One of the largest in the GCC, Saudi Arabia’s insurance industry is expanding at a rate which some believe will soon see it surpass the UAE market to claim the title of regional leader. This rapid development is made all the more remarkable by the fact that until relatively recently the very concept of insurance was considered unacceptable by many of the Kingdom’s citizens.
In the decades following the nation’s founding in 1932 insurance was deemed illegal as it was thought to contravene a number of the precepts of sharia, including riba (usury, or interest), gharar ( uncertainty) and maisir (games of chance or gambling). However, as the sharia-compliant insurance model of takaful began to emerge in regional markets, the Kingdom started to weigh the possibility of introducing a similar concept, and in 1977 the Kingdom’s Council of Senior Ulema (a national body of religious scholars) declared that sharia-compliant coverage would be permitted in Saudi Arabia for the first time. The era which followed saw the creation of a sector run along rather different lines than those seen elsewhere in the region.
Saudi’s Unique Model
Rather than adopt one of the various forms of takaful insurance which were starting to meet with success elsewhere in the region, the Kingdom formulated its own “cooperative” model, which differs in a number of small, yet significant, ways: although it is based on the principles of sharia and is often categorised as takaful in global surveys, the cooperative model does not demand a complete separation of policyholder funds and shareholder funds, nor does it compel insurers to invest only in instruments that are compatible with sharia, or demand the creation of sharia boards for individual insurers. Saudi Arabia’s adoption of the cooperative model makes it unique in the global sharia-compliant insurance sector, and the flexibility that this regulatory framework affords is, according to some industry observers, a distinct competitive advantage. “The cooperative model is a more sustainable one in comparison to takaful. The fact that the policyholders’ fund has full access to the shareholders’ fund makes the cooperative model a much safer way of doing business,” Mousa A Al Rubaian, founder and CEO of Dar Mousa Investment, told OBG.
In the years that followed, a small number of domestic insurers entered the market. In 1986 the government established the state-owned National Company for Cooperative Insurance (NCCI), which quickly became the largest operator and dominated the market throughout the 1990s and early 2000s despite competition from around 100 private insurance companies headquartered outside the country – primarily in Bahrain.
The Modern Sector
The period during which many Saudi individuals and businesses bought insurance from companies headquartered overseas came to an end in 2003, when the new Cooperative Insurance Companies Control Law established the Saudi Arabian Monetary Agency (SAMA) as the industry regulator. This development heralded a new era of modernisation and formalisation, during which a raft of Saudi insurers emerged, a development that was greatly assisted by a ruling that only Saudi-registered firms incorporated by royal decree as public joint-stock companies could provide insurance cover in the Kingdom. Meanwhile, the former state incumbent, NCCI, rebranded as Tawuniya.
According to SAMA, 33 insurers are currently licensed to operate in the Saudi market, while a further three have been approved for establishment. This makes for a crowded sector, and competition is intense and played out largely in the arena of premium prices. Nevertheless, the full-year 2013 financial results published by the Kingdom’s insurers show that just three companies dominate the market in terms of gross written premiums (GWPs): Tawuniya (which claims a market share of 22.8%), Medgulf (16.8%) and BUPA Arabia (12.9%). The remaining players claim less than 5% of the market each, with 24 insurers each taking in premiums of under 3% of the sector’s GWPs.
The prominent role of corporate business means that brokers and agents play a larger role in the Saudi insurance industry than in more developed markets. SAMA currently lists 64 brokers that have successfully met its licensing criteria, as well as 69 agencies. “The relationship between insurers and brokers has been moving in the right direction, with both parties working closely together on corporate accounts. The movement of brokers into the market has had a positive impact overall,” Lutfi El Zein, CEO of Medgulf, told OBG.
The expanding insurance industry also supports a growing number of actuaries, loss assessors and adjusters, and insurance claims settlement specialists, as well as a small number of insurance advisors which consult with businesses and high-net-worth individuals with regard to their insurance needs.
One reason for the rapid growth of the sector over the last decade is the expansion of compulsory lines of insurance. Two areas of compulsory insurance, in particular, have been instrumental in this regard. In 2006 the authorities enacted the Health Insurance Law, which initially required that all expatriates working in the Kingdom acquire private insurance. The regulation was expanded upon in early 2011 to cover all private sector employees, establishing Saudi Arabia as a health insurance pioneer in the region and boosting the segment’s share of the sector’s aggregate GWPs. It is no coincidence that the three largest insurers in terms of written premiums are also the three firms that claim the lion’s share of health policies, together accounting for around 70% of the market. Other major health underwriters include United Cooperative Assurance, Allianz Saudi Fransi Cooperative Insurance, and Malath Cooperative Insurance and Reinsurance.
The second driver of premium growth is the motor cover segment. Motor insurance premiums have been a significant contributor to the sector since 2002, when the government introduced Saudi Arabia’s first compulsory third party liability (TPL) law, which made insurance mandatory for every person with a Saudi driving licence. Under a subsequent regulation published in 2007, the government announced that TPL coverage would be linked to each registered vehicle. The success of these compulsory insurance lines demonstrates the ability of the government to drive sector growth through legislation and regulation.
