THE INSURANCE MARKET
A SUSTAINABLE DOUBLE-DIGIT GROWTH
The insurance market in Saudi Arabia is relatively new. Although insurance products have been sold in the country since the 1960s - through offshore companies and mainly for commercial purposes - the sector only started to develop institutionally in the 2000. By the end of the decade, the market was worth SAR 14 billion.
In 2002, the government approved a first set of regulations covering the insurance market, which made third party motor insurance and health insurance compulsory for foreigners. By 2003, all companies employing over 500 expatriate workers had to take out insurance for their employees. In 2005, insurance was made compulsory for all expatriate employees.
The real growth of the insurance market started in 2003, when the Cooperative Insurance Companies Control Law was approved to regulate a highly unregulated market, which at that time was virtually monopolised by the formerly state-run National Company for Cooperative Insurance (NCCI).
The law expects all insurance companies - including those providing the shariah-compliant form of insurance or takaful - to be registered and publicly listed in the kingdom and to act under the principle of cooperative insurance. The companies need to follow Islamic principles where conflict appears with shariah legislation, notably in the case of life insurance. Under this law, the insurance business as a whole is considered as a cooperative business, with shareholders sharing both profits and losses.
The law sets the minimum initial investment at SAR 100 million for insurers and SAR 200 million for reinsurers. Foreign ownership is limited to a maximum of 49% of a company. 30% of the premiums and 30% of the reinsurance amount must stay in the kingdom and insurance companies are not allowed to open foreign branches. The law also requires 30% or more of the workforce to be Saudi nationals.
In 2008, a more comprehensive set of laws to regulate the sector and protect both providers and customers was approved under the name of “Market Code of Conduct Regulation”. In the same year, NCCI went public, listing 70% of its shares in an Initial Public Offering (IPO). NCCI remains the leading takaful insurer in the country and the region. In 2009, NCCI's profits amounted to SAR 296 million - a spectacular 341% year-on-year rise.
Health and motor: the growth leaders
Since 2006, insurance premiums in Saudi Arabia have grown by over 30%, faster than the non-oil GDP. The rapid population growth, an as yet low market penetration, the extension of the range of Islamic insurance products and the economic development of the country in general suggest that the growth of the insurance market will continue to be in the double-digit range for the at least another few years. According to the Saudi Arabian Monetary Agency (SAMA),penetration of insurance on the Saudi market grew by 40% in 2009, but still only represented a mere 1.06% of GDP.
Also according to SAMA, general insurance gross written premiums (GWP) represented 43.2% of the insurance market, amounting to SAR 6.3 billion, while protection and savings insurance GWP increased by 68.9% to SAR 1 billion. Health and Motor insurance constituted 71 percent of total GWP in 2009.
The greatest demand was for health insurance, which accounted for 50%of total GWP in 2009, as compared to 44% in 2008. Motor insurance came second with 21% of total GWP, while protection and savings, engineering and maritime insurance accounted for 6.9%, 5.5% and 3.6% respectively.
Greater legislation and new areas to grow
Additional legislation intended to boost growth in the sector and increase transparency in insurance and reinsurance activities was proposed at the beginning of 2010 but has not yet been passed.
Contrary to popular belief, life insurance is not per se forbidden in Islamic banking. However, according to experts in the sector, during the last two years, life insurance has been growing by 90% per year. There is a shariah-compliant version of it – a cooperative insurance, which means that people pay into a fund that pays the claims, which is an equalizing factor. Apart from that, the policy and the coverage are no different from any other insurance policy, apart from the fact that the fund will of course not invest in alcohol, gambling, pork or other haram enterprises.
And more explosive growth is likely to hit the insurance sector in the near future. Like the real estate sector, the insurance market too is eagerly waiting for a mortgage law to be issued by the government. Banks are already starting to provide credit to individuals for housing purposes, but they have to tread carefully absent the pending legislation. Some experts say that what is holding back the law is partly stubbornness on the part of religious groups, and partly the fact that the recent global financial crisis exploded over bad subprime mortgages, which is making the government think twice before allowing mortgages. But the figures show that in countries where a mortgage law was introduced, the economy lived up by 50% and more. Eventually Saudi will get the law. It does not have the luxury of choice anymore.
SAMA regulates the market, although there is a specific entity for Health Insurance (CCHI) and, as listed companies, insurers and reinsurers also have to fulfil the requirements of the Capital Markets Authority (CMA).
By Q1 2010, the Council of Ministers had approved 33 insurance and reinsurance companies, 27 of which were ultimately licensed to practice insurance and/or reinsurance. One insurance company was listed on the Saudi Stock Exchange but was still awaiting a license to start operations and the Council of Ministers approved the establishment of five other insurance companies. Additionally, two more insurance companies have been recommended by SAMA and are in an advanced stage of the licensing procedure.
“In 2009, the insurance market witnessed a substantial growth rate of 33.8 percent, with gross written premiums reaching SAR 14.6 billion compared to a total of SAR 10.9 billion in 2008,” a recent publication by SAMA states. “The increase was due mainly to the growing awareness of the importance of insurance and the favourable economic conditions during the year, as well as the introduction of compulsory motor insurance and cooperative health insurance. The total number of working staff in insurance companies in the Kingdom of Saudi Arabia stood at 5,800 at the end of 2009, 47.5 percent were Saudis”.
The two primary state-run pensions funds are the General Organisation for Social Insurance (GOSI) and the Public Pension Agency (PPA), who together cover all pension funds in the kingdom. In recent years, both agencies have been investing heavily in listed and non-listed companies on the local market, rather than in international low-risk equities or even government bonds – their traditional favourite - to balance the lack of financing through traditional channels during the financial crisis. They have both invested in the large ongoing real estate developments, especially in Riyadh, which today is literally covered in construction sites.
PPA has created the Rayadah Investment Company to handle its real estate investments, which include the King Abdullah Financial District (KAFD) and the Information Technology Communications Complex (ITCC). GOSI, which has created Hesana for the same purpose, is considered a traditional leading player in the local market.
Our latest investment report on Kuwait was recently published in one of the leading Spanish dailies, ABC. FindMe in Kuwait explores the economic perspectives of Kuwait and the country´s future plans to compete with its fast developing neighbours. Once the leading country of the Gulf, Kuwait has remained silent for the past decade. And although many would like to see faster changes, Kuwait is moving, at its pace, to them. Inexorably. Learn about who is who in Kuwait and read what the leaders say about their own future in our upcoming release: FindMe in Kuwait Mobile app.
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