The Saudi insurance market is still full of untapped opportunities, and the future bodes well with the government’s ambitious development plans. The sector is expected to take a leap forward in the coming period despite seeing slower growth rates over the past two years.
Insurance is an integral component of the kingdom’s forthcoming development plans and an important pillar in its endeavours to deliver its future vision. Vision 2030 is an ambitious, comprehensive blueprint laid out in 2016 to reduce the kingdom’s reliance on hydrocarbons, diversify its economy and develop public sector services.
The Financial Sector Development Programme (FSDP), launched in 2017, is considered the most prominent element in realising Vision 2030. The FSDP’s objective is to create a thriving financial sector capable of serving as a key enabler in achieving the Vision’s objectives. By 2030, the financial sector is expected to grow large enough to fund the Vision’s objectives, offer a diverse set of products and services, expand financial inclusion, leverage digitisation and maintain financial stability.
The FSDP has three main objectives that contribute to achieving Vision 2030: develop an advanced capital market; support the private sector; and promote and enable financial planning, including retirement and savings. Achieving the objectives and aspirations of the Vision will require a transformational change in the structure and scale of the existing Saudi economy.
The insurance industry has garnered a fair amount of attention in the FSDP plan. Expanding the market is one element within the programme – expected to increase the GWP to GDP non-oil ratio to 2.9% in 2020, up from its current 2.1%, reaching a GWP volume of SAR75bn ($13.3bn) by 2020. This notable growth is expected to be driven by stronger enforcement of mandatory insurance, namely motor and medical.
Moreover, the programme will work on boosting the regulatory environment by enhancing the rules and regulations around M&A to drive consolidation and strengthen the sector’s balance sheet capacity.
Performance of the sector
The financial results for 2018 full year are yet to be released. Nevertheless, the growth of business at the end of the third quarter has continued at almost the same pace in the preceding year (Table 1).
GWP for the first three quarters of 2018 reached SAR27.4bn, around 4% decline from the same period in 2017 (Table 2). Net written premiums have also seen a decrease of 2.6%, while net claims incurred increased by 2%.
The fourth quarter results could make a difference, but indicators suggest that the market’s growth in the top line would most likely remain flat. In 2017, GWP saw a drop of around 1% to SAR36.5bn, almost the same result in 2016.
Medical premiums, which control around 56% of the market, grew by almost 5% by the end of third quarter, reaching SAR15.3bn compared to SAR14.6bn in the same period of 2017.
General lines fell by 14.5%, with energy and engineering witnessing the largest drop, with reduction in premiums of 25% and 27%, respectively. Property and fire also retreated by 9%, while accidents and liability saw a setback of 13%.
On a positive note, protection and savings premiums grew by 4%, but this growth had a limited knock-on effect on overall growth due to the small size of business which accounts for around 3% of GWP and has an insurance density of SAR35 against SAR1,121 for the whole market in 2017.
According to the FSDP, the current low savings ratio (standing at around 2.4% of annual disposable income) hinders the development of the overall financial services sector. In general, the kingdom is keen on growing a savings culture and looks to the private sector – including insurers – to play a greater role in providing a wider range of products to entice the public to take up life insurance.
Motor rates affect the market outcome
Mr Basem Odeh, chairman of the Insurance Executive Committee (IEC), a body akin to an insurance association, attributed the slower growth in the past two years to the notable decline in premiums of the motor insurance business, which accounts for almost 28% of the market.
By the end of the third quarter, motor premiums fell by 15.8% to SAR7.6bn from SAR9bn achieved in the same period of the past year. Motor premiums had also dropped by 8% in 2017 against the previous year. “This contraction in growth of motor premiums was largely caused by the implementation of the no-claim-discount (NCD), a positive initiative introduced by the SAMA in April 2017 to provide affordable options to qualified drivers, as well as to encourage safe driving,” said Mr Odeh.
This is in contrast to the situation in 2014-2015 when motor insurance premiums climbed, a hike triggered as a result of companies strictly complying with actuarial standards in all aspects of underwriting in 2013.“Though the enforcement of actuarial standards led to a reduction of companies’ profits in 2013 due to the allocation of larger amounts of provisions, in the following two years insurers achieved satisfactory results by adopting actuarial pricing which limited price competition to a large extent,” he said.
Profitability makes a retreat
Following the unsatisfactory results for motor insurance, along with the impact the drop in oil prices has made, profitability of the sector has not been in line with previous years. A report by the Saudi-based United Actuarial Services Co reveals that the combined ratio for the sector stood at a mere 1% by the end of the third quarter of 2018, while loss ratio reached 80%.
Underwriting income for 2017 plunged to SAR449m from SAR2.1bn in the past year, while net results for the sector dropped to SAR688m from SAR2.1bn.
