Saudi Arabia's changing regulatory landscape is expected to incentivise M&A activity and drive consolidation among smaller firms, with several deals already announced this year, says Fitch Ratings in a new special report.
The Saudi Arabian Monetary Authority, the regulator of the insurance sector, is in the process of updating its supervisory framework, introducing a risk-based supervision framework, with more stringent, risk-based capital requirements, which will further strengthen the insurance market
The Saudi Arabian insurance market is concentrated in health and motor, accounting for 52% and 31% respectively of the total SAR36.5bn ($9.7bn) GWP in 2017 (2016: 51% and 33%), because they are compulsory business. Non-health and non-motor lines represent only 17% of total GWP (2016: 16%), while life insurance makes up only a small proportion of the Saudi Arabian insurance market.
Performance in health insurance deteriorated in 2017, with the loss ratio reaching 88% in 2017 (2016: 78%), driven by increasing claims costs. The profitability of the health sector was also affected by the SAR1bn reserve strengthening from the second largest health insurer, The Company for Cooperative Insurance (Tawuniya). Health insurance is highly concentrated with the top three companies (Bupa Arabia, Tawuniya and MedGulf) writing 80% of total GWP in 2017 (2016: 83%) benefitting from significant economies of scale.
Fitch, in its report titled "Saudi Arabian Insurance Sector: Tightening Regulation Incentivises M&A Activity", expects that the motor sector will grow substantially over the next few years due to the decision this year to allow women to drive and increased efforts to enforce mandatory insurance for motor vehicles. Total motor insurance GWP decreased by 8% in 2017 after a decade of double-digit increases, as demand for insurance was affected by slowing car sales. Improving pricing had a positive impact on the overall market, resulting in a motor loss ratio of 74% in 2017 (2016: 82%).
Non-health and non-motor lines, despite their small size, were highly profitable in 2017 with a 58% loss ratio for property and fire, 35% for accident and liability and 49% for engineering. Smaller lines use more reinsurance than health and motor with property and fire, accident and liability and engineering, ceding to reinsurers 81%, 52% and 82% of their GWP, respectively.
Fitch expects insurance penetration to improve in the near term, despite falling slightly to 1.4% in 2017 (2016: 1.5%). Fitch expects insurance penetration growth to be driven by expansion of the motor insurance market and a general improvement in economic conditions in the country.