Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Middle EastMarch 3 2004

Consumers run for cover

Root and branch reform of the Saudi insurance sector beckons rich pickings for underwriters and banks, writes James Gavin.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

The high-profile suicide attacks in Riyadh last year sparked renewed questions in the international media and among lenders about the level of terrorism insurance cover in the kingdom. That was the headline news; but on the ground, phlegmatic Saudis and foreign expatriates take a more sanguine line. There is little sense of panic among Saudi-based companies, despite the serious threat posed by militant Jihadi insurgents.

“In reality, companies never ask for terrorism cover,” says Ali Subaihin, marketing director of National Company for Co-operative Insurance (NCCI), the kingdom’s sole official insurance operator. “Whenever there’s an incident, I always get calls from the press but never from clients.”

Sector in upheaval

Away from the “war on terror”, the insurance sector is undergoing its own upheaval. The government published legislative plans in 2003 to bring the sector – which is under-regulated, under-capitalised and under-used – kicking and screaming into the 21st century. With a rapidly growing population, relatively high disposable incomes and a low per capita spend on insurance products, Saudi Arabia presents near ideal conditions for rapid growth, so long as the regulatory framework fits.

Even Lloyd’s of London is mulling over the Saudi market. Lloyd’s head of development strategy James Sutherland told a Gulf insurance forum in Bahrain that the London market had a growing interest in takaful (a form of co-operative, Islamic insurance) but that it was still on a “steep learning curve” outside the big-ticket risks.

The planned Saudi regulatory changes envisage root and branch reform of the sector, ramping up minimum capital requirement levels to root out the smaller Bahrain-based operators – described locally as “cowboys” – whose practices have given the sector a bad reputation among the few Saudis who hold insurance policies.

Call for SAMA

The central bank, Saudi Arabian Monetary Agency (SAMA), will be brought in to regulate the sector, which will also allow foreign players to operate on an official basis for the first time. “It worked well for Saudi banks, it ought to work well for insurance companies,” Mr Subaihin told The Banker.

NCCI, which until now dominated the sector as the sole licensed insurance provider, strongly backs the regulatory push. “Many Saudi citizens have greater confidence in the banking system. They are confident dealing with them and know they can handle transactions smoothly and efficiently. But that’s not the case with insurance – that trust is not established. There’s no regulator whatsoever and there’s too many players in the market. So we hope that, with the regulations, all this will change,” Mr Subaihin says.

The prime effect of the legislation will be to cut a swathe through the 100 or so suitcase operators in the market, few of which will be able to stand the SR100m ($27m) minimum capital base and SR200m reinsurance requirements. SAMA’s strict licensing criteria are expected to lead to a rationalised sector consisting of 10 to 15 players with sufficient resources to cover the gamut of insurance classes.

There is a nod to Islamic sensibilities in the new regulations, which require insurers to operate according to co-operative principles – takaful – similar to the operating guidelines under which NCCI operates. But insiders suggest that the authorities are not in a mood to over-egg the Islamic component.

“It’s a matter of semantics. Co-operative insurance can take several forms, such as the pure version that NCCI operates,” says Mr Subaihin. “But this is not commercially feasible as it stands – it will not be able to attract investors to the sector. For it to be a model for other insurance companies, it needs to be framed in a way that will attract private sector participation.”

Waiting for regulations

Foreign players will need to see the devil in the detail of the reforms before they commit to the kingdom. “There’s a lot of interest from overseas operators,” says Paul Adamson, Jeddah-based country manager for UK insurer Norwich Union. “But there’s also some apprehension as the framework law requires companies to operate on a co-operative basis. Until that detail is revealed, the international insurers will naturally want to wait and see.”

Despite gaining cabinet approval in July 2003, the executive regulations that will allow implementation of the reforms are still awaited. There is little idea of when this critical last piece of the jigsaw will be put into place.

Blue chip international underwriters, like Norwich Union and Royal & Sun Alliance, have been operating in a semi-official capacity from their regional bases in Bahrain. Once the new regulations are in place, these firms will wind up their offshore companies and incorporate a new company inside the kingdom.

Compulsory cover

These players are looking closely at another key legislative reform, which started in late 2002, when third-party motor insurance was made compulsory for the first time and provisions were unveiled for making health cover mandatory for all expatriate workers from 2005. This was followed in 2003 by new requirements for companies with more than 500 expatriates to provide medical insurance for all staff and dependents.

