STAY COVERED

Saudi Arabia 2017 | FINANCE | REVIEW: INSURANCE

Insurance sector growth has slowed over the last year, a possible result of tightened budgets squeezing expendable income. That said, with low penetration, there is plenty of room to grow going forward.

After five years of double-digit growth managed under the careful regulation of the Saudi Arabian Monetary Agency (SAMA), the Saudi insurance sector decelerated for the first time in 2006, as gross written premiums (GWP) posted a 0.5% annual growth and reached SAR35.8 billion (USD9.5 billion), after the 19.7% growth posted the previous year.

According to data disclosed by SAMA, health and motor insurance, which are mostly compulsory insurance lines, have been the main drivers of the sector, contributing in 2016 to a combined 84% of the total market GWP. Health insurance was the biggest insurance line, accounting for 51% of the sector's total GWP with SAR18.6 billion (USD5 billion) in underwritten premiums, while motor insurance GWP amounted to SAR12.2 billion (3.3 billion), contributing to 33% of the total market GWP. The sector's stagnation can be explained by a decline in the health insurance GWP by almost 2% to SAR18.6 billion (USD5 billion) in 2016, whereas in 2015 it had increased by 20.3% to SAR19 billion (USD5.1 billion). Meanwhile, motor insurance grew by 13% on the back of higher prices thanks to actuarial pricing. Protection and savings insurance accounted for 3% of total GWP and remained the smallest category in the sector.

Overall, the total number of insurance policies in the sector decreased to 7.3 million in 2016, down from 8.1 million in 2015. As the Saudi economy was hit by the collapse in oil prices, a resulting growth in budget deficit and cuts in public spending have reduced levels of employment, which in turn have reflected in the fall in insurance policies in the sector. However, the Kingdom's insurance sector was only indirectly and slightly affected by the volatility in oil prices, and it is expected to recover thanks to SAMA's decisive actions to expand the scope of compulsory insurance.

Although over the last five years insurance penetration has increased at a CAGR of 19%, it was still only 1.5% in 2016, a rate that is significantly below global average of 6%, and still below GCC levels of around 2.5%, suggesting a significant growth potential. To tackle this potential, the regulator is implementing recently approved policies that will gradually enforce the uptake of compulsory coverage for millions of uninsured employees and motor vehicles.

In April 2017, the Council of Cooperative Health Insurance (CCHI) announced the start of the fourth phase of implementation of the unified health insurance, which was approved by Cabinet decision in April 2016 and started in July 2016. This final phase is targeting Saudi or non-Saudi employees of companies with 25 or less employees and their dependents. Such companies will be required to join larger firms in providing health insurance for their staff. The first stage included companies with more than 100 employees, the second stage companies with between 50 and 99 employees, and the third stage, which started in January 2017 reached out to companies with 25-49 employees. This finalstage brings all companies in the economy under the scope of the unified health insurance system.

According to local news reports, only 45% of vehicles in the country are insured, the remaining 55% being illegally out in the traffic. Moreover, S&P Global refers to official estimates of about 2.5 million Saudi nationals working in the private sector without being covered by their employers, as well as some 870,000 foreign workers and their families, specifying that this figure excludes the 1.9 million foreign domestic staff employed by Saudi families who are not yet required to have medical insurance. These numbers indicate an important potential for market growth that will be triggered if the government is able to identify and bring in the outliers.
However the most striking result of the year 2016 was that, despite a 0.5% growth in business volume in the industry, net profit surged by 160%, with consolidated net result reaching a total of SAR2.1 billion (USD560 million) in 2016, up from SAR810 million (USD216 million) in 2015. This growth in profit rates can be attributed to the results of actuarial pricing introduced by the regulator in 2013, a measure which needed to be taken after a period of intense price competition that had eroded the profitability of the industry. Since then, tariffs of compulsory lines have to be approved by an independent actuary according to statistical expectations of loss and profit. With a regulation issued in January 2016, the regulator described the procedures for appointing an actuary and his or her roles and responsibilities. Accordingly, SAMA requires insurance and reinsurance companies to apply the regulation latest by January 2017. As companies' bottom lines have finally started to reflect this new policy, smaller companies will from now on be unable to acquire market share through aggressive price cuts and may lose their customer base if they are not capable of offering high-quality services and a range of insurance products.

In 2016, eight of the 34 insurance companies active in the industry generated 72% of the sector's total GWP, while the remaining 26 companies contributed to the remaining 28% of the market premiums. The two biggest companies contributed have a combined market share of 43.4%.

The Kingdom's long-term vision to diversify the economy away from a 90% dependence on oil export revenues will reflect on insurance activities growing beyond compulsory lines, as Ehab Yousef Linjawi, CEO of Gulf General Cooperative Insurance Company, told TBY, “The name of the game here is to move the awareness of people from 'I purchase insurance because it is compulsory' to 'I purchase insurance because I need it and I believe in it.' Then we can move the third party into a comprehensive service.” He also emphasized the role of insurance companies in shaping the demand in the market, adding, “We can move there by providing services and gaining knowledge of new technologies. This is in line with what the insurance regulator would like insurance companies to do. They do not want to have to enforce; they want the public to realize there is a benefit behind insurance. In the public's mind, it is a way of not taking out money. We believe that whatever happens in any mature market will happen in growing markets. That is the story of banking and credit cards. When credit cards were introduced in Saudi Arabia, they were only for the educated, businessmen, and the elite. The rest of the people were using cash, but now everyone is doing it electronically. The banking companies did that, not the regulator.”

An important segment for the Saudi insurance industry is Islamic insurance, or takaful, where Saudi Arabia is the global leader with a gross written contribution (GWC) of USD9.7 billion. Media sources refer to the latest data disclosed by the Global Takaful Report, according to which global takaful GWC is estimated to have reached USD14.9 billion as of the end of 2015. In the GCC region, the takaful industry has grown by CAGR of 18% between 2012 and 2015. In 2015, the GCC had an overall market share of 88% of the general takaful market, where Saudi Arabia and the UAE reported the strongest growth with 20 and 19%, respectively.
In the long term, the Kingdom's Vision 2030 plan will stimulate growth in sectors such as healthcare, tourism, and real estate development. These sectors will in turn create a demand for other types of insurance beyond the compulsory lines.