Towards maturity: Increased awareness among the growing population has the potential to help boost revenues

Over the past decade Saudi Arabia’s insurance industry has become an important contributor to the Kingdom’s economy. In 2011 the sector brought in gross written premiums (GWPs) of SR18.5bn ($4.93bn), up nearly 13% from SR16.4bn ($4.37bn) the previous year, according to official data from the Saudi Arabian Monetary Agency (SAMA), the country’s central bank. The majority of this expansion took place in the health and general insurance segments, which together account for more than 95% of the total market.

GWPs are expected to continue to grow over the course of the coming decade, as the Kingdom’s population becomes increasingly aware of the benefits of coverage. Indeed, while the insurance penetration rate in Saudi Arabia is currently less than 1%, the market has expanded at a compound annual growth rate (CAGR) of 10% over the past five years, according to SAMA, and seems expected to continue to grow for the foreseeable future.

Challenges

At the same time, local players face a number of challenges. For example, a substantial percentage of the population remains largely uninformed and, in come cases, sceptical about the value of insurance coverage. Additionally, price competition among the 30 active insurance firms has resulted in slim margins for many operators, which is considered to be an unsustainable long-term situation, especially for smaller firms.

Consequently, a round of consolidation is expected to take place at some point in the coming years. Other challenges include persistently low global interest rates, which have had a negative impact on investment returns at a number of firms, and the lack of a well-trained local work force.

Despite these issues, local insurers are broadly optimistic about the future. In addition to the health and motor segments, both of which are expected to continue to be major GWP contributors in the coming years, a handful of nascent segments are on the rise. “The life and home insurance segments are poised for massive growth as the market continues to develop in the coming years,” Bader Saad Al Shaya, the head of sales at Solidarity Takaful, a local firm, told OBG. More generally, the Kingdom’s solid economic fundamentals seem to bode well for future expansion. Steadily improving financial awareness among the Kingdom’s large and mostly uninsured population has resulted in particularly rapid market expansion in recent years.

History

In the decades following the founding of Saudi Arabia in 1932 insurance was illegal in the Kingdom, as it was thought to be based on a number of concepts banned under sharia law, including al gharar (uncertainty), riba (usury, or interest) and al maisir (games of chance, or gambling). By the 1970s takaful, or Islamic insurance, had become popular elsewhere in several places in the region, and in 1977 the Kingdom’s Council of Senior Ulema (religious scholars), announced that sharia-compliant coverage would be allowed in Saudi Arabia as well.

In the years that followed, a handful of small Saudi insurance companies launched various cooperative coverage schemes. In 1986 the government set up the National Company for Cooperative Insurance (NCCI), a state-owned firm that quickly became the largest operator in the burgeoning market. NCCI dominated the local sector through the 1990s and early 2000s, despite competition from around 100 private insurance companies, all of which were headquartered outside the country – primarily in Bahrain, one of the Gulf’s major financial centres at the time.

Oversight & Regulation

SAMA became the insurance regulator in 2003, when the government passed the Law on the Supervision of Cooperative Insurance Companies, which sought to modernise and formalise the industry. The central bank’s insurance supervision department, which oversees the sector, has a mandate to ensure fair competition between all operators, guarantee stability in the market, protect policyholders and shareholders, and encourage further development and improvement. SAMA works in close conjunction with the Council of Cooperative Health Insurance (CCHI), which oversees the Kingdom’s health insurance system; and with the Capital Markets Authority, which is in charge of regulating the Saudi Stock Exchange.

Sharia-Compliance

While takaful has become the dominant form of Islamic insurance elsewhere in the Gulf and, indeed, around the world, most Saudi-based companies identify their policy offerings as “cooperative” insurance, which differs from strict takaful coverage in a number of ways.

In general, the former is considered to be more flexible than the latter. Similarly, under the takaful model used elsewhere in the Middle East (and further afield) insurers often charge policyholders an agent fee for managing their capital, whereas in the Kingdom agent fees are rare. Additionally, according to a recent report by Clyde & Co, a law firm located in Saudi Arabia, investments made by firms operating under the cooperative model are not required to align with sharia principles, though this has the potential to change in the coming years.

