It is less than a month since Saudi Arabia’s first pure reinsurance company, Saudi Reinsurance Company (Saudi Re), held its constituent assembly, while most of the 20 or so new underwriters licensed by the Saudi Arabian Monetary Agency (Sama) have yet to begin substantial commercial operations.

The insurance sector is a fledgling market. Estimates of the industry’s total annual premium income are in the mism. In contrast to the advanced state of banking in Saudi Arabia, the insurance market is under-developed and offers huge scope for growth in terms of sales and products.

For years, the development of the sector has been artificially stalled by the dominant role of the National Company for Co-operative Insurance (NCCI). The state-owned giant did not have the market entirely to itself - foreign insurers, for example, were able to offer their services through agents - but conditions were different to those in more diverse and competitive service industries. This had consequences for consumer take-up of insurance services. No more than 10 per cent of Saudi cars were insured, for example.

New rules

The process of change began in 2003 after a new insurance law created a different environment, in which a range of insurers can compete with each other to win custom through their service quality and marketing skills.

The reform has been a resounding success in its first stage: the creation of new insurance providers. By February, Sama had licensed several new takaful (Islamic insurance) companies.

It has also fulfilled a subsidiary government goal of helping to diversify the investment base of the stock market through a requirement for each new insurer to issue a small proportion of new equity through an initial public offering (IPO), and therefore operate as a distinct, listed joint stock company. This offers transparency for investors and will help regulators at Sama gain a clear picture how individual institutions, and the sector as a whole, are performing.

Meanwhile, for Saudi banks, the insurance sector has proved to be a highly attractive invest-ment option. The new regulatory regime allows them to participate, but only indirectly through the creation of distinct joint venture companies.

Foreign investors are allowed to own up to 49 per cent of insurance companies. Those with a major interest in the Saudi market have also been pressured into investing directly because their Saudi agents have been obliged to either set up as full-status companies under the insurance law or to give up business altogether.

A good example is the joint venture created by Bank Aljazira and UK-based multi-national Prudential. Aljazira had already built up a highly successful takaful life cover subsidiary, Takaful Taawuni, with 15,000 individual and 22,000 group clients, generating SR4bn ($1.1bn) a year in premium income. This business is the core of the new venture, which has ambitions to operate across North Africa and the Middle East.

In revenue terms, insurance is not likely to be a major earner early on for most Saudi banks. But it does have some key attractions. “Insurance is a growth area,” says Tim Jackson, senior banking analyst at Cyprus-based Capital Intelligence. “It is going to make a useful addition to revenues and will be a means of expanding the range of services that Saudi banks can make available to their customers.”

The major banks are also seeking to expand the range of ways in which they cater to the needs of Saudi consumers. Insurance is one such complementary product. Moreover, it helps to underpin the security of the mortgage business, another area of financing activity that has huge growth potential.

The range of insurance services has also broadened. The new regulatory framework has been designed to encourage the growth of specific products such as motor insurance, personal lines or employee liability cover.

But despite such strong growth prospects for insurance, some market observers still say the outlook is uncertain, because the recent creation of so many new companies is likely to be followed by a period of rationalisation.

One leading financial sector analyst argues that the creation of several new insurance companies, particularly by banks, “is CMA driven, in line with the requirement to separate businesses such as capital markets and investment management from their mainstream commercial banking business”.

This suggests that the rapid growth in the number of insurers is fuelled as much by the Saudi authorities’ long-term strategy for the development of financial markets in the kingdom as by underlying growth in demand for insurance services. This would imply that time is needed before the real strength of insurance activity becomes clear.