The opening up of the health and general insurance sectors by the Saudi Arabian Monetary Agency (SAMA) has brought in hundreds of millions of dollars to the market. But it is health and motor insurance together that are poised to claim the major share of the growth story. A MONEYworks report from Riyadh.
In the latest development to the Kingdom's insurance industry, the Saudi council of ministers headed by the Custodian of the Two Holy Mosques, King Abdullah bin Abdulaziz, has announced the issuance of the royal decree approval to BUPA Arabia to operate as a licensed co-operative health care insurance company in Saudi Arabia.
Finally getting its physical toehold in the Kingdom was certainly an achievement for BUPA. Tal Nazer, managing director of BUPA Arabia, was quick to sum up the company's overall feelings.
"Having the royal decree issued is a huge step for us, being the only single-line insurer in Saudi Arabia specialising in medical insurance," he said. "On behalf of the BUPA team, I extend my thanks and sincere appreciations to our government headed by King Abdullah bin Abdulaziz for their trust and complete faith in us."
Bright prospects
BUPA Arabia is not alone as a player in the rejuvenated Saudi insurance market. The 20 other insurance firms that have been granted licences are also ready to cash in on the initiatives of the newly-liberalised regime. In fact, there are 24 more companies waiting in the wings for the green light to make a dash for the lucrative market, which is estimated at US$1.5 billion annually and is expected to reach US$8 billion within 10 years.
BUPA (and probably a number of others) expects to ride out the heat of competition by focusing on service standards, for which the company won the Best E-Business prize at the 2006 Middle East Insurance Awards in Dubai. The award was the first ever for a Saudi-based insurance company since the annual event started.
"The award for BUPA puts the spotlight on the high-growth medical insurance market in Saudi Arabia, as it proves that the Saudi insurance industry is on par with world-class organisations," said Wayne Close, BUPA's CEO, after the event.
Close added that excellent services will remain BUPA's trademark even after the company changes its corporate identity.
"We have promised our clients that we will continue to provide them with the best health care they deserve, and we assure them of world-class customer care at all times," he said.
Incidentally, BUPA Arabia has emerged as the eighth and only insurance firm in the Kingdom to be included in the top 10 best companies to work with in Saudi Arabia, according to a recent survey by the Arabic economic daily Al Eqtisadiah.
Currently known in the market as BUPA Middle East, which has more than 370,000 clients in the Kingdom, BUPA Arabia will have a paid-up capital of SAR400 million as soon as it starts operating. It is soon to launch its maiden initial public offering in the Kingdom, diluting 40 per cent of its equity to the public.
Industry opening up
BUPA's entry and its prospective IPO are very similar to what other players coming into Saudi Arabia will have to do to comply with regulations set by the Kingdom. These regulations are among the best in the region and are expected to create the robust insurance market that the authorities envisioned. In fact, the Kingdom's industry leaders have pinned their hopes on the opening of the sector to regional and international competition and a combination of new labour laws for the success of Saudi's insurance industry in years to come.
"We are already seeing the impact of new regulations that will come into force this year," says Ali A. Al-Subaihin, CEO of Saudi insurance provider Tawuniya. "Licensing of new companies, floating of shares in the Saudi stock market, implementation of new insurance laws and increase in competition will make a whole lot of difference to the industry, making it not only stronger, but also sophisticated."
Tawuniya is the leader in Saudi Arabia's insurance market with a net income of SAR525 million reported in 2007, compared to SAR468 in 2006. Since its establishment, the company has been offering insurance coverage on life, health, motor, casualty, property, engineering, aviation, marine cargo, marine hull, energy and excessive loss.
Formerly called National Company for Cooperative Insurance, Tawuniya was established with a capital of over SAR500 million in 1986. The company was also, until recently, the only serious player in the Kingdom's insurance market. Its monopoly of the market was broken only in April-May of last year, when Malath Cooperative Insurance and Reinsurance Co. became the first among new companies to be registered.
Impact of new regulations
The opening up of the Kingdom's insurance sector is believed to have injected US$700 million into the market, with more to come through new company licensing and public offerings.
The new regulations passed on August 1, 2003 stipulate that all insurance companies operating in the Kingdom must obtain a licence by March 2008 or cease operations.
As per the law, the capital requirements for a licence are US$26.67 million for insurers and US$53.33 million for re-insurers, with an additional 10 per cent statutory deposit. Companies are also obliged to float at least 25 per cent of their shares on the Tadawul and meet other regulatory requirements before receiving a licence.
Industry observers say that the creation of the new regulations and the entry of new players into the market are bound to shake up existing businesses, but it will be for the good of the industry. A Standard & Poor's report titled 'Strengths, Weaknesses, Opportunities and Threats as Insurers in Saudi Arabia Come to Terms with New Regulations' described the Saudi insurance market as one with "inherent strengths" that will allow it to "ride out" the forthcoming regulatory changes.
