The market rebounded strongly last year after a tough 2013 which saw the profitability dropping to unprecedented levels since liberalisation around a decade ago. The plunge, though harsh, was unavoidable and the market today looks vibrant and headed for a better tomorrow.
The sector has overcome many challenges and looks much more promising today compared to two years ago. Mr Basem Odeh, Chairman of the Insurance Executive Committee (IEC) and General Manager of Arabian Shield Cooperative Insurance Co, said that results in 2013 were negative due to the Financial Condition Report (FCR) standards which require having sufficient technical reserves upon the recommendation of the actuary.
“This was reflected in big losses in the companies’ balance sheets. Last year, however, the market performance improved greatly, thanks to the procedures taken by companies and the regulations enforced by the Saudi Arabian Monetary Agency (SAMA), which led to the correction of some market practices,” he observed.
Premium Deficiency Reserve (PDR) rates improved for many companies in 2014 as a result of better pricing mechanisms, noted Mr Fahad Al Hesni, CEO and Managing Director of Saudi Re. “There have been major changes in the market. Now, actuaries have a say in setting prices and terms. Motor and medical rates have increased, depending on each company’s actuarial standing.”
New market setting
The market has witnessed a serious correction with SAMA putting strict measures to preserve market balances and protect policyholders and shareholders, he observed. For instance, SAMA’s instructions to insurers to share loss ratios when setting prices and giving quotations “has had a positive effect on the players’ results, and on the market in general”, said Mr Al Hesni.
Expressing the hope that this new normal will continue, Mr Odeh said: “The price competition has alleviated; it has not completely vanished but has eased to a large extent. Price differences have become more reasonable while unprofessional competition has declined. Competition has therefore become more focussed on the quality of services, and we expect the trend to continue in 2015.”
The correction has also been seen in motor where there have been increases in prices because of the increase in accidents, fraud and the inflation in costs. He added that there was “very active cooperation within the sector last year, through the IEC sub-committees and all the legislative parties, SAMA in particular”.
Concentrated market
In 2014, market premiums grew to SAR29.7 billion (US$7.9 billion), a 21% jump over the preceding year, while net profits surged to SAR912 million against losses of SAR1.3 billion. Despite achieving the highest growth rate in the GCC, and probably in MENA, the Saudi insurance sector remained extremely concentrated – both in terms of a handful of operators controlling the majority of business and having most of market premiums concentrated in certain lines, motor and medical.
According to Mr David Anthony, Director at S&P, having 55% of premiums controlled by the top three operators and over 78% by the top 10 puts pressure on the remaining players to build up their businesses. He also noted that more than 90% of the market net written premiums are concentrated in motor and health.
Troubled operators
Despite the huge improvements in 2014, understandably not all problems can be solved overnight. Market results from Tadawul showed that 12 operators reported losses in 2014, while at least five operators have lost more than half of their capital size with massive accumulated losses as well.
Yet, market solvency is getting stronger with at least five companies having gained the Capital Market Authority’s approval to increase their capitalisation. “This will strengthen the market and expand capacity,” said Mr Al Hesni.
There remains a good number of players who lost big chunks of their capital, “but they are unlikely to affect the market. Companies facing solvency problems are required to submit business plans to SAMA, explaining their strategies to amend their situations,” he added.
The sector’s reputation is at stake if an operator fails, noted Mr Odeh. “Yet, it might be difficult to rescue those companies by raising capital, which could prolong the issue instead of solving it. M&As are still not an easy option, especially with some companies’ book value very much lower than the market value. I expect SAMA to closely monitor the situation and provide proper solutions, but it could be unavoidable for some players to leave the market. Very few are troubled, though.”
Mr Al Hesni pointed out there are no radical solutions to this issue, such as forcing consolidation. “Liquidations are the last resort as they are long and complicated processes. There are attempts to limit the negative effects of troubled companies on shareholders by taking certain measures in the stock exchange, such as suspending trading. SAMA also intervenes to help the affected company stand on its feet again. Additionally, shareholders are always willing to pump in more capital to help companies recover.”
Market for reinsurers
Despite the challenges, market discipline in Saudi Arabia is far better than its regional counterparts, noted Mr Al Hesni, explaining that the Saudi market is active and its retention rates are much better than those in neighbouring markets, which are extremely dependent on reinsurance. “The requirement to reinsure 30% of operations locally further increases the retention,” he added.
