The insurance market in Saudi Arabia is potentially facing a major shake-up as a new draft insurance law has proposed raising the minimum level of capital insurers need to hold to 500 million Saudi riyals ($133.3 million), ratings agency Moody's has said.
The firm's latest CFO survey of GCC insurers found that competition was the biggest worry among finance chiefs, cited by 42 percent of the total, as many operate in crowded markets - in the UAE, for instance, there are around 60 insurance and Islamic insurance (takaful) firms.
"We think for many of the small insurers who aren't compliant, this could cause challenges as well as pressures for consolidation," Mohammed Ali Londe, an analyst at the firm told journalists at an event held by the ratings agency last Tuesday.
In an earlier interview with Zawya on the sidelines of the recent Dubai World Insurance Congress, Londe said that “quite a few insurance companies will struggle with that”, given that some had even depleted the current capital limit of 100 million riyals as a result of losses.
He argued that if introduced, the higher capital limits would either spark consolidation in the Saudi market, or lead to smaller players exiting by not writing any new business and running down current books.
“This is a way in which the Saudi regulator is trying to ensure the companies that come out of this are stronger, well-capitalised, more sophisticated companies,” Londe said. “The way they can ensure the first two is very easy - by increasing capital. The way they increase the sophistication is by making sure that the marketplace is less crowded and only those that want to be in the market (and) have the capability to be in the market, are the ones that survive."
SAMA did not respond to requests for comment.
Salman Siddiqui, an associate director within specialist insurance ratings agency AM Best said that as yet, no draft of the law has been published. However, he said the proposed increase “has been discussed quite heavily amongst market participants across the region”.
In an emailed response to questions from Zawya last week, Siddiqui said the increase "would represent the highest level of minimum paid-up capital" in the region.
Go big or go home
“It would appear that the intention is to encourage the smaller insurers to consolidate and justify the increased capital requirements or alternatively for smaller players to exit the market,” he said.
“However it must be noted, whilst we have previously seen attempts by regulators to encourage consolidation, this hasn't yet resulted in any real M&A activity.”
Londe told journalists at last week's event that although longstanding predictions of consolidation in the market had not materialised, because many boards had been unwilling to cede power, the higher capital requirements and a keener interest in the market from insurers outside the region could mean that this changes.
"What we have seen is, because of the previous couple of years of good profitabiliy in the insurance sphere in the GCC, there are a lot of investors who are now interested or looking at the GCC insurance market," he said, citing the tie-up between Lebanon's Fidelity and Dubai's United Insurance announced last week as an example.
"They have seen that the market is profitable, and we do expect that there might be more to come," Londe said.
(Reporting by Michael Fahy; Editing by Mily Chakrabarty)
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