"The new regulations will affect all insurers and re-insurers writing business in Saudi Arabia. Client relationships and tariffs will characterise the scene as newly-licensed players enter the market and as old, unauthorised entities are finally forced to cease operations," states the report.
As the new regime begins to take its toll, two companies, Methaq and Saudi Allied Company for Cooperative Insurance and Reinsurance, have already closed down. These insurance operators, which were both heavily into medical insurance, caused hospitals to lose millions of riyals due to unpaid bills. Experts say that this instance will not be repeated under the new regime, as the new regulations will protect the interest of all parties involved in insurance.
Insurance industry grows
According to the SAMA, the insurance market in Saudi Arabia grew almost 33 per cent in 2006 after the world's largest oil exporter made health and motor insurance compulsory. Gross premiums paid to Saudi insurers by clients rose to SAR6.9 billion (US$1.84 billion) in 2006 from SAR5.2 billion in 2005.
For life insurance, premiums rose to SAR218 million (US$59 million), up 13 per cent from SAR193 million (US$52 million) the previous year. The Saudi Arabia Report 2008 issued by Business Monitor International (BMI) stated that life premiums are expected to grow 36 per cent annually in both riyal and US dollar terms between 2006 and 2011.
In non-life, premiums rose to SAR6,719 million (US$1,816 million) in 2006, up 13 per cent from SAR4,960 million (US$1,341 million) in 2005. Non-life premiums, therefore, increased by 35 per cent in both riyal and dollar terms.
In 2006, the two most important lines within the non-life segment were health and motor. These two lines accounted respectively for 33 per cent and 29 per cent of non-life premiums.
In terms of local currency premiums, the fastest growing lines last year were engineering (which grew by 83 per cent), health insurance (64 per cent) and accident/liability/others (37 per cent).
Huge potential for health insurance
BMI categorises Saudi Arabia as a moderately large national market for health insurance and one where premiums are growing quickly.
"There is huge potential for growth in health insurance, which, until now, has contributed less than 0.5 percent of the Kingdom's GDP," says Dr. Abdullah Al Shariff, secretary general of the Council for Cooperative Health Insurance at the ministry of health.
Mohammed Abdullah Khan, an MBA graduate, Fellow of Insurance at the Institute of India and Associate of the Chartered Insurance Institute in the United Kingdom, further points to the Kingdom's health insurance growth prospects.
"The potential for health insurance alone is more than SAR20 billion, which is expected to be achieved within few years," says Khan, who has more than 20 years of experience in the insurance industry (12 of those in Saudi Arabia).
Given the developments in the recent past, Khan's remark looks to be on the dot. In a major development for the health insurance market, Saudi Electricity Company (SEC) signed a three-year health insurance contract with Tawuniya last year, the total premium being SAR56 million. The contract took effect on November 20, 2007 and expires on November 19, 2010.
The contract stipulates providing healthcare services to SEC's non-Saudi employees and their eligible family members. The maximum benefit limit per employee is SAR250,000 and the insurance cover provided includes all the sites and offices of SEC across the Kingdom. The health care services will be provided by more than 250 hospitals and medical centres in the various regions of the Kingdom with which Tawuniya has health services provision contracts.
Saleh Al-Subail, Tawuniya's vice president for key accounts, says that his company has developed, in collaboration with SEC, a suitable mechanism for the enhancement of health services. The mechanism is aimed at lessening the period of time it takes to process medical approvals for some services through the use of a Waseel electronic link.
The SEC contract is considered one of the largest medical insurance policies issued by Tawuniya in 2007.
SEC's contract with Tawuniya is in compliance with the Compulsory Cooperative Health Insurance Act. The first phase of enforcing this act began in June 2006 and covers the non-Saudi workforce of Saudi firms with more than 500 foreign employees or more.
Under a phased programme, some Saudi citizens will be also covered by the mandatory health insurance scheme, while expatriate employees will have to be covered by their sponsors and will no longer be admitted for free treatment in government hospitals.
Observers point out that with the Saudi population growing at three per cent annually, growth in the health insurance market is helping spur development in the health care and pharmaceutical sectors.
The Saudi population presently stands at 27.7 million and, by 2015, is expected to grow by six per cent.
Motor insurance
Motor insurance, which was made mandatory on November 20, 2002, has also shown tremendous growth potential. Because of Saudi Arabia's high rate of car accidents, second and third party motor vehicle insurance is now compulsory in the Kingdom. There are more than ten million cars registered in Saudi Arabia, and approximately 1.2 million cars enter the Kingdom every year. The ministry of interior prohibits any car entering the borders of Saudi Arabia without insurance coverage.
In the Kingdom's capital city, damaged cars that have suffered road accidents and are covered by insurance are brought to the First Industrial Area, or Old Sinaiyah, for repairs. The 400-plus workshops in the area are all busy - and bring a good return for their owners.