Beyond the compulsory lines, Saudi insurers have succeeded in growing their premium take on the back of the nation’s expanding economy: fire, engineering and marine coverage are all significant contributors to the sector’s aggregate GWPs, and are likely to continue to play an important part in the market thanks to a pipeline of large-scale government housing and infrastructure initiatives. General insurance lines such as these, which also include motor cover, contributed around 42.5% to the sector’s total GDP in 2012, according to SAMA, compared to the 53.3% from health. Life insurance, which in Saudi Arabia is referred to as protection and savings (P&S), represents only a small part of the market, contributing 4.2% to total GWPs in 2012. Another area that has not yet been fully developed is coverage of the energy sector. This potentially lucrative segment is insured almost entirely offshore, with the largest provider, Stellar Insurance, being a Saudi Aramco-owned captive insurer registered in Bermuda.
While brokers and agents play a prominent role in the insurance sector, particularly with regard to corporate business, direct sales – which drive growth in more developed markets – are becoming more common. Allianz was a pioneer of direct sales in Saudi Arabia, using the technique to break into the P&S market, and the firm’s success has prompted others to follow suit. The retail segment, where seeking commission on coverage for individuals is financially unrewarding for brokers, is now served almost completely by direct sales, and some expense-driven corporate lines, such as medical, are also being sold directly to large clients.
Bancassurance, which until recently had been relatively lightly regulated in the Kingdom, offers another route to the market for insurers, but their activities in this sphere have been circumscribed by a new regulatory structure introduced in 2011. SAMA’s introduction of the Insurance Intermediaries Regulation in October 2011 brought about a number of changes, the most important of which is the requirement that insurers and banks which partner to sell insurance must now establish an independent bancassurance agency, licensed by SAMA, which sits between both companies to market and sell insurance products independently of banking products. Banks are only permitted to establish an agency with one insurer, and many of these relationships have already been cemented: Al Rajhi Bank, for example, has formed the Al Rajhi Company for Cooperative Insurance with the Oman Insurance Company; Saudi Hollandi Bank runs Wataniya Cooperative Insurance Company with the Saudi National Insurance Company; and Riyad Bank operates Al Alalmya for Cooperative Insurance Company with Royal and Sun Alliance Middle East. The fact that there are more listed insurers than banks clearly limits the development of this channel, as do the financial and labour costs associated with setting up a separate agency.
The rapid expansion of the sector is reflected in its main indicators. Saudi insurers have been successful in growing their premium take, even in the more challenging environment that has prevailed since the global economic crisis. Aggregate GWPs for the sector nearly doubled from $2.9bn in 2008 to $5.65bn in 2012, according to SAMA, with the expansion of the health segment accounting for the largest single share of this increase. In 2012 health insurance grew at a year-on-year (y-o-y) rate of 16.2%, compared to 14.1% for general insurance and a 1.8% decline in GWPs from P&S. Within the general segment, motor was the fastest-growing line with a rise of 19.6%, followed by marine (17.2%), and property and fire (16.6%).
In terms of GWPs, the expansion of the insurance industry continued in 2013, which saw a sector aggregate of $6.56bn – up 19% on 2012 – but the overall performance of the sector has been negatively affected by a reduction in operational profits posted by many industry participants. In 2013, 20 of the 33 listed firms posted net losses for the year, including two of the industry’s “big three”. Tawuniya, the market’s largest player, registered a net loss of SR564.2m ($150.42m), down 260% y-o-y, while the second-largest insurer, Medgulf, was down 195%. The financial results of some smaller firms revealed more severe losses, the greatest of which was a 2819% decrease in net profit. This was also reflected in the aggregate profit for the industry: sector profitability declined from a gain of $222.6m in 2012 to a loss of $317.2m in 2013 – a y-o-y reduction of 242.9%. The dual trajectories of the industry – expanding GWPs undercut by a reduction in profitability – suggest that the Saudi insurance sector has reached an important transitional point in its development.
A number of factors combined to produce the negative profitability results of 2013, the most salient of which was intense price competition in the health care segment. “In a bid to gain market share, insurers have in many cases lowered health care premiums. They have effectively been buying in business at technically unsupportable levels,” Gary Lewin, CEO of AXA Saudi Arabia, told OBG. The deleterious effects of what has become a price war have been exacerbated by inflation in hospital charges over the past year, with health care providers imposing increased levies without sufficient warning for insurers to price them into premium rates.
Fraudulent claims have also played a part in reducing net profits for many insurers. According to a report in Saudi newspaper Al Hayat, health insurers are losing up to 15% of their revenues, or around $320m per year, to fraudulent claims. In the motor sector, an increase in the blood money rate (a payment made by an insurer to the family of someone killed in an accident) from $26,660 to $79,980 that was implemented with retrospective effect also eroded sector profitability, as insurers had not anticipated this when calculating premiums previously.