Currently, so long as a firm maintains separate profit and loss accounts for shareholders and policyholders, as well as distributing part of its operations revenue among policyholders, it is considered to be sharia-compliant under the Kingdom’s laws. This flexibility means that local firms are free to develop and roll out new products and services as they see fit, unlike many of their takaful counterparts, which are required to authorise any new policies or products with a federal sharia board.

At the same time, the absence of case-by-case oversight in the Kingdom means new products have the potential to be criticised by some religious scholars or to receive government penalties. Over the past few years SAMA has worked to clarify the regulatory guidelines, with the goal of ensuring that the insurance sector maintains strict sharia compliance while simultaneously continuing to encourage innovation among local firms (see analysis).

By The Numbers

According to the most recent data available from SAMA, in 2011 total GWPs reached SR18.5bn ($4.93bn), up 12.9% from SR16.4bn ($4.37bn) in 2010 and SR14.6bn ($3.89bn) in 2009. Health insurance, which is mandatory for private sector employees, accounted for SR9.7bn ($2.59bn) worth of GWPs, which translates to 52.5% of the total, up from SR8.7bn ($2.32bn) and 53% the previous year. General insurance policies, meanwhile, brought in SR7.9bn ($2.12bn) in GWPs in 2011, or around 43% of the total, up from SR6.7bn ($1.79bn) and 41% the previous year. The general insurance category is made up of a variety of segments, such as motor (including mandatory third-party liability, or TPL, policies and voluntary policies), fire, property, engineering and marine and aviation. Finally, life insurance, which is known as protection and savings (P&S) in the Kingdom, brought in SR905m ($241.2m) in GWPs in 2011, which was equal to around 5% of total premiums, down slightly from SR972m ($259.04m) and 6% in 2010.

Penetration

Insurance penetration, which is defined as GWPs as a percentage of GDP, was at 0.85% in 2011, down slightly from 0.97% in 2010 and 1.04% in 2010, though up from 0.61% in 2008 and 0.59% in 2007. The drop in penetration over the past few years is primarily the result of strong GDP growth in the Kingdom – around 28% in 2011 and 18.6% in 2010, according to SAMA – especially in the oil sector, which accounts for a substantial percentage of GDP. Insurance density, which is a measure of GWPs on a per capita basis, reached SR682 ($182) per capita in 2011, up from SR604 ($161) in 2010, SR576 ($154) in 2009 and SR440 ($117) in 2008. Since 2007 the insurance density in the Kingdom has increased by an annual average rate of around 17%, according to statistics published by SAMA.

Saudi Arabia is currently one of the fastest growing insurance markets in the region. According to an October 2012 report released by AM Best, an international ratings agency, the Middle East and North Africa (MENA) insurance market is expected to grow by less than 5% in 2012, compared to expected double-digit growth in the Kingdom. The regional market has been negatively impacted by the political unrest that has been under way since early 2011, in addition to the lingering after-effects of the 2008-09 international economic downturn. Saudi Arabia, meanwhile, has remained stable through both the socalled Arab Spring and the financial crisis, which has been a major benefit for the insurance industry and local businesses in general.

Major Players

As of the end of July 2011, the most recent date for which SAMA data is available, Saudi Arabia was home to 30 insurance firms (a handful of which are also licensed to offer reinsurance) and one reinsurance company, Saudi Reinsurance. The great majority of GWPs are concentrated in a handful of leading firms. Indeed, according to a recent report from Standard & Poor’s (S&P), a ratings agency, in 2011 around 52% of all GWPs and 79% of revenues were concentrated in the hands of just three firms – namely Tawuniya (previously NCCI), the Mediterranean and Gulf Insurance and Reinsurance Company (MedGulf) and Bupa Arabia.

Tawuniya, the legacy operator, has managed to maintain its status as the largest insurer in the Kingdom and one of the largest in the region over the past decade, despite ongoing market liberalisation over the same period. According to SAMA data, in 2011 the firm accounted for nearly 24% of total GWPs, while MedGulf was responsible for around 15.2% and Bupa Arabia brought in 11% of the total. The top eight insurance firms accounted for nearly 70% of GWPs in 2011, according to data from SAMA.

