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Feb 03 2011

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Saudi Arabia: Insurers

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In July 2003 the Saudi cabinet approved a groundbreaking insurance law, the Co-operative Insurance Companies Control Law. Under the law, all insurance companies providing policies in the kingdom must be locally registered and operate according to the principle of co-operative (or mutual) insurance. Shariah-compliant insurance, known as takaful, must also be co-operative by definition. Customers put money into a communal fund and take out what they need in the event of a claim. Insurance companies charge a fee for managing the operation, and any money left over at the end of the year is paid back to customers. Conventional insurers in Saudi Arabia can invest in a range of financial instruments, but almost always refrain from investing in companies whose main business is gambling, alcohol or pork; most do invest in interest-bearing instruments, unlike their takaful counterparts.

Saudi Arabia’s already low penetration rate of insurance and some religious objections to conventional insurance position takaful for strong growth in the coming years. According to Ernst & Young’s World Takaful Report 2010, global takaful contributions grew by 28% in 2008 to reach US$5.3bn and remain on course to surpass US$8.9bn in 2010—a leap from just US$2.5bn in 2006. Saudi Arabia accounted for more than half of global takaful contributions in 2008 totalling US$2.9bn; Malaysia, the second top takaful market, accumulated US$889m in contributions.

According to the most recent insurance market survey completed by the Saudi Arabian Monetary Agency (SAMA—the central bank), gross premiums in 2009 increased by 33.9% to reach SR14.6bn at year-end from SR10.9bn at end-2008. Health insurance replaced general insurance as the biggest line of business with a 50% share of the insurance market, as gross written premiums rose 52.1% to SR7.3bn from SR4.8bn at end-2008. Gross written premiums for general insurance, which includes property and automobile insurance and represents 43% of the insurance market, grew by 14.5% to SR6.3bn in 2009 from SR5.5bn in 2008. Meanwhile gross written premiums for protection and savings insurance, which includes life insurance and represents 7% of the market, increased by 69.5% to SR1bn from SR590m in 2008.

According to SAMA , at end-September 2010, the largest insurance company in Saudi Arabia was The Company for Cooperative Insurance with total assets of SR7.31bn and market share of 29.9%. It was followed by Mediterranean and Gulf Insurance and Reinsurance with assets of SR4.07bn (and 16.6% market share); BUPA Arabia for Cooperative Insurance with SR1.70bn (6.9%); Saudi Re for Cooperative Insurance with SR1.2bn (5%); and Malath Cooperative Insurance and Reinsurance with SR1.07bn (4.4%).

SAMA regulates the insurance sector. Insurance companies must register as joint-stock companies and engage only in insurance and reinsurance activities. According to the standards of the Co-operative Insurance Companies Control Law, an insurance company must be set up with at least SR100m and a reinsurer with at least SR200m. SAMA also requires a 90-10 split of profits between shareholders and policyholders, respectively, while any deficit in the policyholders’ fund is borne solely by the shareholders. The law also made it possible for foreign firms to operate officially on an open and more extensive basis.

Prior to the opening of the sector to greater competition and foreign insurers, the formerly state-run National Company for Cooperative Insurance (NCCI) had a virtual monopoly over the market. In January 2005 NCCI launched an initial public offering (IPO) on the Saudi exchange and listed 70% of its shares. In October 2010 Global Investment House of Kuwait reported that NCCI recorded a 5% rise in gross premiums in the first nine months of 2010, compared to the year-earlier period. A December report by Bahrain-based investment bank TAIB said that NCCI posted total revenues of SR2.1bn over the same nine-month period, with net profit more than doubling to SR395m from SR195m in the year-earlier period.

Many newly formed insurance companies are joint ventures with foreign insurance firms. The government has specified that 30% of the premiums must be retained within Saudi Arabia and that 30% of reinsurance must be conducted within the kingdom. Another critical element of the Co-operative Insurance Companies Control Law is the requirement that Saudis must make up 30% of the workforce of each firm. According to SAMA’s 2009 insurance-market survey, the total number of insurance company employees in Saudi Arabia reached 5,800 in 2009, up 6.5% from 5,447 in 2008. Saudi nationals comprised 47.5% of the insurance workforce (compared to 45% in 2008).

The insurance law builds on a programme launched in September 2002 that required mandatory health insurance for all expatriate employees in the kingdom by end-2005. From September 2003 all companies with more than 500 expatriate workers had to provide medical insurance for the expatriate staff and their families. In addition, in November 2002 the government put in place a motor-insurance law that made third-party motor insurance compulsory.

SAMA published the most comprehensive regulatory statements on conducting insurance business in the kingdom on January 5th 2008. Called the Draft of the Market Code of Conduct Regulation, the regulations were implemented in September 2008 and list insurance providers’ and customers’ rights, obligations and disclosure requirements in an effort to regulate the sector more effectively.

Insurance, particularly life insurance, historically has been viewed as going against Islamic principles, which claim the practice is a form of gambling (in this case, betting against sickness and death). In order to avoid accusations of legitimising this form of gambling, the more religiously rigorous principle of co-operative insurance enables those with insurance policies to be treated as if they were shareholders. This comes with an entitlement to a share in profits, but also with a potential obligation to pay additional money should unexpected losses occur. SAMA must approve licences to operate under the law, with input from the Ministry of Commerce and Industry. The Saudi Arabian General Investment Authority issues the licences.