Posted on Oct 10, 2011 by Sergio Ulloa
A new report released this month by the Oxford Business Group has highlighted the significant progress being made by Saudi Arabia's insurance industry. In the past few years, policy take-up in the Kingdom has grown, premium levels have risen, and the insurance sector's regulatory body has been able to strengthen and enforce better business practices. Despite these impressive strides however, Saudi Arabia remains one of the world's most underinsured areas, and penetration rates will need to improve considerably if the Kingdom is to reach the levels of more developed markets, both in the region and internationally.
At 27.6 million people and growing, Saudi Arabia is the largest insurance market in the GCC and one that has developed substantially since insurance business was first permitted in the 1990s. Driven by strong macroeconomic performance (tied to a global rise in oil prices), rising income levels and positive demographic trends, the Saudi insurance market has grown by double digits for the past 5 years. The country's insurance sector is now able to play a more significant role in the national economy and enjoys a greater capital position as more local businesses and individuals become aware of and recognize the value of having adequate insurance coverage.
Saudi Arabia's insurance sector has been able to weather the worldwide financial crisis well, outperforming a number of other business segments to posts consistent year-on-year growth throughout the duration of the global economic downturn. Saudi Arabia hosts a number of prominent multinational firms
in addition to several domestic players that rival them in size. The Saudi market is dominated by health and motor insurance business lines, which currently account for around 71 percent of the market's gross written premiums. Protection and savings products, however, have become the fastest growing insurance segment, posting a 68.9 percent annual growth and now accounting for 7 percent of gross written premium premiums, largely attributed to the introduction of Islamic insurance (takaful
According to data released earlier this year by the Saudi Arabian Monetary Agency (SAMA), the Kingdom's insurance sector grew by 12.4 percent in 2010, passing SAR 16.4 Billion (US$ 4.4 Billion) in gross written premiums. The insurance industry was furthermore able to improve its underwriting performance regarding payouts in 2010, with estimated claims processed dropping to US$1.25 billion from US$1.54 billion in 2009, which has allowed some local insurers to recapitalize and build up reserves. These double-digit growth indicators have helped push the Saudi insurance sector's overall contribution to around 1 percent of national GDP, a record level according to SAMA. This has all happened while the Kingdom's non-life and life insurance penetration, at 1.0 percent and 0.1 percent, remain amongst the lowest in the region.
While the Saudi Arabia insurance industry has been able to improve upon its services and register consistent growth in recent years, more must be done to modernize the industry and attract more consumers and private enterprises. Local authorities are now acting upon this to boost compliance with laws and regulations. At the end of July, SAMA, the chief regulator of the Kingdom's financial services sector, issued a draft of new audit committee regulations for all insurance and reinsurance companies operating in Saudi Arabia. Amongst the key reforms planned by SAMA is the establishment of audit committees by all active insurers and reinsurers in the Kingdom. Firms will also be required to abide by suitable written controls and procedures to both monitor and ensure compliance with mandatory fiduciary requirements.
The new Saudi insurance company audit committees will be required to maintain thorough records and regularly submit reports and other appropriate documentations directly to the SAMA, who will monitor compliance to local regulation. Each audit committee will also be forced to have relatively independent representation, with at least three of its five members required to come from outside the company's board and no executive managers, employees or consultants are to be permitted. SAMA insists that this new oversight panel will improve transparency and accountability within the Saudi Arabian insurance sector and enable the industry to build upon its recent successes with appropriate financial controls.
According to the Oxford Business Group, Saudi Arabia's insurance sector should continue to see double-digit growth rates for the foreseeable future and become one of the Gulf region's most important markets. These findings are corroborated by a recent report issued by Dubai-based investment bank Alpen Capital
, which estimated that insurance business throughout the Gulf region would grow 20 percent annually on average over the next 5 years, moving from US$18 billion in gross premium value in 2011 to over US$37 billion by 2015. Of that total, The United Arab Emirates and Saudi Arabia are predicted to hold a 75 percent market share between them by 2015.
The total written premium value in Saudi Arabia's insurance sector is forecast by Alpen to reach US$9.24 billion by 2015 at an 18 percent combined annual growth rate. Due to an ageing population and regulatory initiatives, Saudi Arabia will be the only GCC market in which sales of new life insurance policies are expected to grow faster than that of non-life products. According to Alpen, the life insurance sector is projected to have a compounded annual growth rate of 48 percent over the next 5 years, while general insurance lines grow at a more moderate 14 percent. While the main growth drivers in the Saudi insurance industry will continue to be health insurance and motor insurance retail cover, sharia-compliant takaful insurance products also have a significant presence in the Kingdom and their continued development will improve awareness and acceptance towards other lines of insurance in the region. Increased participation from the international private sector
is also expected to yield additional positive returns.
Another important contributing factor to the development of Saudi Arabia's insurance industry could be the avalanche of impending government infrastructure spending and the pronounced effect this will have on the Kingdom's construction industry. To help counterattack regional unrest, the Saudi government has pledged to spend over US$400 billion in the next five years on upgrading the Kingdom's infrastructure, including transport, housing, health and education developments. This presents a multitude of opportunities for the Saudi insurance industry, as each project will undoubtedly required comprehensive coverage options. Furthermore, if these development projects help to diversify the Saudi economy away from the dominant oil production industry, other insurance business lines could open up.
The Oxford Business Group concludes that while insurance premium levels and the number of policyholders are certainly rising in Saudi Arabia, the insurance industry still has much to do in order to capitalize on their potential and realize premium levels similar to those in many Western economies. While Saudi Arabia's insurance sector can now be valued at 1 percent of GDP, for instance, the ratio of premiums to GDP is well over 10 percent in France and 13 percent in the United Kingdom. The number of policyholders in the Saudi market meanwhile remains smaller than that of Dubai, the Gulf emirate with a population of only 5 million. This will all soon change however, as more Saudi citizens become of aware of the value of private coverage and the local insurance sector evolves to more adequately promote insurance to meet their citizens' demands for protection against risk.
Oxford Business Group
The Oxford Business Group (OBG) is an international publishing, research and consultancy firm. OBG regularly publishes economic intelligence reports, print and online, on the Middle East, Africa, Asia, Eastern Europe and Caribbean markets. OBG also provides specific analysis on industry sectors, including banking, insurance, energy, transport, industry, telecoms and capital markets.
Alpen Capital Group
Alpen Capital Group is an investment banking firm that provides financial consulting services. The firm's advisory services focus on equity and debt capital markets, credit ratings, debt syndications, and mergers and acquisition consulting, amongst others. Alpen Capital was founded in 2008 and is based out of Dubai, United Arab Emirates.