According to S&P, Saudi insurers tend to have a disproportionately high capital-to-premiums ratio compared to most Western firms. Indeed, while SAMA requires that insurance companies hold at least SR100m ($26.65m) in capital, many firms have much more. As of the end of 2011, according to the regulator, Tawuniya boasted total equity of SR2.05bn ($546.3m) in total, and 24 other firms also exceeded the minimum. Most local companies rely primarily on underwriting revenues to turn a profit, as opposed to investments, which represents a challenge for the industry moving forward.

With this in mind, many local players and market watchers alike expect to see a round of mergers and acquisitions (M&A) sooner rather than later. “Authorities may consider a total of 15 or 20 larger, stronger companies more appropriate than 30 to 40 smaller, more diverse entities where half the players struggle,” David Anthony, the director of debt capital markets at S&P, said in media reports in October 2012.

The Kingdom’s legal environment in relation to M&A is currently in its infancy, which could potentially hinder consolidation in the market in the immediate future, though SAMA is working to develop new legislation in this area. According to a July 2012 report published by the international consultancy AT Kearney, if underwriting margins continue to weaken and consolidation remains challenging, some insurers could potentially be forced to shut down some of their operations in the coming years.

In addition to insurance companies, as of the end of July 2011 Saudi was home to 59 licensed insurance brokers, 33 agents, seven claims settlement specialists (known as third-party administrators in the local market), nine loss assessors, six coverage advisors and two actuaries. These firms fall under SAMA’s Insurance Intermediaries Regulation, which came into effect in October 2011.

Policy Offerings

Insurers in Saudi Arabia are required to hold separate licences for general, health and P&S underwriting. Over the past five years health policies have come to dominate the sector, accounting for nearly 53% of GWPs in 2011, compared to just 36% at the end of 2007.

The health segment took off largely as a result of the Mandatory Cooperative Health Insurance Law, which came into effect in 2006. The law, which initially required that all expatriates working in the Kingdom acquire private insurance, was expanded in early 2011 to cover all private sector employees, including Saudis, instead of just expatriates.

As implementation of the law continues in the coming years, the health insurance segment is expected to continue to grow and expand substantially. Indeed, according to early 2012 projects from RNCOS, a market research firm, GWPs from health insurance are expected to post a CAGR of around 20% through 2015, a considerable increase on present rates.

Health Segment

The health sector, like the insurance market as a whole, is dominated by Tawuniya, MedGulf and Bupa Arabia. Tawuniya pulled in SR2.5bn ($666.3m) in health GWPs in 2011, up from SR2.38bn ($634.3m) the previous year. The 2011 figure was equal to more than 55% of the firm’s total GWPs for the year. MedGulf, meanwhile, posted 2011 health GWPs of SR2.02bn ($538.3m), up from SR1.8bn ($479.7m) the previous year. The 2011 figure was equal to more than 70% of MedGulf’s total GWPs. Finally, Bupa Arabia, which underwrites only health risk, earned SR1.9bn ($506.35m) in health GWPs in 2011, up from SR1.7bn ($453.1m) in 2010 and SR1.3bn ($346.5m) in 2009. Together, the three largest firms accounted for around 66% of total health GWPs in 2011. Other major health underwriters in Saudi Arabia include United Cooperative Assurance, Allianz Saudi Fransi Cooperative Insurance and Malath Cooperative Insurance and Reinsurance.

Motor On

After the health segment, motor policies account for the largest percentage of GWPs in the Kingdom. In 2011 motor GWPs totalled SR3.92bn ($1.05bn), or around 21.2% of total GWPs for the year, up from SR3.24bn ($863.5m) in 2010 and SR3.1bn ($826.2m) in 2009. This represents substantial expansion since 2005, when motor GWPs totalled SR1.6bn ($426.4m). In 2011 Tawuniya had the largest share of motor GWPs, at SR1.1bn ($293.2m), up from SR999m ($266.2m) the previous year.

