Cover Up


An overly competitive sector begging for consolidation is holding back growth, yet a drive to enforce compulsory lines and regulatory changes from the central bank offer a way forward.

According to industry reports, Saudi Arabia’s insurance sector is set to overtake the UAE as the largest insurance market in the Gulf between 2015 and 2020. Indeed, over the next five years, according to Dubai-based Arqaam Capital, the sector is expected to grow at a swift 17% a year as a result of growth and enforcement in compulsory lines, especially motor, and new regulations. Arqaam Capital Managing Director Jaap Meijer also suggested that the insurance sector is the least likely to be affected by weaker oil prices and the resultant belt tightening as better enforcement will see growth of up to 26% and 16% in motor and health insurance premiums, respectively.

This is all music to the ears of insurers in the country, which have struggled of late in a highly competitive sector—35 insurance and reinsurance companies ply their trade in the Kingdom, with a penetration rate of just 1.08% as of 2014. In terms of numbers, gross written premiums came in at SAR30.48 billion ($8.13 billion) in 2014, up over 20% on the previous year, according to the central bank, the Saudi Arabian Monetary Agency (Sama). Speaking to TBY about the challenges the sector faces, Ammar Halawani, Acting General Manager of the Arabia Insurance Cooperative Company (AICC), said, “There is severe competition in the market and it is price driven,” continuing that, “economies of scale are not present for small and medium companies versus the bigger companies [and that] presents a challenge in pricing standard products which is actuarially driven.” Going forward, Halawani believes we will begin to see consolidation as insurers look “to create economies of scale and efficiency and consolidate talent.”

Compulsory lines, which represent 75-80% of insurance premiums in the country, represent the best growth prospects in the short term. According to Arqaam, medical and motor insurance could represent half of insurance-sector growth through to 2020, adding 3.5 million medical policyholders and 3 million insured vehicles. Actually, Arqaam Capital’s Jaap Meijer sees motor, lagging behind in terms of enforcement, pricing, and penetration, potentially “doubling premiums by 2018 on re-pricing, cost of inflation, and an additional two million insured vehicles.”

Currently, health insurance is the largest line in the Kingdom, representing just over half of all premiums. That is followed by motor, on just over one-quarter. But despite a growing appetite for insurance, pricing challenges have meant many insurers barely scrape by, incurring underwriting losses as they attempt to pull in customers, whose predominant thought pattern was highlighted aptly by AICC’s Halawani: “If I can buy it cheaper elsewhere, I will.”

To help tackle this problem, Sama has recently issued new regulations relating to underwriting practices, reserving, solvency requirements, and actuarial-backed pricing.

But compulsory lines can only take you so far, and at some point Saudis are going to have to make the jump to non-compulsory lines if the sector is to grow long term. Halawani seemed positive in this regard, stating directly that, “Soon, people here will start buying insurance in addition to the compulsory medical, motor, and small business insurance policies. They will start insuring their properties and their liabilities.”
Some are also beginning to think outside the box in order to boost awareness among the country’s large, young population. “We run communications campaigns from time to time for our customers, and we launched our “TRUST” campaign, aimed at raising awareness of motor insurance products,” said Raeed A. Al-Tamimi, CEO of The Company for Cooperative Insurance (Tawuniya), who underlined the need to convince customers that, “the relationship with insurance companies is long term, that they are building a history in the database, and that it is no longer about just having a policy because the premium and claims experience is important.” Tawuniya is also pioneering e-services and sales in the country, a savvy move aimed at a population that has embraced the age of the smartphone, with Saudis representing over 40% of Twitter users in the MENA region and enjoying access to some of the lowest data costs in the world.

For outsiders looking in, it is also important to understand the unique differences in the Saudi insurance market. Although insurance was once illegal in Saudi Arabia, the Kingdom began introducing some forms of insurance that were deemed to be sharia compliant in 1977. It wasn’t until 2002 , however, that the Saudi cooperative model of insurance was defined under Sama. The model is sharia compliant, but differs from takaful in that it does not demand a total separation of policyholder funds from shareholder funds. It also does not require insurers to only invest in share-compatible instruments, and there are no sharia boards for individual insurers.

In terms of the takaful sector, Saudi Arabia’s biggest competitor regionally is the UAE, which leads in terms of return on equity at 6%, compared to the latter’s 0.4%. In that respect, Saudi Arabia, where insurers employ the mudarabah contract (insurer and policyholder share policy risks and invested premium profits)—compared to the UAE, where firms adopt the wakalah model (policyholders pay a fee to insurers in return for risk insulation)—enjoys definite benefits, including incentives to cut costs.

In regional terms, the GCC’s takaful contribution stood at $8.9 billion at end-2014, according to EY, with 77% of that figure represented by Saudi Arabia. Globally, Saudi Arabia represents 48%, making it the center of sharia-compliant insurance.

Moving forward, an improved regulatory environment and better-policed compulsory lines offer up short- to mid-term growth opportunities. Consolidation within the sector also seems inevitable as firms look to establish economies of scale and also keep to strict Saudization rules. Longer term, insurers need to take advantage of a strengthening middle class with more assets and disposable income and begin to peddle non-compulsory lines in a far greater capacity.

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