org/index.php/JSMaP
e-ISSN: 2395-0463
Volume 01 Issue 03
April 2015
Available online: http://internationaljournalofresearch.org/ P a g e | 19
examination standards to follow such as
defining clearly the scope of
examination. It requires confirming
adherence of the prescribed process and
the capital figure has been quoted as an
accurate reflection of reality and within a
specified threshold of materiality.
Amid signals of the Middle East
rising economic growth, well-devised
insurance systems provide the key to
sustain long-term growth of gross
development product. The nature of
insurance systems creates consistent
flow of capital into long-term
investments for the GCC economy,
offering a great formula for sustained
GDP growth in the GCC region. In 2015,
Saudi Arabia and United Arab Emirates
provide solid insurance growth in the
emerging insurance markets. According
to Sahli and Hakim (2014), significant
opportunities for economic growth are
present in the emerging Saudi Arabia
and UAE markets, leading to a shift in
insurance landscape in rapid growth
markets. In Saudi Arabia, rapid
consistent premium growth has been
recorded even with penetration rates
were once low, still insurance market
growth has accelerated.
Insurers need capital optimization
and formulation of strategies on asset
liability while maintaining cost
competitiveness without losing sight on
customer satisfaction, in the search for
revenue and organizational growth.
Employing new technologies and
building flexibility in every aspect of the
insurance industry will be needed to face
the challenge of adaptability to an
evolving market and regulatory changes.
The UAE insurance industry reaffirms its
contribution to greater economic
sustainability in the era of rapid
evolution of the risk landscape. Various
challenges have been identified as being
beyond organizational capabilities in the
management of the country’s emerging
risks and their protection. Substantial
amounts of capital were viewed as
essential in sustaining the demand to
cover the growing volume of insurable
assets in the developing UAE market.
1.1 Statement of the Problem
The study evaluates how capital
modelling in the UAE insurance industry
influenced the attainment of economic
sustainability. It focuses on the four
variables of capital modelling; capital
adequacy, return on equity, asset pricing,
and insurance penetration. Specifically,
it seeks answers to the following:
1. What is the level of economic
sustainability as a result of the
utilization of financial simulations of
capital modelling in the UAE
insurance industry?
2. Is there significant influence of
capital modelling in the UAE
insurance industry and attainment of
economic sustainability?
3. Is there significant association
between capital modelling in the
UAE insurance industry and
economic sustainability?
4. Is there significant difference
between the economic sustainability
of UAE insurance industry over the
past ten years and in the long-term?
5. How strongly the variables of capital
modelling in UAE insurance industry
predict economic sustainability?
Null Hypotheses
Ho1: There is no significant influence
of capital modelling in the UAE
insurance industry on the attainment of
economic sustainability.
Ho2: There is significant association
between capital modelling in the UAE
insurance industry and economic
sustainability.
Ho3: There is no significant difference
between the economic sustainability of
UAE insurance industry over the past ten
years and in the long-term.
Ho4: The variables of capital modelling
in UAE insurance industry do not predict
economic sustainability
Page 3 of 21
Journal for Studies in Management and Planning
Available at http://internationaljournalofresearch.org/index.php/JSMaP
e-ISSN: 2395-0463
Volume 01 Issue 03
April 2015
Available online: http://internationaljournalofresearch.org/ P a g e | 20
1.2 Significance of the Study
The study is significant for
improving the risk and capital management
capabilities of organizations specifically in
the insurance industry of the United Arab
Emirates. The principles involved in the
study relate to the design and application of
capital models that promote sound practices
with respect to internal risk and
development of better informed decisions.
Insurance companies would directly benefit
from the current investigation where capital
models presented will allow information of
strategic managerial decisions that enhance
the overall value and utilization of financial
models. Other businesses can duplicate the
approach of investigation adopted in the
study and similar framework could serve as
a model for their existing financial and
capital management practices. Principles
discussed in the study are of value to
external stakeholders in assessing the
soundness and strength of insurers’ capital
models. Academicians in financial risk
management and economists will benefit
from this study where the results could
enhance their effectiveness in expounding
on the subject which is an update on the
developments of concepts on financial
models that will impact economic
sustainability of a country.
1.3 Scope and Limitations
This research is an evaluation how
capital modelling in the UAE insurance
industry influenced the attainment of the
national goal for economic sustainability. It
only covers the most important areas
(variables) that influence and predict
economics sustainability in UAE; capital
adequacy, return on equity, asset pricing,
and insurance penetration. It will identify
significant influence of capital modelling
four-variables on the attainment of
economic sustainability in the country.
Documentary analysis conducted to gather
historical data of capital models used by
companies in UAE insurance industry.
1.4 Definition of Terms
Capital Modelling. It is a framework
used to identify a theoretically
appropriate required rate of return of a
particular asset. In this study, it refers to
the development of financial capital
models through simulations, which
insurance companies in UAE can utilize,
in enhancing capital management
capabilities that will contribute to the
achievement of national goal for
economic sustainability of the country.
Economic Sustainability. It is the
implementation of various strategies for
the optimal use of resources to achieve
beneficial balance in the economy over
the long-term. In this research, it refers
to the ability of the UAE economy to
indefinitely support a defined level of
economic production through
contributions from the efficient use of
assets of firms in the insurance industry.
Capital Adequacy. It is the amount of
capital present relative to factors of
production. In this paper, it refers to the
required capital of UAE insurance firms
to strengthen the organizations’ capital
capabilities.
Return on Equity. It is the amount of a
company’s net income generated from
the owners’ investments, as a percentage
of the equity of shareholders. In this
study, it is the measure of the UAE
insurance firm’s profitability through
profits generated from the investments of
owners/shareholders.
Asset Pricing. It describes the
relationship of risk and return expected,
used as pricing scheme of risky
securities. In this study, it is the model
used by UAE insurance firms to
determine the appropriate price on an
asset at a given level of risk.
Insurance Penetration. It is the
development level of the insurance
industry in a country. In this study, it
refers to the ratio of premium
underwritten to GDP in a particular year.