Abdulaziz Nasser Al-Nuweiser, the Saudi owner of the Al-Yamamah Car Repair Shop, has supported his family through his earnings from the workshop for the last 25 years. He bought out the previous owner, Saad Al-Jeidan, five years ago. Al-Nuweiser's clients include Tawuniya, Al-Ahli (which is into foods) and the giant appliance and electronics dealer Extra.
"Four to five cars insured with Tawuniya are brought to the workshop regularly for repairs," says Floro Brenna, the Filipino head mechanic at the workshop. He has been there since it started 30 years ago. Al-Yamamah has 16 staff, most of whom are Filipinos. Other workshops are located in the Um al-Hamam area.
Car workshops also abound in great numbers in the industrial areas in key cities like Jeddah in the west and Dammam and Alkhobar in the east.
Realising that there is big money to be made repairing cars, many mechanics have resigned from their respective companies to start their own workshops and accept repairs of cars covered by insurance. To legalise their operations, they take Saudi nationals as partners.
Life insurance
While leaders of the local insurance industry are upbeat about non-life insurance, it is clear that more efforts will be needed in the life insurance business. Saudi Arabia's life insurance industry has always lagged behind its counterparts in the region. In 2003, life insurance premiums averaged US$310 per person in the UAE, US$149 per person in Kuwait and just US$41 per person in Saudi Arabia.
From 1998 to 2002, life insurance premiums more than doubled in Kuwait. Premiums in the UAE rose 45 per cent during the same period, while premiums in Bahrain went up 28 per cent. However, in Saudi Arabia, life premiums declined four per cent.
"One reason for this decline is the fact that in the past, insurance products available in the market did not conform to Islamic principles," says Dr. Mohsen Abdulmohsen, a Saudi working in Riyadh's King Fahd Medical City.
Ali Z. Zahrani, a Saudi English teacher at Al-Shifa School in Riyadh, adds: "Saudis regard life insurance as haram. It's forbidden."
However, things are looking up now as Takaful, the Islamic alternative to life insurance, gains ground in the Kingdom.
"Lack of public awareness is one reason why Saudis have reservations about life insurance. So, there's a need to disseminate information about it and its benefits," says Dr. Mohammed Fawzy Abou Dahab, an ophthalmologist at the Specialised Medical Centre, which has tie-ups with insurance companies to treat or extend medical assistance to the employees of the latter's clients.
"Furthermore, insurance services must also be reliable. If the service that insurers provide is not up to the mark, people, particularly Saudi nationals, could hardly be convinced to seek life insurance coverage," stresses Dr. Abou Dahab.
The future
More than 75 insurance operators did business estimated in excess of US$800 million in the Kingdom before legislations were enacted to regulate the industry. The Cooperative Insurance Companies Regulation enacted through royal decree no. M/32 on August 1, 2003 was the first Saudi Arabian legislation to regulate the Kingdom's insurance industry. The creation of the new regulations has changed the face of the industry for good, as what used to be a free for all has become one of the most tightly-regulated insurance markets in the region.
Of the 13 licences issued last year, five were for Takaful companies. It is expected that these companies will play an important role in deepening the reach of life insurance business in the Kingdom.
Also, as part of the opening up of its insurance market, the Kingdom now allows foreign insurers to open and operate direct branches in Saudi Arabia. Commercial presence is permitted for insurers that establish a locally incorporated cooperative insurance joint stock company, in which foreign participation is limited to 60 per cent.
A three-year transition period (which ended on August 1, 2006) was given to existing foreign insurance providers to convert to either a Saudi cooperative insurance company or a direct branch of a foreign insurance company. During this transition period, existing foreign insurance providers were able to continue existing business operations, as well as offer new products and service new clients.
As was expected, many international and regional insurers have made a beeline for the potentially lucrative Saudi insurance market. More will knock on the door. And in the future, with Saudi nationals participating in the IPOs of these insurance companies, there will be a vested interest to make the insurance business successful.
Insurance companies in the Saudi market:
Al-Ahlia Cooperative Insurance, Allied Cooperative Insurance Group, Arabian Shield Cooperative Insurance, Assurance Saudi Fransi, BUPA, Gulf Union Cooperative Insurance Company, Malath Cooperative Insurance & Reinsurance Co., SABB Takaful, Sanad for Cooperative Insurance & Reinsurance, Saudi Arabian Cooperative Insurance Company, Saudi IAIC for Cooperative Insurance, Saudi Indian Cooperative Insurance, Saudi United Cooperative Insurance, Tawuniya , The Mediterranean & Gulf Insurance & Reinsurance, Al Ahli Takaful, United Cooperative Assurance, Arabia Insurance Cooperative Company, Al Sagr Company for Cooperative Insurance, Trade Union Cooperative Insurance Company and Saudi Re for Cooperative Reinsurance Co.
© MONEYworks 2008