Combined, these developments have brought the sector to a crossroads. The aggressively low premium pricing represents a challenge to all players, but for some companies it has called their future viability into doubt. Seven firms lost more than 50% of their capital over the past year as a result of a poor technical performance, which in turn will make it impossible under the current regulatory structure to book additional business until their capital levels are restored.
The obvious solution to this is consolidation. However, a reluctance of family-owned insurers to cede control of their business, and the troubled finances of many smaller insurers, means that the question of mergers and acquisitions (M&As) has long been discussed without any concrete development (see analysis). Therefore, while many in the industry believe that a period of consolidation is now inevitable, the question of its timing remains moot. “I expect there will be a consolidation in the market through M&As over the next few years. However, this will likely require SAMA to intervene in the market, because there is currently no financial incentive for bigger companies to purchase smaller ones given their overvalued share prices,” Nasser Al Bunni, CEO of Malath Insurance, told OBG. In the shorter term, firms that have suffered severe capital losses and are unable to secure a buyer face the challenge of recapitalising through other means or being required to wind down their business.
Insurers are already taking steps to address some of the challenges that have dented profitability, such as introducing measures to combat health care fraud. However, it is the industry regulator which will likely play the key role in securing the sector’s long-term sustainability. SAMA’s Insurance Supervision Department is widely regarded as one of the best regulatory agencies in the region, and is mandated with ensuring fair competition between all operators and stability in the market, protecting policyholders and shareholders, and encouraging further sectoral development and improvement. It also works in close conjunction with the Council of Cooperative Health Insurance, which oversees the health insurance system, as well as with the Capital Markets Authority, which is in charge of regulating the Saudi Stock Exchange.
SAMA has already moved to counter the damaging price war that began to gain momentum in 2012 by issuing an instruction in early 2013 to the effect that all new business be subject to actuarial pricing. Perceiving that some actuaries’ calculations remained too lenient for the conditions, it reinforced its guidance later in the year, the result of which is a more conservative and technically proficient market environment that will, it is hoped, bring about an improvement in underwriting performance in the short to medium term. The longer-term regulatory focus of the Insurance Supervision Department will likely involve introducing more robust solvency regulations in line with the Solvency II Directive. “This is one of the issues which SAMA must address. It has already developed solvency requirements which are tailored to the local market, with advice from [UK regulator] the Financial Services Authority, but has yet to implement them. They are not as sophisticated as Solvency II, which reflects the stage the market is at here, but they are important. The number one concern should be to protect the policyholders, not the shareholders,” Al Rubaian told OBG.
Despite the recent dip in profitability, the establishment of a robust regulatory environment and the size of Saudi Arabia’s vibrant economy mean that the sector has significant growth potential. Insurance penetration, measured as a percentage of GDP, remains low, calculated at around 0.8% in 2012 by SAMA, and has been declining slowly from a high of 1.03% in 2009 as the economy expands. Nevertheless, per capita expenditure on insurance products has been growing over recent years, rising from $117.30 per capita in 2008 to $193.29 in 2012, largely driven by an increase in health care cover. Health and motor insurance still represent the most promising avenues for growth on the retail side, while the expansion of P&S remains a challenging proposition for the industry. Once the market has become more developed, there will be big opportunities in the bundling of retail products. One spur to such development may emerge in the short term with the conclusion of the government’s efforts to establish new mortgage legislation. The full implementation of the “Saudi mortgage law”, actually a series of separate pieces of legislation, is expected to boost the property segment, as well as increase premiums from related industries.
This anticipated expansion will present its own challenges, particularly in the field of human resources. An ambitious Saudiisation policy, plus the dearth of insurance expertise in the Kingdom, have combined to make the sourcing of skilled labour one of the more pressing issues in the industry. This makes it all the more important to invest in training programmes, which can often pay for themselves in that they create higher-calibre employees with better skills who are ready to work earlier. With this in mind, many firms have set up in-house training programmes, but there is room for a more formal structure whereby the industry can be assured of a ready supply of talent. “There is an emerging market in training centres, both public and private, which provide programs at all levels, from short-term certification to full diplomas. Greater specialisation is needed from both the insurers and providers,” Abdullah Al Sharif, secretary-general of the Council for Cooperative Health Insurance, told OBG.
The outlook for the nation’s fast-developing insurance industry, therefore, remains a positive one. As the sector matures, insurers are starting to look beyond the easy growth of the mandatory lines such as health and motor cover to widen the scope of their coverage. “There is unquestionable premium growth available to insurers. There will be opportunities in discretionary classes, not just compulsory classes, which is good for the industry,” Philip Head, former CEO of SANAD Cooperative Insurance & Reinsurance Company, told OBG. In order to realise this potential, particularly in the undeveloped P&S segment, insurers will likely continue to combat traditional indifference to insurance by using compulsory lines to cross-sell other products, as well as conduct awareness campaigns through the national media. The challenge for the short term for both insurers and the regulator, however, is to ensure profitability while maintaining high technical standards, and the results of this process will be crucial for the long-term sustainability of the industry.