Saudi Arabia’s insurance sector set for consolidation

New insurance regulations in Saudi Arabia could offer advantages to larger, more well-established market participants, and encourage smaller providers to seek merger partners.

According to a September report by Moody’s Investors Service, the Gulf region is one of the fastest-growing insurance markets globally, while Saudi Arabia represents the best opportunity for policy writers among the member states of the GCC. Premiums in the region more than doubled between 2006 and 2012, reaching $16.3bn, equivalent to a compound annual growth rate (CAGR) of 16.8%.

The regional leader in terms of expansion was Saudi Arabia, with a CAGR of 19.7%. The exceptional growth is set to continue over the near to medium term, in part thanks to low penetration rates, averaging 1.1% among GCC member states as of 2012, just under one-sixth of the global rate.

The Moody’s report also underscored another feature of the Gulf insurance industry, one that is very much apparent in the Saudi sector: high levels of concentration. The typical GCC market has 4-6 operators accounting for up to 70% of premiums, with smaller businesses competing to win the remaining share, putting pressure on all participants in the sector.

Potential for further market concentration

This competition, and the gap between the major players and the second-tier insurers in the Saudi market, could spur a round of mergers and acquisitions. There are more than 30 companies licensed to provide insurance and reinsurance services, along with a further 66 businesses that offer insurance support services. Combined, these firms generated premiums of $5.6bn last year.

Recent regulatory changes will only exacerbate the tendency toward concentration, according to a new report by credit ratings agency Standard & Poor’s (S&P). Earlier this year, the Saudi Arabian Monetary Agency (SAMA), the financial sector regulator, introduced new rules that require insurers to apply actuarial pricing to their motor and medical policies.

For smaller insurers that lack economies of scale, the regulation could spell the end of their primary strategy, namely to sell policies at a loss. Saudi Arabia is by no means alone in this regard, as it is common across the GCC and other less-developed insurance markets. Unless smaller policy writers can lower their costs, they may be forced to go out of business or find a larger partner.

“The promotion of the new, prudent pricing regime by SAMA indirectly risks further entrenching the competitive advantages of the largest players in an insurance market that is already dominated by a small number of large companies,” said David Anthony, a credit analyst with S&P.

Opportunities for growth

Those insurers able to comply with the new rules, however, are facing the welcome prospect of a market that is expanding rapidly. According to a recent report by Dubai-based investment bank Alpen Capital, Saudi Arabia could soon outstrip the UAE in terms of gross written premiums. This prediction is based on the size of the Kingdom’s population and economy, both the largest in the region, and the increasing awareness of the importance of coverage.

Sanjay Vig, managing director of Alpen Capital, said another factor in promoting growth in the sector has been the unrest in the Middle East and beyond.

“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,” he said in late September.

Commenting on the Alpen report, S&P analyst Kevin Willis said that Saudi Arabia had the biggest potential for insurance development, both at home and beyond its domestic market.

“The Saudi insurance market is still relatively new, but as the market starts to deliver some operational maturity, I think we can expect to see the companies there slowly look to expand outside that domicile,” said Willis.

Though maturity may see expansion beyond its domestic market in time, for the moment there is strong growth potential at home, at least for the larger operators in the sector that have the depth of capital and volume of business to sustain their activities under the new rules imposed by SAMA.

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