Saudi Arabia

Saudi Arabia’s insurance sector has more than doubled in growth over the past five years. The market today is estimated to be worth just under $4bn, compared with only $1.4bn in 2005. By the end of 2009 the sector had grown 33.8 per cent compared with the previous 12 months.

Gross written premiums (GWPs), the total value of premiums paid during 2009, was $3.9bn compared with net written premiums (NWPs) of $2.7bn. NWPs are the value of premiums retained by the insurer following reinsurance to local or international companies. This value has risen from $1.95bn in 2008 and indicates that local firms are increasingly electing to underwrite their own policies.

Health insurance dominates sector

In terms of GWPs, the largest contributors to the market are health and motor insurance. Between them, they accounted for 71 per cent of GWPs in 2009. Other lines, such as life, investment, engineering, marine, aviation and property insurance make up the remaining 29 per cent.

Health insurance dominates the market, accounting for 50 per cent of premiums. It has also been the fastest-growing insurance sector experiencing 432 per cent growth since 2005 when premiums were recorded at just $365m. This was expected as Saudi Arabia passed its Cooperative Health Insurance Law in October 2005, which began the process of making health insurance compulsory for expatriates. By the end of 2009 this had expanded to cover Saudi nationals and their families working in the private sector.

In total, more than six million people in the kingdom now have health insurance policies and as a result the private healthcare sector is booming – and health providers are struggling to meet demand. Particular difficulties are reported by insurers seeking to cover expatriates in rural areas where private hospitals report that low population densities make building hospitals an unattractive investment.

Overall health insurance GWPs have now grown to just under $2bn by the end of 2009. The largest jump in growth, 52 per cent, was between 2008 and 2009 as the private sector began to cover its employees.

Given its market position, health insurance also accounts for the most claims paid out. By the end of 2009, 55.3 per cent of all claims worth just over $1bn were paid out on health insurance policies, an increase of 41.2 per cent on pay outs in 2008. Considering the market grew by 51.7 per cent during the same period, the net effect has been a more profitable year for the health insurance industry – despite competition putting pressure on premiums.

The second most prevalent type of insurance is in the motor sector, where more legislative changes have also boosted demand for cover. In early 2007, third-party liability motor insurance became compulsory for all vehicles registered in the kingdom. Before this, in 2002, the government made driver licence insurance compulsory along with third-party vehicle insurance for foreign vehicles in transit in the kingdom. As a result, insurers have seen cover almost double since 2005 from $423m to $815m at the end of 2009. It now accounts for 21 per cent of market share and insurers expect this growth to continue.

Another area where growth has also been rapid is in protection and savings insurance. Life insurance is just beginning to appeal to customers in Saudi Arabia and represents an underdeveloped segment of the market. People are increasingly seeking to protect their savings after a range of investment failures have stung many residents. However, the loss ratio for this sector of the market is very low, at just 25.7 per cent.

This means that despite a growing number of Saudis taking out such policies, the payouts to date have been relatively small. Retention rates are also very high for this newly emerging sector at over 90 per cent, making it attractive for the firms that offer such services.

Project insurance cover is growth sector in Saudi

Engineering, energy and property insurance are also emerging growth sectors. The scale of Saudi Arabia’s projects market is estimated at $697bn by MEED. Insurers are increasingly working with contractors to provide project cover as construction disputes across the region are on the rise.

Amid the growing demand for services, there is clearly growing competition among firms, but a side effect of the strong regulatory role taken by the Saudi Arabian Monetary Authority (Sama) is that only financially robust, locally registered companies are allowed to operate. This process of regulation, which began as far back as 2003 when the Law On Supervision of Cooperative Insurance Companies was approved, has removed the ability of insurers based overseas to serve the kingdom remotely. During the past decade it was common practice for insurers to take premiums and then cease trading or refuse to pay out leaving customers with no route for enforcement. Today the market is very different. Sama has 55 insurance supervisors who monitor the sector very closely and ensure that companies are meeting the terms of their licences.

Under the legislation 25 articles lay out the terms of operation. These state that all insurers must be locally registered, joint-stock companies acting only as insurance or reinsurance firms. They may not offer brokerage services. The law states that insurance companies must have base capital of SR100m ($26.7m) and this is even higher for reinsurers at SR200m.

Business activities are also closely monitored, with Sama demanding that insurance firms have written approval before opening new branches, merging with other firms or ceasing to trade. Operational practices, such as the requirement of two auditors (both internal and external) are also in place to ensure that risks are appropriately priced. Further standards are also set out on a sector by sector basis by various governing bodies, such as the Council for Cooperative Health Insurance.

As a result of the regulatory strengthening, the sector has streamlined the process as firms have struggled to meet the new criteria and obtain local licences. Today Sama reports that 30 firms are licensed as insurance or reinsurance companies and 47 brokers are also allowed to operate. Insurers estimate there were more than 100 firms serving the market before the regulatory system was introduced. Many of these were not actually operating in the kingdom, instead opting to serve Saudi Arabia from Bahrain.

International insurance giants presence

International insurance giants are, however, present in the kingdom’s market. Bupa Arabia is a leading insurer alongside market leaders the local Tawuniya and Lebanese insurance giant Mediterranean & Gulf Insurance and Reinsurance Company (Medgulf).

International firms have been able to penetrate through their long standing establishment of locally registered businesses. In Bupa Arabia’s case it began working with local family conglomerate Nazer Group back in 1997. Other international players with a local presence include Saudi Re For Cooperative Reinsurance Company and AXA Cooperative Insurance Company.

Although there are fewer firms in the market today, those that do operate are stronger companies able to meet the high standards insisted upon by Sama. In addition the number of licensed companies is steadily rising as more and more prove that they can meet the operational criteria. The licensing process itself takes up to 16 months.

As a result, insurers report that competition is intensifying. In the health sector, for example, retention ratios have fallen from 80.8 per cent in 2005 to 76.2 per cent in 2009.

At the same time, the market is becoming more profitable. In 2009, net income was up 52 per cent from $185m in 2008 to $282m. However firms report that premiums are under pressure as customers begin to play the field in the maturing market. At the same time, insurers are increasingly being forced to invest in their operations and products to provide a better service than their competitors, especially in markets such as health, where policies are heavily prescribed by the regulators. These factors are all putting pressure on profits.

Looking ahead, insurers remain bullish about future growth opportunities, but many of the major gains brought about by legislative change have now been made. The market is now entering a period of competition and consolidation, which should see the companies with the best prices, customer services and insurance products begin to take market share away from their peers.