The insurance market in Saudi Arabia is potentially facing a major shake-up as a new draft insurance law has proposed raising the minimum level of capital insurers need to hold to SAR500m ($133.3m), international ratings agency Moody's has said. The current minimum capital is SAR100m.
According to a report by Zawya, Mr Mohammed Ali Londe, a Moody's analyst said, "We think for many of the small insurers who aren't compliant, this could cause challenges as well as pressures for consolidation."
Previously, Mr Londe had said that “quite a few insurance companies will struggle” with the higher capital requirement, given that some had even depleted the current capital of SAR100m as a result of losses.
He argued that if introduced, the higher capital limits would spark consolidation in the Saudi market.
“This is a way in which the Saudi regulator is trying to ensure the companies that come out of this are stronger, well-capitalised, more sophisticated companies,” Mr Londe said.
Mr Salman Siddiqui, an associate director with insurance ratings agency AM Best said that as yet, no draft of the law has been published. However, he said the proposed increase “has been discussed quite heavily amongst market participants across the region”.
Mr Siddiqui said the increase would result in "the highest level of minimum paid-up capital" in the region.
“However it must be noted, whilst we have previously seen attempts by regulators to encourage consolidation, this hasn't yet resulted in any real M&A activity.”
Mr Londe said that although longstanding predictions of consolidation in the market had not materialised, because many boards had been unwilling to cede power, the higher capital requirements and a keener interest in the market from insurers outside the region could mean that the situation would change.
"What we have seen is, because of the previous couple of years of good profitability in the insurance sphere in the GCC, there are a lot of investors who are now interested or looking at the GCC insurance market," he said, citing the recent tie-up between Lebanon's Fidelity and Dubai's United Insurance.