Last year was exceptional for the Saudi Arabia’s insurance market with its unprecedented losses of SAR1.3 billion (US$347 million). Underlying the figures are major market developments which are testing the survival of the various operators. But there is still a strong ray of sunshine blazing through this attractive market.
In 2013, the Saudi Arabian Monetary Agency (SAMA) directed insurers to base their reserves on comprehensive actuarial reports, and called on actuaries to adopt proper standards when assigning provisions and setting prices. The overall tone was strict, and the implications have been reflected in the operators’ balance sheets, and consequently, in the market’s overall performance.
SAMA’s move is only an enforcement of regulations issued in 2004, noted Mr Basem Odeh, Chairman of the Insurance Executive Committee (IEC), the Saudi equivalent of an insurance association. “These reforms are going to make or break the market. Either insurers will weather the storm of heavy regulations or give up.”
Of the 35 licensed insurers, all of which are listed on the Saudi Stock Exchange (Tadawul), there are 27 operators below book value at the moment. “This is a very serious issue,” said Mr Odeh, who is also the General Manager of Arabian Shield Cooperative Insurance Co.
Losses due to reserving
The shareholders’ equity of several companies at the end of 2013 was impacted by financial results, noted Mr Johnson Varughese, CEO of Saudi United Cooperative Insurance Company (Walaa)*. “This was mainly due to improper pricing and not paying required attention to loss ratios. The premiums charged were insufficient which resulted in higher amounts for claims incurred but not reported (IBNR) and premium deficiency reserves (PDR) this year.”
In the past, only newly set-up and smaller companies were affected, he said. “But now after the new measures were enforced, even the big operators are feeling the pinch. Established players have suffered heavy losses and that shows that they were also trying to expand or retain their market shares.”
Mr Odeh said that the regulator moved to enforce the regulations and reaffirmed the role of actuaries to ensure accurate pricing as a number of insurers were not following proper technical standards. “The SAR1.3 billion in losses were mainly due to conservative reserving, which can be turned to profits if companies prove efficient in the future.”
Increasing reserves should improve market conditions if insurers enhance their underwriting practices and actuaries monitor pricing efficiently, he opined.
Many players have reassessed their reserves actuarially, thereby putting pressure on their income statements, noted Mr Fahad bin Abdulrahman Al Hesni, CEO of Saudi Re. “This, however, has its merits in supporting the policyholders’ reserves. It is thought that this will largely influence the pricing dynamics of the market and prices should go up to acceptable levels.”
Actuaries play it safe
There are cases, however, of actuaries being extra conservative in reserving, just to be on the safe side, observed Mr Odeh.
Mr Abdullah Al Fouzan, Chairman of Weqaya Takaful, said: “Though the reserves are available and can be released when the portfolio improves or when actuaries’ calculations are revisited, the new measures are extremely strict.”
Many insurers have reservations about actuaries’ calculations, he added. “There needs to be clearer actuarial standards rather than having the calculations based on the outlooks of actuaries, who tend to be extremely conservative.”
He said more balance is needed to avoid putting pressure on balance sheets, considering that there are large discrepancies between the quarters of the same financial year. “This will negatively affect stock prices, and could lead to questioning of the management and boards of insurance companies, as they will be perceived as influencing the results to achieve certain benefits.
“I support SAMA’s move in principle, but reserves should be accumulated gradually over the years. The law should have been applied gradually. Also, reserves should reflect the reality of figures instead of being solely based on actuarial estimates.”
New leadership in SAMA driving changes
The recent regulatory enforcements can be traced to major changes within SAMA recently, with SAMA’s leadership coming from the private sector. The head of the insurance department, Mr Ali Al-Ayed, is an industry veteran from the private sector as well. “This has created a better understanding of the sector’s challenges and paved the way for corrective measures. Additionally, the staff at SAMA has become much more experienced and mature,” said Mr Odeh.
SAMA has been working closely with the industry to assess its strengths, areas needing improvements, operating performance and other prudential issues, said Mr Varughese. “The regulatory team is now functioning with a greater degree of pro-activeness and is closely examining how each company in the industry functions. SAMA also conducts on-site inspection to ensure better compliance and provides guidance to companies on how to function efficiently. For instance, for the first time, the regulator is asking companies to disclose the performances of their top five accounts in motor and medical, and how the pricing is determined.”
Mr Odeh revealed that the IEC, supported by SAMA, is working on several projects such as revising loss ratio calculations, surplus distribution and other issues.
Other regulatory measures
SAMA has also introduced more conservatism in two other areas, said Mr Odeh. “New criteria in calculating the unearned premiums for engineering projects were introduced. Companies used to calculate premiums and reserves proportionally on the basis of the remaining period of projects. The new formula takes into account the size of risks accumulated at the project’s final stages. This is logical, since risks are higher at the end of the implementation period, but it will simultaneously increase the reserve allowances.”
The second area is related to estimating the value of motor salvage and recoveries, whereby SAMA has instructed companies to factor in the depreciation value after some time.
SAMA has also informed insurers to adopt the Financial Condition Report (FCR) standards which require informing boards of directors of the actuarial report so that they will be aware of the company’s actual financial conditions.
