The regulatory transformation of the Saudi insurance sector gathers pace as more insurers are licensed and competition intensifies, with health insurance fuelling growth.

Market size
The Saudi insurance market grew by 27 per cent over 2008 as gross written premiums hit SAR10.9bn. The latest industry report from SAMA revealed that growth continues to be driven by the spread of compulsory health insurance, which now represents the largest class of business in the market (44 per cent) at SAR3.1bn. Motor was the second largest class of business, accounting for 23 per cent of market premiums, followed by property (seven per cent), engineering (six per cent) and marine (six per cent). Protection and saving insurance may be starting from a miniscule base, but it’s projected to grow at a CAGR of around 55 per cent during 2009 to 2013.

A recent report from Standard & Poor’s acknowledged the further commercial potential for insurers in the healthcare sector, but highlighted that this segment appears to be already well-served on a direct basis by the existing leading insurers, and by specialist health providers such as BUPA Arabia.
Yet even those existing insurers that lack sufficient infrastructure to administer a large health book on their own often feel it necessary to offer the line as an accommodation to their larger corporate clients. They have almost invariably achieved this through the extensive use of third-party administrators, of which about half a dozen already operate in the kingdom.

Interestingly, energy-related lines do not register significantly on the radar due to the control exercised over much of the kingdom’s energy infrastructure by Saudi Aramco, which channels virtually all of its insurance requirements through its captive insurer, Stellar Insurance Ltd.

Competitive conditions
To date, 26 insurance companies have registered with SAMA (the table shows companies at varying stages of the licensing process) with at least four more companies nearing the final stage of the licensing process. Competition is expected to intensify, particularly for major and prestige group health accounts. Few insurers in Saudi Arabia can afford to ignore the health sector when the related premiums are rising toward half the total net premium.

However, the market is expected to continue to be dominated by a few major players. There were 43 insurers operating in the Saudi market in 2008, with the top eight insurance companies generating 63.8 per cent of total GWP. The remaining 35 insurers included in the SAMA survey accounted for the remaining 36.2 per cent.

Faced with increasingly competitive conditions, local insurers have a limited number of strategic choices according to S&P: “They can aim for volume in the highly competitive, administratively demanding areas of health and motor, or use their niche technical skills to pursue higher margins on much lower volumes in fire, engineering, marine, accident, and liability.

“The other alternatives are to take on the banks, fund managers, the local stock exchange, and other investment outlets to attract money into the insurance sector by offering the prospect of attractive capital gains potential. Alternatively, they can attempt to join the cut and thrust of the international reinsurance markets by accessing a sliver of the 35.4 per cent of national gross premium income that the statistics show as being ceded to reinsurers.”

The S&P report added: “No single approach guarantees success, particularly as the regulatory minimum capital requirements now applicable and the ongoing enthusiasm of local IPO investors means that many of the newly listed insurers now starting operations are extremely well capitalised relative to likely retained business volumes. . . many of the new providers will have too much capital to be able to afford to pursue a small niche strategy while still adequately rewarding their shareholders, unless a significant part of earnings comes from investment income, with all the attendant risks that an aggressive investment strategy brings.”

Regulatory overview
Insurance regulator: Saudi Arabian Monetary Agency
Governing legislation: Cooperative Insurance Companies Control Law 2003.
Capital requirements: Branch – N/A.
Locally domiciled insurer – SAR100m (US$26.7m)
for direct insurance and SAR200m (US$53.4m) for reinsurers.
Foreign ownership restrictions: Branch – N/A
Locally domiciled insurer – law requires minimum 51 per cent ownership by Saudi nationals with between 25 per cent and 40 per cent of that being offered to the public. Ownership structure varies according to Saudi interests involved (eg bank, trading company etc).

Insurance companies must operate in the kingdom on a cooperative basis. Until 2003, Saudi Arabia only had one registered insurance company (NCCI – Tawuniya).  However, following the issue of the new insurance law, 26 new insurance companies have been registered to date.  SAMA has established rules for permitted shareholding in Saudi insurance companies. Every insurance company is required to offer between 25 per cent to 40 per cent of its shares to the public.

At present, although draft legislation exists, no branches of foreign insurers are currently permitted.

Restrictions on foreign reinsurance of Saudi cedants apply in the form of mandatory levels of local reinsurance by Saudi registered insurers.

Regulatory Overview provided by Clyde & Co