S&P Report on Saudi Insurance Market

Posted on Jan 10, 2012 by Sergio Ulloa (G+)

Fresh analysis released this week by one of the world's foremost industry information and ratings agencies, Standard & Poor's (S&P), reveals the challenges and opportunities that players in the Saudi Arabia insurance market will likely face throughout 2012 and beyond. In 'Underwriting Sustains Profitability In Saudi Arabia's Increasingly Competitive Insurance Industry', S&P observes that despite stubbornly low interest rates and a more crowded protection market with increased international attention, Saudi insurers should be able to maintain profitability going forward on the back of the Kingdom's continued overall socio-economic development and the accompanying demand for more protection and savings solutions. With a population now exceeding 27 million people, Saudi Arabia represents the largest insurance market in the GCC and has witnessed considerable growth since the insurance business was first allowed in the 1990s. S&P noted that the Kingdom's domestic insurers have seen their businesses expand in particular over the past few years from the introduction and increased awareness and availability of health insurance products and services. After compulsory medical insurance laws for the country's sizeable expatriate workforce were first introduced in 2008, the concept quickly spread on to domestic employees, and medical insurance has fast become the biggest line of insurance business throughout the Kingdom. Overall, the Saudi Arabian insurance sector is looking to take on a more significant role in the national economy and today enjoys a greater capital position as more local businesses and individuals become aware of and recognize the value of having adequate insurance coverage. Compared to other emerging insurance markets in the region, regulatory oversight in the Saudi Arabia insurance industry has become moderately strong, with adequate transparency and corporate governance in force, and this is listed by S&P as a neutral to positive factor in the country's overall insurance risk assessment. The Saudi Arabian Monetary Agency (SAMA) is responsible for regulating the Kingdom's insurance sector and has been working with other government and industrial agencies to proactively develop and modernize the domestic insurance trade. S&P notes that the Saudi insurance market underwent a significant change in 2008, when a raft of new regulations were introduced by royal decree that produced some considerable administrative, economic, and operational hurdles to establishing new insurance companies in the Kingdom. SAMA has gone on to enforce these new requirements, which include quarterly reporting, independent board members, public listings, operation licences and regular product approvals. While some of these requirements, especially local office and Saudi national staffing quotas, have proven particularly burdensome, overall many feel that this new framework has provided some order to the market, improved consumer protection, and prohibited anticompetitive behaviour, such as dropping rates. These updated regulatory processes have also, according to S&P, worked to erect higher barriers to entry in the Saudi insurance market and have perhaps mitigated the competitive pressures currently facing the 33 insurers already operating within a limited marketplace. Because the Kingdom's lucrative energy business risks remain under a state-owned monopoly domiciled in Bermuda, most of the insurance companies in Saudi Arabia are competing across the same few profitable lines of business. While this certainly drives prices down for prospective customers, it also impacts company profitability prospects based on inadequate pricing going forward. S&P however expect that the pressure caused by overcrowding should ease as the Kingdom's insurance market grows in both size and sophistication. "With more profitable business available, market participants will be able to expand organically without taking market share from their competitors," S&P stated. Despite these impressive strides, the Saudi Arabian insurance sector's institutional framework has yet to be truly tested under significant stress. The individual insurance players in the market still have much to do in order to capitalize on their potential and realize premium levels similar to those in more developed markets. S&P found that in comparison to many Western insurance companies, Saudi insurers have held a disproportionate amount of capital given the amount of premium they currently write and have tended to focus more on achieving a return on equity (ROE) through underwriting profits alone. The investment strategies for these domestic insurers have been more conservative and, according to S&P, have contributed little to the industry overall sound profitability so far. As competition in the Kingdom increases through 2012 and beyond, S&P anticipate that it will become harder for domestic companies to maintain their market share with underwriting discipline. More profound investment strategies and innovation will surely need to be taken by these companies to tap into Saudi Arabia's still largely unpenetrated insurance market. Another issue Saudi insurance companies must contend with now is persistently low global interest rates, and how these low borrowing costs affect their market in particular. Because these insurers operate in an Islamic country adhering to Shariah law, they are all subject to a 'zakat' tax on investments. In Saudi Arabia, zakat is a flat-rate 2.5 tax on cash holdings and, according to S&P estimates, exceeded the average investment return for domestic insurers by SR30 million for year-end 2010. "Thus, for Shariah-compliant insurers, the obligation to pay zakat tends to limit the underlying ability of earnings to enhance capitalization½until interest rates rise from their current low levels, Saudi insurers must make an underwriting profit to break even," Standard & Poor's reported. When underwriting earnings or investment returns for these companies begin to increase, zakat will then constitute a decreasing share of profits. Overall, S&P marked the insurance penetration and profitability trends in Saudi Arabia as positive. According to data released by the SAMA last year, the Kingdom's insurance market grew by 12.4 percent in 2010, passing SAR 16.4 Billion (US$ 4.4 Billion) in gross written premiums. During this period the domestic insurance industry was also able to improve its underwriting performance regarding payouts, with estimated claims processed dropping to US$1.25 billion in 2010 from US$1.54 billion in 2009. This has allowed some domestic insurers to recapitalize and build up reserves. These double-digit growth indicators have helped push the Saudi insurance sector's overall contribution to around 1 percent of national GDP, double the 0.53 percent reported in 2006, which is remarkable considering that the penetration rate for non-life and life insurance in Saudi Arabia, at 1.0 percent and 0.1 percent, remains amongst the lowest in the region, with a modest average premium per capita of roughly SAR 600 (US$ 160). These low insurance penetration and premium levels will likely soon improve of course, 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. "While insurance penetration remains low as a percentage of GDP, it is growing fast and it is expected that as the economy grows, so will the insurance sector," S&P concluded. Ratings Company Mentioned Standard & Poor's Standard & Poor's (commonly referred to as S&P) is a business branch of publishing house McGraw-Hill. Operating out of 20 countries, S&P provides the investment community with independent credit ratings on important financial vehicles such as stocks, municipal bonds, corporate bonds and mutual funds. In addition to its risk management, investment research and credit rating services, Standard & Poor's is known for its indexes, in particular the S&P 500 index.