The motor insurance segment has been a major contributor to the insurance sector since 2002, when the government introduced Saudi Arabia’s first compulsory TPL law, which made insurance policies mandatory for every person holding a driving licence issued in the Kingdom. Under a subsequent regulation released in 2007, the government announced that TPL coverage would be linked to each registered vehicle in the country. This change resulted in a substantial amount of increased business for insurance firms.

New Contenders

While the compulsory health and motor TPL segments currently account for nearly three-fourths of total GWPs in Saudi Arabia, the burgeoning P&S segment is widely viewed as a key growth area. In 2011 the segment brought in SR905m ($241.2m) in GWPs, down from a high of SR1bn ($266.5m) in 2009, but nevertheless still substantially up on the SR594m ($158.3m) seen in 2008 and the SR327m ($87.15m) seen in 2007.

While P&S only accounted for around 5% of total GWPs in 2011, the segment is substantially more profitable than both health and motor coverage, primarily as a result of the fact that it is a relatively new product and has not yet succumbed to the price competition that has brought down margins in other areas. The P&S segment is expected to expand steadily in the coming years, as young Saudis – who are generally considered to be more receptive to life coverage than the older generations – settle down and begin to start families.

Other segments that are currently on offer in the Kingdom include property and fire coverage, which together brought in GWPs of approximately SR1.2bn ($319.8m) in 2011, up from SR959m ($255.6m) the previous year; engineering, with SR913m ($243.3m) in GWPs in 2011; and marine coverage, with SR634m ($169m) in GWPs in 2011.

Both the engineering and the fire and property segments are expected to play an increasingly important role in the sector for the foreseeable future, as a result of the government’s numerous large-scale infrastructure and housing initiatives that are currently under way. The energy sector, which is among the largest in the world, is insured almost entirely offshore, primarily under a state-owned firm registered in Bermuda. In 2011 domestic energy-related GWPs were valued at just SR361m ($96.2m).

Reinsurance

The reinsurance segment, which currently consists of just one company – Saudi Re – has the potential to be a growth driver in the coming years as well. According to a September 2011 reported released by the Qatar Financial Centre, between 2005 and 2010 Saudi had the lowest reinsurance cession rate in the GCC, at around 40%, compared to 57% in Qatar, for example.

The Kingdom’s low cession rate reflects local regulations, which require Saudi insurers to reinsure at least 30% within the country and retain at least 30% of their total GWPs in house. With this in mind, as the sole reinsurer in the Kingdom, Saudi Re is well positioned to take advantage of the segment’s continued growth in the coming years.

Outlook

The local insurance industry faces a number of challenges moving forward. In addition to fierce price competition in the non-life segments, the market lacks a large, well-trained insurance work force. The most qualified employees tend to move between firms on a regular basis, lured by higher salaries and other benefits, which has resulted in a substantial amount of personnel turnover and work force instability that is felt throughout the market.

Additionally, many higher-level positions continue to be filled by expatriates, despite the Kingdom’s “Saudiisation” policy, which is designed to help boost the percentage of Saudi nationals taking part in the Kingdom’s workforce. A number of specialised training institutes and educational organisations offer insurance training, including a few local universities, SAMA’s Institute of Banking and the Manama-based Bahrain Institute of Banking and Finance, the latter of which has a regional footprint.

In addition to these key issues, a fundamental challenge currently facing local underwriters is a lack of awareness about the benefits of insurance among the general population. Many insurers are working hard to boost public awareness about insurance. The primary avenues being used to promote this awareness are a number of traditional TV- and billboard-based advertising campaigns.

Despite these challenges, the industry is expected to continue to grow for the foreseeable future. While insurance penetration remains low compared to more developed markets around the world, it has improved dramatically over the past decade, and most projections show it rising through 2020 as a result of the Kingdom’s strong economic fundamentals. Indeed, rising levels of financial awareness among the country’s large youth population bode well for the insurance sector. As SAMA continues with its push to implement a new and comprehensive regulatory framework for the sector and public awareness continues to rise, the market is likely to mature considerably over the course of the coming decade.