Overseas market - Saudi Arabia: full of Middle Eastern promise

The Saudi Arabian insurance industry is one of the fastest growing insurance industries in the world. Even in the global economic crisis its insurance industry has achieved an annual growth rate of 30% to 35%, thanks largely to compulsory insurance lines.

In 2009, gross written premiums reached SR14.6bn (£2.4bn) — an increase of 33.8% on the previous year. And, according to the latest analysis by market research firm RNCOS, the Middle East insurance sector as a whole will reach premium income levels of $80bn (£48.5bn) by 2013.

Escalating insurance spend
Health insurance, which represents 50% of the Saudi Arabian insurance market, increased by 51.8% to SR7.3bn in 2009. Further growth is expected as a result of the increasing involvement of private companies and the obligation for foreign nationals and foreign pilgrims to buy insurance covers.

In addition, the most recent introduction of compulsory health insurance for private employees — irrespective of the size of the company they are working for — will further boost the health insurance market.

Moreover, the general insurance category has shown substantial growth despite being heavily hit by the financial crisis. General insurance GWP increased by 14.4% to SR6.3bn in 2009. And this is expected to grow at a compound annual growth rate of more than 24% between 2010 and 2012 because of rising motor and energy insurance. Property and aviation insurance are expected to emerge as the fastest growing general insurance segments.

The motor insurance segment is projected to grow at a CAGR of 30% between 2010 and 2012. With the strong prospective growth in car sales, the premium of motor insurance will increase as vehicle cover has been made compulsory.

Protection and savings insurance GWP, which represents 7% of the insurance market, increased by 68.9% to SR1.0bn and is expected to grow at a CAGR of around 55% until 2013. Energy-related lines remain small, however, as a result of the control of the energy infrastructure by Saudi Aramco, which channels practically all of its insurance requirements through its Bermuda-based captive, Stellar Insurance.

Penetration and retention
Insurance density, which is defined as the GWP per capita, increased from SR440 per capita in 2008 to SR576 in 2009, representing a 30.8% increase. Expenditure per capita on insurance products has increased by an average annual rate of 27% between 2005 and 2009.

The overall retention ratio of insurers — calculated by dividing the net written premium by the GWP — in the Saudi market for 2009 was 67.4%. For motor and health insurance the figures were 96% and 76% respectively. Naturally, newly licensed insurers are required to retain a minimum of 30% according to Article 40 of the implementing regulations.

As for how this top-line premium growth relates to the collective bottom line, the total gross claims paid by insurers in Saudi Arabia in 2009 was SR7.26bn in 2009, which represents an increase of 38.9% on 2008 figures. The largest proportion of total claims paid were health insurance at 55.3%, followed by motor at 22.3%.

The largest growth rate in gross claims paid came from energy insurance, which saw a staggering increase of 2049.4% from SR27m in 2008 to SR570m in 2009.

The insurance sector is regulated by the Saudi Arabian Monetary Agency, which was established in 1952 and is part of the Ministry of Finance. Since the implementation of the Co-operative Insurance Companies Control Law — which came into force on 20 November 2003 — insurer Tawuniya no longer has the monopoly on insurance business from state-owned companies and institutions. However, it remains the largest insurer with a share of more than 20% of the total insurance market with total shareholder equity of SR1.4bn.

According to the SAMA in 2009, the top eight insurers generated 67.6 % of the market's GWP. In total there are 21 licensed insurance companies operating in Saudi Arabia (see box, below) and four listed companies. There are also a number of companies approved to be established, including: Alalamya for Co-operative Insurance; Buruj Co-operative Insurance Company; Solidarity Saudi Takaful Company; Gulf General Insurance Company; Amana for Co-operative Insurance; and Tokio Marine Saudi Arabia.

Minimum monetary laws
The law on supervision of co-operative insurance companies stipulates a minimum capital requirement of SR100m for those only transacting insurance business — and SR200m for companies undertaking both direct insurance and inwards reinsurance activities. Locally domicilied insurers must be at least 51% owned by Saudi nationals, with 20% to 40% of that being offered to the public.

As of 2009, 5800 people were employed by insurers in Saudi Arabia. Of these, 47.5% are Saudi nationals, which represents an increase of 2.7% on the previous year. Article 79 of the implementing regulations requires newly licensed insurers to adhere to the Saudization ratio of 30% during the first year of operation.

There is currently no official insurance association in Saudi Arabia. However, three informal bodies do meet regularly in Jeddah, Riyadh and Al Khobar/Dammam. The Jeddah association is known as the Jeddah Insurance Training Committee and is the most established of the three. It has more than 30 corporate members, coming from insurers, underwriting agencies and brokers.