“Compulsory motor and health insurance have increased awareness of the need for insurance cover. These reforms have played a big part in deepening public consciousness about the concept of insurance. Despite the rapid growth of the population and the rise of commercial banking in the past two decades, Saudi social mores remain founded in traditionally religious-centred concepts of community and family self-help. The incipient changes precipitated by the imposition of compulsory third-party motor cover are slowly spreading the insurance message throughout society,” says Mr Adamson. “These government initiatives can take time, but it is slowly taking shape.”

The medical insurance legislation has yet to be fully implemented. In principle, the Co-operative Health Insurance Law will require an estimated six million expatriates and their families to be covered by private medical insurance. Future plans include a provision to extend compulsory health insurance to all citizens. Full enforcement of the law is unlikely until first authorising insurance companies under the new Co-operative Insurance Control Laws.

With an estimated five million vehicles in the kingdom, the gradual implementation of compulsory motor insurance has increased public awareness of insurance. Market indications reflect that the majority of vehicles are still uninsured but recent enforcement by the authorities will ensure that consumer demand for motor insurance cover will continue to rise.

Record growth

The impact of the compulsory measures is already being felt. NCCI racked up a record 415% growth in its business in the third quarter of 2003, mainly due to a surge in income from the motor and media insurance business. Motor and health insurance are expected to see the most dramatic growth of any Saudi insurance class, although the authorities’ efforts to push medical insurance have been hindered by a regulatory mishap, under which the health law cannot be implemented fully until insurers are regulated under the main insurance law.

Along with the new business provided by the launch of these two insurance classes, the bigger operators should experience growth as a result of the sector’s contraction as small, unofficial operators disappear. A wave of consolidation is anticipated as smaller players move to hook up with their larger counterparts.

Local underwriting capacity, which hitherto has been strained, should grow exponentially. The sector reforms will force better-resourced operators to dip their toes in underwriting rather than to continue to depend on external reinsurance expertise. “Until now, the smaller local companies have operated more as brokers than insurers. There’s been very little retention simply because of a lack of expertise,” says Mr Adamson. “Historically, insurers in the kingdom have depended on passing risks and subsequently premium income outside the kingdom to international reinsures. The market anticipates minimum retention levels to be set, which may range between 30% and 50%.”

The authorities expect the value of the Saudi insurance market to increase five-fold to SR50bn as a result of the changes. Conservative projections based on compulsory insurance alone puts the likely market size at SR20bn. NCCI expects growth beyond that as the industry is cleaned up, and as professional operators develop and distribute products into the market with the added credibility of being able to fulfil promises of paying claims.

NCCI estimates suggest that the second-phase implementation of the health insurance reforms, which will impose compulsory medical cover on both Saudis and non-Saudis, will net gross written premiums of SR24bn. Throw in motor insurance and that figure inflates by at least another SR2.2bn.

Bancassurance emerges

Saudi banks are likely to emerge as key players in the newly liberalised scene – as product distributors rather than underwriters. Banks will leverage their distribution channels, whether branch networks, phone or internet banking.

“Banks are definitely interested in life insurance and pensions but any tie-ups are likely to be on a distribution basis and not on sharing risk. But you will see banks looking to invest in Saudi insurers, so there will be new shareholders coming into the market,” says Mr Adamson.

In March 2003, in a potential precursor of future bancassurance deals to come, NCCI signed a strategic alliance with the ABN Amro-affiliated Saudi Hollandi Bank to market investment-based life insurance products. It was the first such partnership between a Saudi bank and insurance company. Other lines of business will follow in the near future, it says.

NCCI does not anticipate a substantial change in its role once the reforms have kicked in. “We already manage the company as if it were operating in a highly competitive area, and it is. We are competing but it isn’t yet a level playing field,” says Mr Subaihin. “We have an abundance mentality here: there’s enough for everyone, not just NCCI.”

The bigger foreign players like Norwich Union back up this point. “It’s a market that is attracting a lot of attention and that attention is only just starting to generate. But it will take time,” says Mr Adamson.

Was this article helpful?

Thank you for your feedback!

Read more about:  Middle East , Saudi Arabia