Opportunities in Saudi insurance sector

More than a decade has passed since the first insurance IPO was listed on the Saudi stock market. Back then, there was a debate among different Saudi regulators whether insurance companies should go public from day one, especially as the majority of them were startups with a minimum capital of SR100 million.

That era, which was also the early days of the newly set up Saudi Capital Market Authority (CMA), was a memorable one. Almost every other month, a new insurance company was approved by Saudi Arabian Monetary Authority (SAMA) followed by an approval by CMA for listing. I do not think this unique phenomena will ever be repeated in the Saudi market or any other capital market. It is worth mentioning here that back then BMG Financial Group alone would be handling three IPO files simultaneously. To the best of my knowledge, I do not recall any other investment bank, even those which are subsidiaries of local banks, handling more than one IPOs at any one time.

It was noticeable then, since every IPO was floated at par value, that these companies would be traded at limits up upon closing for 7 to 10 consecutive days. Obviously, traders were speculators without referring to market fundamentals or even reading the offering memoranda.

Those years very quickly created an overcrowded insurance sector, but with obvious challenges from the start, including low capital, lack of awareness by consumers, scarcity of experienced or even qualified human capital, policies price war, etc. On the other hand, the Saudi insurance market was, and still is, considered to be one of the lowest penetrated markets with growth potential.

The potential growth of the Saudi insurance sector is known to most participants. The big differential in Saudi Arabia is the demographics. It has a young population, one of the largest ones in the Middle East.

For the past several years, SAMA has been urging Saudi insurance companies to strengthen their financial position and seek consolidation via mergers or acquisitions. SAMA is currently studying new laws which will encourage insurers to raise capital, compared to the current SR100 million ($26.5 million) and SR200 million capital for insurance and reinsurance firms, respectively. This will automatically force small companies to merge in order to meet this requirement or to invite global companies to acquire them.

My recommendation to global foreign insurance companies is to consider and explore the Saudi market for their expansion strategies in the region. In spite of the challenges listed above, global companies with their respective experiences in similar markets can turn these challenges into opportunities and benefit from the potential growth in the Saudi market. Such companies would have two choices: Either apply to SAMA for a new license or operate via the acquisition of a local one. For obvious reasons, not to mention SAMA’s preference, the latter is advisable.

• Basil M.K. Al-Ghalayini is the Chairman and CEO of BMG Financial Group.