Insurers in Saudi Arabia rely very heavily on reinsurance support — especially in the property, construction and energy sectors, where there is plenty of capacity.

Following implementation of the Co-operative Insurance Companies Control Law (Royal decree number M/32) which imposed the previously detailed capital requirements, there has been a reduction in the number of insurance companies offering inwards facultative reinsurance cover.

Reinsurance requirements
Over the past few years, Saudi insurers have been making more use of the facultative reinsurance capacity available within the Gulf Co-operation Council states, especially the United Arab Emirates and Bahrain.

All reinsurance must be approved by the SAMA in order to encourage business to be retained in Saudi Arabia. Article 40 of the implementing regulations requires 30% of total gross premiums to be reinsured within Saudi Arabia. Insurers must provide the SAMA with financial and licensing arrangements of their intended foreign reinsurers, which must have a minimum Standard & Poor's rating of BBB — or its equivalent — from a recognised international rating agency.

The SAMA's prior written approval must be obtained in order to place reinsurance with foreign reinsurers with a lower rating. Such rating constraints are not imposed by the regulator in respect of domestic reinsurers.

The leading domestic reinsurer, Saudi Re, has a paid-up capital of SR200m and is rated BBB+ by S&P. Its mission statement makes it clear that its business focus is on all Middle Eastern and North African markets, not only Saudi Arabia. Medgulf and Sanad are also writing both insurance and facultative reinsurance business.

As for distribution channels, insurers in Saudi Arabia derive the majority of their business from their sponsors and shareholders. Most companies have their own direct sales force. Direct handling has traditionally been the strongest distribution channel but brokers are active in the corporate client market, particularly those involving major industrial and commercial business. The influence of major brokers, like Marsh, Willis, JLT and Aon is increasing.

Websites are generally used to advertise the availability of insurance products and for lead generation rather than completion of sales.

Distribution channel restrictions
Several companies have banks as major shareholders and use the bank's distribution network as their sole or principal method of distribution — for example, SABB Takaful (SABB/HSBC Bank) and Al Rajhi Company for Co-operative Insurance (Al Rajhi bank). The authorities have made it absolutely clear that insurers owned and/or managed by banks must be separate, duly licensed insurers. The bundling of banking and insurance products into one package is also not permitted.

Agents used in the sale of individual takaful (life) insurance are tied to one company. Locally licensed agents are supervised by the SAMA and must meet minimum educational requirements and pass an examination as a condition of their license. They must submit reports to the regulator every six months outlining all underwriting transactions and premiums generated through insurance and reinsurance activities. They must also have professional indemnity insurance cover.

Brokers are also supervised by the SAMA and must meet minimum educational standards and pass an examination as a condition of their license. They have similar reporting requirements to the regulator as agents do. Brokers are required to pay a levy of 1% of total commissions and fees earned in any one financial year to the SAMA. There is currently no brokers' association in Saudi Arabia.

One of the greatest challenges to growth and profitability in the insurance industry in Saudi Arabia is the real shortage of skilled insurance professionals. There are few universities offering specialised insurance and risk management courses and participation in Chartered Insurance Institute and other professional education programmes is still relatively small. Greater investment and commitment to training and developing staff in the insurance sector is needed if this Middle Eastern promise is to become a reality.

Dr Dexter Morse is an international consultant specialising in insurance, reinsurance, risk and legal issues and recently held the post of professor of insurance & risk management at a university in Riyadh.

Licensed and listed companies in Saudi Arabia

Licensed companies
The Mediterranean & Gulf Co-operative Insurance & Reinsurance (Med Gulf); The Company for Co-operative Insurance (Tawuniya); Saudi Arabian Co-operative Insurance Company; Malath Co-operative Insurance & Reinsurance Company; SABB Takaful; Al Ahli Takaful; Saudi IAIC for Co-operative Insurance (SALAMA); Arabian Shield Co-operative Insurance; Assurance Saudi Fransi; Gulf Union Co-operative Insurance Company; Trade Union Co-operative Insurance Company; Sanad for Co-operative Insurance; Saudi Indian Company for Co-operative Insurance; Al Sagr Company for Co-operative Insurance; Saudi United Co-operative Insurance (Wala'a); Arabia Insurance Co-operative Company; Saudi Re for Co-operative Reinsurance Company; Bupa Arabia for Co-operative Insurance; Al Ahlia for Co-operative Insurance; United Co-operative Assurance; and Allied Co-operative Insurance Group.

Listed Companies
Al Rajhi Company for Co-operative Insurance; Wiqaya Takaful Insurance & Reinsurance Company; Ace Arabia Co-operative Insurance Company; Axa Co-operative Insurance Company.