Shaping up: A survey of the sector’s regulatory environment

The Saudi Arabian Monetary Agency (SAMA), the Kingdom’s central bank, is widely viewed as one of the top insurance regulators in the Middle East and North Africa (MENA) region. According to an October 2012 report released by AM Best, an international ratings agency, SAMA is “well respected locally” and is “one of the more rigorous insurance regulators” in the region. The agency’s solid reputation among Saudi-based underwriters and international observers alike is the result of nearly a decade of comprehensive development initiatives and transparent oversight, which together have transformed the local industry into one of the fastest-growing insurance markets in the Gulf. In recent years, in particular, SAMA has introduced a series of new insurance-related regulations, with the goal of jump-starting growth of premiums and ensuring adequate consumer protection throughout the sector. At the same time, SAMA has made an effort to fine-tune the existing regulatory environment, with a focus on boosting public participation in a handful of new segments. Once these initiatives are implemented effectively, the future of the Kingdom’s insurance market looks bright.

A Long History

SAMA’s approach to the insurance market is a reflection of the agency’s long track record in financial regulation and development. Since it was created in April 1952, SAMA has been at the forefront of financial regulation in the Gulf. As the second-oldest central bank in the region, the agency has overseen the creation of the national currency and the stock exchange, and has been charged with managing the Kingdom’s massive foreign exchange reserves.

Indeed, when the central bank was formed Saudi Arabia did not even have a sovereign currency. Local traders and the business community carried out business in a mix of foreign currencies and Hejaz riyals, which were issued in the 1920s and 1930s in what is now western Saudi Arabia, and based on the Ottoman kuru In 1953 SAMA began issuing Hajj pilgrim receipts, which were intended to be used as currency by religious pilgrims travelling to Makkah in lieu of coins. The receipts, which looked like banknotes, quickly became the standard form of currency in the country. They were replaced by the current currency, the Saudi riyal, which was first issued in June 1961. Like many other currencies in the region, the Saudi riyal is pegged to the US dollar (see economy chapter). SAMA’s experience developing and regulating the Kingdom’s financial sector from the ground up stood it in good stead when it became the regulator of the insurance industry in the early 2000s.

Encouraging Growth & Transparency

In 2003 the government rolled out a series of comprehensive new laws and regulations with the goal of modernising the insurance sector and boosting competition in the market. Under the Law on the Supervision of Cooperative Insurance Companies, which was introduced in July 2003 and implemented the following year, SAMA was put in charge of regulating and developing the industry. Since then the agency has continued to update and expand on the 2003 law, which is considered to the backbone of the Kingdom’s insurance framework.

The market was transformed by the 2003 legislation, which required all insurance companies carrying out business in the Kingdom to be registered in the country as well. This was a major change for private insurers, which up until that point had been based outside the country, primarily in Bahrain. In 2004 the National Company for Cooperative Insurance (NCCI), the state-owned firm and market leader since it was launched in 1986, was awarded a licence under the new law, at which point it changed its name to Tawuniya. Similarly, beginning in 2007 private insurers that had managed to partner with a local representative and move their headquarters into the Kingdom began to receive licences from SAMA. By 2008 a substantial number of insurance firms were up and running in Saudi Arabia, and as of 2011 all 30 licensed insurance companies active in the country were also registered there.

New Costs

In addition to the registration requirement, the 2003 law mandated a minimum paid-up capital of SR100m ($26.65m) for insurance companies and SR200m ($53.3m) for reinsurance companies. Under the 2003 regulations all local underwriters are required to offer sharia-compliant “cooperative” policies, though the law is not specific as to how cooperative insurance should function. Indeed, according to the law, cooperative firms are required to keep separate books for policyholders and shareholders and distribute a set percentage of revenues among clients. Like all other firms in Saudi Arabia, insurance companies are also required to pay a 2.5% zakat (tithing) tax on an annual basis.

Shoring Up Standards

In the years since the 2003 insurance law came into effect, SAMA has released a number of supplementary regulations, with the intention of bringing the industry in line with international best practices. In 2008, for example, the central bank introduced a raft of new legislation, including an insurance market code of conduct, an anti-fraud regulation for insurance companies and a risk management regulation. These laws, which were published just as many new companies were setting up shop on Saudi soil for the first time, were aimed at raising the bar for entry into the local market. Indeed, regulations introduced in 2003 and 2008 required Saudi-based insurers to issue quarterly financial reports, appoint independent board members, list on the Saudi Stock Exchange (Tadawul), obtain a separate licence for each type of coverage they offer (health, general or life insurance) and receive approval from the regulator before launching any new services or products.

Additional insurance-related legislation came into effect in 2009, 2010 and 2011. In mid-October 2009 SAMA rolled out a new law related to the supervision and inspection costs that insurers are required to pay to the regulator on a quarterly basis. In November 2010 the central bank introduced a new reinsurance law, which continues to serve as a framework for Saudi’s small reinsurance sector (see overview). The law requires local insurers and reinsurers alike to clear their reinsurance plans with SAMA before they are allowed to carry out any reinsurance business. In October 2011 SAMA introduced a new piece of legislation that codified codes and rules of professional conduct for insurance intermediaries, such as insurance brokers and agents. Finally, in December 2011 the agency published a new set of regulations related to online insurance activities. The legislation includes rules on website accessibility, data security and transparency, among a number of other issues.

Ramping Up Regulation

As of early December 2012 SAMA had introduced four new insurance-related laws since the beginning of the year, making it one of the busiest legislative years on record in the local industry. In February 2012 the central bank rolled out new investment regulations for insurance and reinsurance companies, which codified investment rules for industry players. Investments have accounted for only a small percentage of most firms’ revenue streams in recent years, with the majority of revenues coming from underwriting profits. The law aims to encourage firms to adopt the best international investment practices, with the goal of expanding investment returns and, eventually, profitability throughout the sector. According to SAMA, the new regulation “must be read in conjunction with” a handful of other related regulations, including the original 2003 insurance law and the 2008 risk management law, among others.

Later in February 2012 the regulator released an insurance-focused Anti-money Laundering and Combating the Financing of Terrorism (AML-CFT) regulation, which builds on a nationwide AML-CFT regulation implemented in 2003. The 2012 regulation covers the same ground as the 2003 document, albeit tailored specifically to the insurance sector. In May 2012 SAMA issued a unified compulsory motor insurance policy, which replaced a handful of other regulations relating to third-party liability (TPL) motor coverage, which has been mandatory in the Kingdom since 2002. The new regulation includes a few new developments, such as a rule that allows insurance firms to report late payments to the Saudi Credit Bureau, for example. Most recently, in mid-November 2012 SAMA introduced the Outsourcing Regulation for Insurance and Reinsurance Companies and Insurance Service Providers, which has been in public consultation since mid-2010. The new law, which serves as a framework for the increasingly common practice of outsourcing various insurance functions to third-party firms, seeks to ensure that these arrangements do not contravene Saudi law or otherwise hinder policyholders’ rights.

Saudi’s insurance sector is also expected to benefit substantially from the implementation of a new mortgage law in the coming years. The law, which has been under discussion among policymakers for more than a decade, was finally approved in early July 2012. In late November 2012 SAMA issued the first three components of the law, which cover real estate financing, supervision of financial firms and leasing. With the law having the intended effect of helping to jumpstart bank lending for home purchases and residential construction projects, the property insurance segment will likely expand exponentially in coming years (see analysis).