Besides the operators’ willingness to create a viable and professional marketplace, SAMA’s close supervision has helped improve the performance of the sector. “Compared to other markets, reinsurers are content with existing reinsurance terms and conditions, though there are some drawbacks.”
The fire branch has seen some of the heaviest losses in the past few years, which pushed many reinsurers to stop writing large segments of this business in the Kingdom. Saudi Re has also reduced its business in the local market because of this branch, said Mr Al Hesni. “For fire, it is not so much a matter of pricing as it has to do with building a proper risk management culture on both sides of the equation: the client and insurer. Business interruption (BI) remains a big threat. Most reinsurers are altering their underwriting strategy, and risk appetite has become muted in this area. Last January’s renewals were more difficult and there was a complete change in reinsurance terms on the treaty and facultative sides of business.”
Recently, operators noticed a very strict approach on both the facultative and treaty sides, he said. “This might not be a negative issue, but we are not in favour of any extreme actions. Losses in the Saudi market could justify this tendency. The IEC is aware of this issue and is working to enhance risk management and underwriting criteria.”
As the Chairman of the market’s P&C and Reinsurance Committee, Mr Al Hesni outlined plans to solve this issue, with SAMA expected to issue new guidelines soon to help build risk management culture. This could include conducting risk surveys and implementing risk managers’ recommendations. “There is also a suggestion to require clients to prepare contingency plans to reduce BI risks. The guidelines should improve market performance and they will also show the regulator’s proactiveness.”
The voice of the industry
The IEC consists of seven sub-committees – motor, medical, legal, finance, training & awareness, P&C & reinsurance, and protection & savings. The last was created at the end of 2014.
Each sub-committee is active in its respective field. The motor committee, for instance, is actively working on enforcing compulsory motor insurance. “Less than 40% of the vehicles in the Kingdom are insured. The motor committee is working closely and in full coordination with the General Directorate of Traffic to try to address this situation,” said Mr Odeh, while Mr Al Hesni is positive that operators’ efforts to comply with the requirements on compulsory motor insurance will add to the market size.
A major breakthrough was accomplishing the borders’ agreement which took effect this year, pointed out Mr Odeh. In the past, as the only national insurer, Tawuniya used to insure all vehicles entering or passing through the Kingdom. Now, however, all companies receive a share of this business, while Tawuniya will continue to manage the portfolio. “This shows that the market is organising its activities and doing something for the well-being of all players.”
The IEC has also contributed towards developing some legislations, such as the corporate governance and audit committee regulations. “Such regulations need to be discussed in detail between the regulator and the sector. There will be new circulars on underwriting guidelines in the near future. We expect that once the medical and motor issues are fully settled, SAMA will address other lines such as P&C.”
New market initiatives
The market is taking steps on more than one front to help expand the safety net and increase the market penetration, said Mr Al Hesni, noting that there is a new initiative underway to introduce compulsory insurance for large risks and risks of crowded areas. “We are working with the Civil Defence Directorate on this project. There is also a plan to introduce compulsory professional indemnity policies for engineers.”
The market is also awaiting the creation of a pool for large risks, following a feasibility study the P&C and Reinsurance Committee has conducted. The outcome will be decided after feedback has been given, noted Mr Al Hesni.
Not much, however, has been done in the area of fronting and increasing the involvement of the local market when insuring mega risks, he said. “It is the regulator’s responsibility to solve this issue. Local players are not against writing business with overseas providers, but we want more involvement in terms of placement, underwriting and claims handling. This is very important to transfer knowledge to the local market.”
The drop in oil prices has not impacted the economy, with infrastructure projects still ongoing and public spending not declining. Therefore, the insurance sector has not been affected. “In general, I think the drop could have a positive impacts in the medium to long term, as it would encourage growth in the non-oil sector and thereby diversify the sources of income,” said Mr Odeh.
Brighter future ahead
Signs suggest that the Saudi insurance industry is gradually growing to become not just the largest insurance market in MENA, but also one of the strongest. Given the increasing level of cooperation among market players coupled with the regulator’s support, this could be achieved in the near future.