Profits of the sector for the first three quarters of 2018 reached SAR982m against SAR1.47bn in the same period of the past year, a drop of 33%. “Motor plays a major role in this outcome, considering its sizable market share. The increase in companies’ expenses against diminishing profit margins is also a key factor.”
M&A: A need for a conducive environment
The market includes 32 direct players and a national reinsurer (Saudi Re). According to a SAMA report, eight providers controlled 73% of the market premium income in 2017. There have been several calls to consolidate the arena especially since there are several companies with minimal market share, as low as less than 0.05% of the market GWP, not to mention their scanty profits.
There have been two merger attempts in the past year. In both cases, talks were ended because shareholders rejected the moves after failing to reach an agreement on the valuation method.
There is a dire need for the regulatory authorities to introduce effective initiatives to overcome the obstacles derailing M&A. “On the one hand, there needs to be clear incentives to encourage insurers to take the M&A route. At the same time, underperforming companies must be guided to strictly enforce technically sound standards that would leave no other survival option for them but to seek M&A,” said Mr Odeh.
Some companies are losing their capital and not showing a tangible presence in the market, yet their shareholders continue to inject capital to stay in the market. This could signify the interest in the market and the hope investors hold in the sector. “This is another point to consider, liquidity is available and shareholders are willing to inject capital despite poor financial performance. Therefore, stringency is necessary and expected from the regulator to control and protect the economic infrastructure. Additionally, there is a need for setting up a clear M&A methodology.”
Creating the right conditions for development
The FSDP looks to create a transformational change in the financial services and aspires for the insurance industry to demonstrate a ground-breaking performance by 2020 by almost doubling the penetration level and increasing the size of GWP. “This is achievable given the huge potential in the market, but there are several initiatives which need to be activated,” said Mr Odeh.
The first thing to be done is to firmly enforce motor insurance as over 50% of vehicles in the country remain uninsured despite the introduction of compulsory motor insurance in 1999, he said. “This should surge market income by around SAR5bn.”
He noted that the government has shown seriousness in dealing with this issue, and the sector expects a strict implementation in the coming period.
The market can also generate another SAR2bn in premiums from medical insurance if domestic workers are to be included in the mandatory medical insurance scheme. “There are some SMEs and private companies which evade buying medical insurance for their employees. This is another opportunity loss for the sector.”
Mr Odeh also stressed the importance of activating the compulsory liability insurance initiative for commercial institutions and crowded places.
In addition, he advocated retaining reasonable share for the local capacity within the market instead of insuring mega risks abroad as is currently being done by some brokers. “Both the companies and the regulator are studying several proposals concerning these issues and opportunities and we are confident that positive steps will be taken in the coming period.”
Looking ahead with optimism
The market growth in 2019 is expected to continue with the same trend as in the previous two years based on the fact that there has not been new initiatives introduced. However, the sector is expected to reap the benefits of the development plans in the coming years, said Mr Odeh. “Any initiative will gradually improve the sector’s performance. There is a strong will to exert greater effort and to improve the sector by both the regulator and the providers, which will certainly culminate with a positive outcome for our economy. The kingdom’s future vision looks to create a thriving insurance industry that will be a major pillar in managing risks and we are looking forward to achieving that vision.” M
| Raising insurance contribution to boost GDP is the main target
Mr Adel Al Eisa, media spokesman for insurance companies at the Saudi Arabian Monetary Authority (SAMA) and chairman of the Media & Awareness Committee pointed out that a major challenge facing the sector in the kingdom is increasing the sector’s penetration level, which was at 1.42% in 2017, down from 1.54% in the preceding year. “Increasing the penetration level is linked primarily to the development of the insurance sector and raising its competitiveness by spreading awareness and diversification of products, as well as focusing on SMEs,” said Mr Al Eisa.
He added that there is a need to encourage the culture of protection and savings in light of the growth of businesses and population. “The goal, at the end of the day, is to add value to the national economy.”
The 5th Saudi Insurance Symposium, which will take place this month with the theme ‘Protection and Sustainability’, will shed light on the endeavours the sector is taking on to keep pace with the National Transformation Plan 2020 (NTP), an economic action plan the government adopted as part of the kingdom’s Vision 2030 development plan. This year’s symposium aspires to discuss the various economic reforms the kingdom has conducted as part of its ambitious Vision.
“The symposium is the main platform for the sector’s professionals and experts to meet and discuss the opportunities and challenges of the industry. It is a valuable opportunity for the regional and international (re)insurance community to discover the great potential of the Saudi insurance sector. We look at this biennial event as an opportunity for enriching dialogue and offering solutions to address the challenges facing the sector. It is also an opportunity to strengthen the partnership between the public and private sectors to support the role of the insurance sector and increase its contribution to the GDP,” said Mr Al Eisa.
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