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Report Says Underwriting Sustains Profitability As Competition In Saudi Arabia's Insurance Industry Heats Up

LONDON (Standard & Poor's) January 9, 2012--In a report published today, Standard & Poor's Ratings Services said domestic insurers in the Kingdom of Saudi Arabia remain profitable, despite the effects of increasing competition and low interest rates (see "Underwriting Sustains Profitability In Saudi Arabia's Increasingly Competitive Insurance Industry"). The market has expanded very quickly in recent years as health insurance has become widespread. Compared with insurers in Western markets, insurers in the Kingdom tend to focus more on achieving a return on equity through underwriting alone. Investment strategies are conservative, and contribute little to the industry's overall good profitability. But we anticipate that it will be harder for companies to maintain underwriting discipline as competition increases.

Because the Kingdom is an Islamic country that adheres to Sharia law, all its insurers must pay a "zakat" tax on their investments, including 2.5% of the value of their cash investments. While interest rates remain low, we estimate that insurers are paying more in zakat than their aggregate investment return. Therefore, until interest rates rise, domestic insurers must make an underwriting profit to break even.

The Saudi Arabian Monetary Agency ( SAMA ), which regulates insurance in the KSA, aims to maintain standards as the industry expands. SAMA rigorously enforces its requirements for reporting and disclosures, and demands that all insurance and reinsurance providers gain operational licenses and product approvals. Its processes create a barrier to entry for new participants, somewhat reducing the competitive pressures caused by the presence of 33 insurers chasing a fairly small, if growing, market.

We view insurance industry risk in the Kingdom as low because we consider
that:

Return on capital is likely to remain robust;
The industry benefits from high barriers to entry;
Insurance penetration is growing fast; and
Regulatory oversight is moderately strong.

We consider that these positive factors are partially offset by:

The unseasoned nature of the institutional framework;
Product risks, which could cause return on capital to be moderately volatile; and
The competitive market, which could also cause volatile returns based on inadequate pricing.

The report is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to research_request@standardandpoors.com. Ratings information can also be found on Standard & Poor's public Web site by using the Ratings search box located in the left column at www.standardandpoors.com. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4009.

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© Press Release 2012