Saudi Arabia: Opportunities in life insurance

Although growth is expected to ease in Saudi Arabia’s competitive insurance sector this year, the industry still holds plenty of potential for expansion, particularly in the health and life segments.

Despite having the largest population and economy in the region, the Kingdom’s insurance sector is characterised by underperformance and low penetration rates, especially in the non-property and automotive fields.

Overcrowding in the market and tight margins have combined to put the Kingdom’s 30 policy writers under pressure as they vie for business from a comparatively small base, prompting them to adopt tactics aimed at attracting clients away from rival companies, such as cutting policy contribution rates.

Fahd Al Anazi, a member of the Shura Council, the Kingdom’s consultative assembly, believes consolidation could be the solution for struggling insurers, enabling them to both strengthen their capital and increase customer numbers.

“A number of insurance companies have had their capital diminish because they failed to get high enough returns to compensate for their losses,” Al Anazi told the Arab News in October. “There were 30 established companies investing $26.6m, and high establishment and operating costs have caused the erosion of their capital.”

While the environment that Saudi’s insurers are operating in is challenging, a recently published report by ratings agency A M Best highlighted the opportunities for growth that the industry offers, both in the Kingdom and across the wider Middle East and North African (MENA) market. “The MENA insurance markets tend to be immature, with very low penetration rates compared to their international peers,” the report, issued in early October, said.

Life insurance is seen as the most under-developed segment, with the trend magnified in Saudi Arabia. Figures show that life insurance makes up about 6% of all premiums written in the Kingdom, well below both the 16% recorded in the UAE, which is the region’s largest single insurance market.

The health segment is also expected to provide opportunities for local insurers on the back of a drive by the government to move away from state-dominated health care and encourage the development of private medical services. Demand for cover looks likely to rise in the direct health services segment, pharmaceuticals, and also among subsidiaries as private medical care operations expand.

The Best study said Saudi Arabia’s stability, together with the insurance sector’s potential and the size of its economy, should see the Kingdom achieve a higher rate of growth than regional forecasts, which have estimated a below 5% rise in total gross premiums written (GPW) for MENA.

The solid regulatory system that governs the insurance sector is also expected to support growth. While a reinforced oversight system introduced by the regulatory body, the Saudi Arabia Monetary Agency (SAMA), spelled added bureaucracy for firms when it was enacted in 2008, it was widely agreed the system played a key part in improving transparency and accountability across the industry.

The regulatory system has also been instrumental in keeping the country safely distanced from markets that have found themselves in the spotlight over questionable practices, such as concerns about whether all Islamic insurance firms are meeting sharia compliance requirements.

SAMA, which covers both the conventional and sharia-compliant segments of the insurance industry, earned praise from Moody’s ratings agency in a report published earlier this year. The agency noted that, “Insurance regulators in the region are increasingly embedding prudential insurance regulatory supervision philosophies into their monitoring of local insurance companies, particularly in Saudi Arabia and the UAE”.

While regulation is expected to play a part in supporting growth, the marketplace remains a tough environment in which to do business. Industry players, particularly smaller outfits, may well find that survival depends on an ability to successfully expand their business activities and deepen penetration rates. The alternative looks increasingly likely to be a round of mergers that will consolidate the industry, lift capital standing and strengthen the position of a potentially smaller number of operators in the marketplace.

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