JEDDAH: Saudi insurers are benefiting from a strong economic operating environment, with the sovereign rated Aa3 by Moody's, driven by its very high economic and fiscal strengths. Saudi Arabia is the second largest insurance market in the GCC, with total premiums of $8.1 billion in 2014, and represented over 36 percent of the GCC premiums written in 2014, according to a recent report from Moody's. With a CAGR of 20.3 percent between 2006 to 2014, Saudi Arabia was the second fastest growing insurance market in the GCC after Qatar, it added.
Moody's also says in the report entitled " GCC Insurance Industry: Growing Economy Will Drive Further Market Growth Over Next Two Years" that despite being a small insurance market, the GCC remains the fastest growing insurance region, outpacing all other markets with top line growth of close to 15% in 2014, says Moody's Investors Service in a new report published today. "The positive growth outlook on the region will continue to attract insurers -- both domestic and foreign -- to invest in the GCC markets, but this is likely to increase competition and put even further pressure in what is already a weak-to-average profitability in the sector," said Mohammed Ali Londe, Moody's assistant vice president and analyst.
"However insurers in the region are generally strongly capitalized and possible future pressure on profitability is unlikely to reduce the credit strength of the sector in the medium term," added Londe. The report noted that the Saudi Insurance market is regulated by the Saudi Arabian Monetary Authority (SAMA), requiring that all Saudi insurers operate under the cooperative model in line with Shariah principles. Since its inception, SAMA has pro-actively introduced numerous regulations to stabilize the Saudi Insurance market and for the benefit of the economy, and as a result we consider SAMA to be one of the most sophisticated insurance regulators in the GCC.
Additionally, Saudi insurers benefit from a strong economic operating environment, with the sovereign rated Aa3 by Moody's, driven by its very high economic and fiscal strengths. In the Saudi insurance market, premiums grew by over 20 percent in 2014, benefiting from industrywide premium rate increases in both the medical and motor lines. Price hardening in these two lines have been close to 20 percent in 2014 and we expect this higher pricing to be sustained in 2015.
The growth in the last few years results from: (i) the Saudi Arabian authority making health and motor third-party-motor coverage compulsory; (ii) the increasing awareness of the need to purchase insurance products; (iii) the favorable economic conditions, as shown by a GDP that has doubled since 2006; and (iv) prudent actuarial reserve modelling introduced by the regulator in 2013 which has spurred rates hardening in the medical and motor lines. Despite this significant growth, Saudi Arabia has the lowest insurance density (a ratio which reflects the per capita $ spend on insurance) in the GCC at $277 and one of the lowest insurance penetrations in the region at 1.1 percent of GDP in 2014, rates that are significantly below those of most advanced economies. This indicates potential for further growth in the Saudi Arabian insurance market.
Market Structure: Fragmented, competitive market With 37 licensed insurance and reinsurance companies in 2014, the Saudi insurance market is highly competitive, with 24 of these licenses being approved between 2008 and 2012. The top five insurers (by premium) include three large local groups, The Company for Cooperative Insurance (Tawuniya), Malath Cooperative Insurance and Reinsurance Company and United Cooperative Assurance (UCA), and two international groups, BUPA Arabia for Cooperative Insurance (BUPA Arabia) and The Mediterranean and Gulf Insurance and Reinsurance (MedGulf).
Excluding the top five groups, which write around 62 percent of the market's premiums, the 2014 average premiums per insurer stand at approximately $96 million, which we believe indicates a considerable level of overcapacity in the industry. Although insurers will benefit from continued growth in the market, we expect that the number of market players may need to reduce over time, driven by the stringencies of operating in the new pricing environment enforced by the actuarial review of the reserves, coupled with the desire to improve profitability.
With 76 brokers and 76 insurance agencies, the Saudi market is highly dependent on the intermediary distribution channels, with direct channels such as phone, Internet and affinity channels in their infancy or non-existent. The increasing awareness of insurance could affect the distribution mix in the future, as shown in other GCC countries where more awareness has given a boost to the non- broker distribution channels such as direct, online and bancassurance. Medical (health) and motor insurance have been the growth drivers of the Saudi insurance market, contributing for over 50 percent and over 25 percent of GPW respectively.
This has resulted in the Saudi insurers having high concentration in these two lines which have sizeable volumes of relatively low-risk (high frequency, low severity) claims. The dominance of these two lines is the direct result of the mandatory nature of both (i) medical, firstly introduced nearly a decade ago for expatriates and dependants and around five years ago for nationals, and (ii) motor third party liability, firstly introduced in 2001. "In the short term we expect the premiums of the medical and motor lines of business to further benefit from the industrywide premium rate increases following the implementation of actuarial reserves modeling in 2013," said the Moody's report.
The remainder of non-life as well as life (protection and savings) products individually account for only a few percentage points of the market, with the non-life being a small number of sizeable commercial insurance contracts related to high-risk infrastructure projects. Life insurance growth was marginally lower than that of non-life with a 2014 CAGR (eight years) of 19.5 percent, albeit from a very low base. In the medium to long term we expect the non-motor, non-medical covers to gain ground as a result of the increasing awareness of the benefits of insurance and the increasing wealth of the population given the favorable economic conditions in the country.
Asset Risk: Reliance on deposits and fixed income securities is credit positive The Saudi insurance market's invested assets have grown at a CAGR of 13.6 percent over the past five years. Deposits with financial institutions have averaged just above 40 percent over the past six years and as of 2014 stood at 44 percent of invested assets followed by fixed income securities above 22 percent. Equities (including investment in subsidiaries and affiliates) and real estate investments accounted for around 7.5 percent as at 2014 and have averaged close to 10 percent of invested assets over the past six years.
"Although we generally regard exposure to the volatile local equity and real estate markets as credit negative for insurers, we note that the portion of invested funds in real estate and equities in Saudi Arabia to be comparatively low versus other GCC markets," stated the report. Under the Law on Supervision of Cooperative Insurance Companies the minimum capital requirement for insurers is set at SAR100 million for insurance companies and SR200 million for companies that undertake insurance and reinsurance activities. In aggregate, capital in the Saudi insurance market decreased by around 9 percent in 2013 to SR8.8 billion, and the top five insurers alone accounted for over 45 percent (SR4.0 billion or $1.1 billion) of the total industry capital.
The decline in the overall industry equity in 2013 was the result of underwriting losses driven by reserve strengthening, following the introduction of actuarial modeling which obliged reserves to be signed off by a consulting actuary. As a result of these losses, eight insurers recapitalized in 2014, resulting in an increase of the overall industry capital by almost 14 percent to SR10.0 billion ($2.7 billion) in 2014. The top five insurers equity increased by 21 percent to $1.3 billion. In addition, in order to standardise the profit sharing arrangements between shareholders and policyholders, the Saudi Arabian Monetary Agency has issued new guidelines which have been implemented from 2015.
These guidelines state that 10 percent of the net surplus shall be distributed to the policyholders directly, or in the form of reduction in premiums for the next year, whilst the remaining 90 percent of the net surplus shall be transferred to the shareholders' income statement. The guidelines apply to (i) insurers underwriting general insurance and medical insurance classes and (ii) insurers underwriting only group protection out of the protection and savings class of business.
© Arab News 2015