Changes in the reinsurance practices
Reinsurers play a vital role in improving the performance of the market, said Mr Al Hesni. “A number of reinsurers have put in place certain measures, which include applying specific guidelines for co-insurance and facultative inward acceptances. Furthermore, the sliding scale commission structure has become commonly applied for under-performing treaties, while additional capacity is becoming generally restricted.”
Mr Varughese noted that some reinsurers have prohibited co-insurance and facultative inward operations. “Being stringent is the right thing to do because there were couple of major losses which were reflected in many insurers’ books.”
Some reinsurers have become stricter in accepting certain risks, and, this will hopefully be constructive in creating prudent pricing and putting an end to unprofessional competition, said Mr Odeh.
Proactive risk management is very crucial in improving the quality of risk, especially in the property, which has been a source of concern for the market over the last two years, said Mr Al Hesni. “To address issues relating to the property line of business, Saudi Re has organised a market seminar for all insurance companies with the aim of promoting the role of risk management which we believe will contribute significantly to controlling claims.”
Market challenges
“The challenge now, after setting the reserves, is for insurers to improve the quality of their portfolios,” said Mr Al Hesni.
The other problem is fraud, which is spreading in the Saudi market, he added. “There should be a credit bureau revealing the identities of loss-making clients, whether they are individuals or companies. SAMA should initiate this as companies would tend to avoid making such information available. Such a system will make fraudsters aware that their practices are being monitored and that these are reflected in their premiums. This is one of the best ways to combat fraud, to deal with the roots of the problem.”
One of the peculiarities of the Saudi insurance market is that insurers are obligated to pay zakat on wealth, not on profit, said Mr Odeh. Companies pay 2.5% of their wealth annually, not on returns from technical results and investments. This adds pressure as investments have been under-performing, especially with the strict investment regulations in Saudi.
The biggest challenge is for the industry to show a united stand, said Mr Varughese, who chairs IEC’s Finance Committee. “Things are changing as now, as all companies have enrolled for membership with the Saudi Credit Bureau (SIMAH) to control receivable issues. United efforts and better cooperation are expected amongst companies to address various common issues.”
Insuring mega risks
The industry is working to further involve the sector in covering the mega risks, said Mr Odeh. “The capacity of local companies is a concern but the sector wants to retain as much premiums as possible within the Kingdom, and SAMA is supportive of that.”
When the Riyadh Metro project was launched, the industry raised this issue but unfortunately it came too late, said Mr Varughese. “SAMA has promised to give its support in future, especially where government-sponsored projects are concerned, to ensure that local capacity is fully utilised. Retentions in engineering and property are very low in the Kingdom, though the insurance sector can retain more risks on those kinds of businesses as it has close to SAR10 billion in capital, but such projects tend to be placed in the international market.”
The government is increasingly involving the insurance sector by stipulating the need for covers when announcing or calling for bids, which is a positive sign, said Mr Al Fouzan. “But though there are rules regulating reinsurance practices, what is worrying is that huge companies are insuring business abroad. Insuring part of those businesses locally would help make the sector profitable. Instead, the lack of retention has severely affected the market, which relies heavily on motor and medical, presently loss-making lines. This means that insurers need to double motor and medical premiums to make up for the losses.”
Growth is inevitable
Last year’s premiums reached $6.6 billion, of which the lion’s share came from medical (52%) and motor (24%). A new regulation making insurance obligatory for government vehicles will expand the market, said Mr Odeh.
“Another long-awaited initiative is the introduction of compulsory TPL insurance for high-risk or crowded public premises. We are working with the government to define these entities and will try to widen the definition to increase premium size. This step alone would increase the liability insurance line to no less than 10% of the market,” he added.
This initiative will raise awareness, said Mr Varughese. “In addition, the new mortgage law is also expected to boost the market.”
Currently, there is a motor insurance gap because drivers’ licences are renewed every three years, while insurance is renewed annually. “Effectively, only 50% of vehicles are insured and hopefully, there will be more inspections by the traffic authorities to correct this issue. It will take around two years to do so but this will eventually increase the market premiums by no less than 100%. Saudi Arabia is going to be the largest market in MENA in two to three years,” he said.
Mr Al Hesni said that the growth potential remains, with economic indicators still positive and given the introduction of the new compulsory lines.
Correcting the path
There is no other way to correct the market but to increase prices, especially in motor and medical, said Mr Varughese. “In motor, prices were hiked by 25% to 30% in the second half of 2013 in some cases, which was necessary to save the market. The failure of any company will be reflected on the industry, and companies are complying with regulations to correct their situation.”
He also disclosed that the IEC is calling for a meeting with actuaries, auditors and insurers’ representatives to seek measures to improve market performance. “SAMA’s executives are participating at this meeting as well, and I am very confident that with the help of inputs from industry experts and the regulator, the insurance industry will move towards stability and strength.”
The improvements in terms and prices indicate a common desire to restore stability into the market, observed Mr Al Hesni. “SAMA is keen to effect the role of actuaries in order to instil risk adequate pricing and limit the impact of price led competition.”
Mr Odeh is optimistic that the market will overcome the difficulties and correct itself. “The signs are promising, but it is up to players to act responsibly and forge a sustainable industry.”
*Views expressed by Mr Johnson Varughese are personal and are not in his capacity as an industry representative.