New protocols and regulations can help Saudi Arabia's insurers compete for upcoming mega-projects

Project insurance is nothing new in Saudi Arabia: the insurance market in its modern form emerged in the 1970s, when foreign insurers, brokers and agents opened branches in the country to provide coverage for the spike in construction projects caused by the oil boom of that era. Over successive decades these firms expanded their business to segments that are related to other promising fields of economic activity, such as marine cargo, motor vehicles and contract work, and in more recent years the compulsory health and motor lines have emerged as the principal routes to premiums.

The rapid economic development of the nation during this time has meant that project cover has remained a fruitful source of revenue for the Kingdom’s insurance companies, and now one of the most promising areas of potential growth for Saudi Arabian insurers over coming years is the sizeable number of mega-projects that are either already under way or soon to commence. It is estimated that more than 80 mega-projects, each valued at $1bn or more, are currently taking shape on the ground or are planned for completion by 2030.

These include the $27bn King Abdullah Economic City being constructed north of Jeddah; the $7bn Knowledge and Economic City in Medina; the King Abdullah bin Abdulaziz Security Forces Medical Complexes; King Abdullah Medical City; King Abdulaziz International Airport; the $7bn Saudi Landbridge, a rail project that will extend from the Red Sea to the Gulf; an $80bn, 22-year expansion of the Jubail industrial area; the $22bn Riyadh Metro (the construction of which is already well under way); and the Kingdom Tower, which is to be built in Jeddah and is expected to be the world’s tallest building when complete in 2019, at over a kilometre high. The range and scale of the project pipeline clearly offers Saudi Arabia’s insurance industry an opportunity to expand its activity on the back of the lines associated with developments of this size. It also brings challenges, not least the question of how to efficiently insure such complex undertakings.

Non-Compulsory Lines

Much of the insurance business derived from large projects being undertaken in Saudi Arabia stems from the non-compulsory cover that contractors typically require when undertaking complex initiatives. This usually includes all risks insurance, employer’s liability insurance and third-party liability insurance. However, in recent years both the regulator as well as various arms of the government have shown a tendency towards increased compulsory coverage. Following a fuel tank explosion in Riyadh in 2012, which resulted in a number of fatalities, the General Directorate of Civil Defence worked with the Saudi Arabian Monetary Agency to create a new law that compels certain businesses to secure third-party liability.

Although it was published in February 2014, as of mid-2015 it had yet to be fully enforced by local authorities, and consultation between the regulator and the marketplace was still ongoing. However, as the law stands it will apply to both the public and private sectors, and while it does not apply to projects directly, it will have a monetary impact on the network of contractors and subcontractors that are generally brought together by large contracts.

Compulsory Lines

An increasingly large proportion of the insurance business generated by large projects comes from the lines of cover made compulsory by regulation. In recent years, health cover has risen to the fore as a key growth driver with regard to project insurance. This is thanks to a regulatory provision for entities that employ persons in the Kingdom to provide health cover for all of their employees as well as their dependents, in accordance with the standards established by the Ministry of Labour. This is enforced on all companies, including contractors formed as limited liability companies (LLCs) and joint stock companies (JSCs). Usefully for Saudi insurers, the law requires that the insurance company engaged to provide the cover has a commercial registration in Saudi Arabia. Since June 2013, the large number of foreign companies winning contracts for projects in Saudi Arabia have been faced with a further layer of compulsory insurance.

According to a new standard adopted by the Saudi Arabian General Investment Authority (SAGIA), all international companies that seek to engage in construction contracts must “obtain insurance against the company’s errors in implementation of the project” after receiving a foreign investment licence. At the same time, while the requirement to obtain cover is explicit, companies remain free to use their discretion as to the specific type of insurance and the amount of liability that it covers.

Increasing Capacity

The principal challenge facing the Saudi Arabian insurance industry with regard to project cover is how best to take advantage of the nation’s sizeable pipeline. A costly price war in recent years has weakened the domestic insurance market, and as a result only a small number of the strongest players can meet the risk management requirements of the considerable list of mega-projects currently being rolled out.

Speaking at the Saudi Mega Transport & Infrastructure Projects 2014 Conference, Abdul Aziz Al Bouq, executive vice-president of sales at Tawuniya, highlighted the fact that because of the solvency challenge facing much of the market, and the related problem of a loss of confidence in the technical capabilities of some insurers, most of the cover for mega-projects is being provided by foreign companies. Compounding this challenge is the fact that the Saudi insurance companies that are able to benefit from mega-projects by providing smaller cover packages to the plethora of subcontractors they support, do so in an inefficient way.

Indeed, the piecemeal provision of cover means that contractors and subcontractors often obtain different insurance policies from numerous providers for the same project, leading to unnecessary (and potentially legally problematic) cover duplication. The financial costs of doing this can be considerable. Insurance cover is usually built into the contractor’s cost structure, so that premiums become part of the bid, affecting competition between contractors and compelling the project owner to pay for the administrative costs of potentially dozens of separate insurance brokers and insurance companies, even where cover is not directly duplicated.

Providing Cover

Tackling these challenges represents both a long- and short-term undertaking. Many domestic insurers will only be in a position to provide cover to mega-projects when they have improved their technical performance and strengthened their balance sheet – both of which are currently being pursued by the sector’s increasingly proactive regulator. This process is likely to take some years, although it could be precipitated by the regulator requiring project owners to place a fixed percentage of insurance cover with local firms.

Even though the bulk of this cover would be passed on to the international reinsurance market due to the limited capacity of the local sector, such a provision would be able to provide further employment opportunities in the insurance industry, foster skills-building and result in the development of useful working relationships with global reinsurers.

Market Inefficiency

In the shorter term, Saudi’s larger insurers are addressing the problem of market inefficiency by adopting protocols seen in more advanced markets, such as owner-controlled insurance programmes (OCIPs) and contractor-controlled insurance programmes (CCIPs). Under these models project owners are able to secure cover for a range of liabilities, such as construction, materials, workers, hazard, terrorism, materials and other building-related issues, from a single policy issued by a single insurer. Project owners and contractors benefit from the lower costs offered by bulk purchase, improved risk control and time savings.

Insurers capable of engaging in OCIPs and CCIPs, although they entail more complex accounting measures, stand to gain a competitive advantage in the market. Speaking to the local press in 2014, Sultan S Al Khomashi, property and casualty general manager at Tawuniya, one of the first companies to adopt the OCIP and CCIP models, outlined some more efficiencies. “OCIP is provided as one programme controlling all insurance covers and providing consistent coverage, dedicated limits, consistent services and high liability limits for small contracts. OCIP also decreases the mark-ups and avoids the cross-litigation and coverage duplications. It also decreases the insurance cost by 30% compared to the traditional insurance method,” he said.

With the stabilisation of the domestic insurance market in 2014, the coming years are expected to see more locally licensed players attempting to cater to the Kingdom’s larger projects. In doing so, they will increase the efficiency of the market as a whole.