News Middle East01 Feb 2021

Saudi Arabia:Number of building contracting firms to shrink in wake of IDI rule

| 01 Feb 2021

At least a fifth of building contracting firms in Saudi Arabia, especially small and medium-sized enterprises, is expected to exit the industry following the implementation of rules requiring construction and building contractors working on non-governmental projects to insure hidden defects under compulsory inherent defects insurance (IDI) policies. Construction costs are expected to rise too.

Progress on introducing IDI in Saudi Arabia has been steady. Last March, the then-Saudi Arabian Monetary Authority (now the central bank) issued the model text for the compulsory IDI policy. The provisions set out in the standard policy specify the minimum coverage for inherent risk, as well as exceptions.

In July 2020, Malath Cooperative Insurance signed an agreement with several participating insurance firms to offer IDI products. The agreement followed SAMA's approval of Malath as the leading insurer to manage the latent defects insurance programme on behalf of the insurance sector. In August 2020, Saudi Re signed an exclusive five-year reinsurance contract with Malath that named Saudi Re as the exclusive reinsurer of the IDI programme.

The head of the Property and Liabilities Insurance Committee in the insurance sector, Mr Hussam Al-Qannas, welcomes the introduction of the mandatory policy, adding that it is important in elevating the standards of construction and the quality of buildings.

He also said, “The cost of the insurance does not exceed 1% or 1.5% of the total value of the insured building for a period of 10 years following its completion.”

The secretary general of the Saudi Contractors Authority, Mr Thabet bin Mubarak Al Sweid, confirms that since the beginning of this year, a building permit for housing will not be issued unless there is a contract with a licensed contractor. At the same time, the contractor is required to acquire IDI for the building for a period of 10 years. 

The Ministry of Municipality and Rural Affairs has drawn up a four-year schedule from 2020 to 2023 to roll out the mandatory IDI programme. The schedule extends over four stages as follows:

Stage

Types of buildings to be covered by mandatory IDI

1

tall buildings (towers), warehouses, hospitals, hotels, and community buildings (mosques), Sports facilities), educational buildings, commercial complexes, communication towers, industrial buildings and facilities, buildings below 23m in height, high-risk buildings

2

wedding halls, cinemas, theatres, healthcare centres, furnished apartments, hotels, hostels, residential buildings and service buildings, entertainment centres ( in addition to what is applied in the first phase)

3

Commercial buildings, airports, banks, television stations ( in addition to what is applied in the first two phases)

4

All types of buildings are to be covered by mandatory IDI by the end of this stage

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