Saudi Arabia's primary insurers saw weaker profitability in the first half of this year amid intense competition, and there is increasing pressure for consolidation in the industry, Moody's Investors Service said in a report published yesterday.
"The profitability squeeze will hinder organic capital generation and thus pressure capitalisation," said Mohammed Ali Londe, AVP– analyst at Moody's. "The sector also faces a likely increase in capital requirements that small to medium-sized insurers may struggle to meet from their own resources. We therefore expect more pressure for Saudi insurers to consolidate and/or go into runoff."
Insurers' average return on capital in the first half of 2019 was 2.4%. This compares with 4.6% in full-year 2018 and 8.4% in 2017.
Moody's expects flat to modest premium growth over the coming year, reflecting sluggish economic growth. Compulsory motor and medical cover, which is sensitive to economic conditions, accounts for 80% of Saudi premiums. Lacklustre premium growth will add to pressure on profitability, particularly for smaller players with inefficient cost bases and little brand recognition.
The Saudi insurance market's ratio of shareholder's equity to total assets remained strong at 27.3% in the first half, but tightening profits have hindered organic capital generation, with the ratio having hardly improved from around 27% since 2016. The industry also faces a likely increase in the minimum capital requirement for direct insurers to SAR500m ($133m) from SAR100m currently.