The Saudi insurance industry has made notable progress in the past year in terms of premium growth and profitability, but the challenge remains in sustaining the positive performance and moving to the next level.
The year 2015 followed a couple of tough ones which saw the sector’s profitability dropping to unprecedented levels.
At first glance, last year’s results give the impression that the sector has recovered from its stumble. Though that could be true, looking in depth at companies’ individual results indicates that it has been but a first step in a long road ahead.
2015 was generally a “reasonable” year, said Mr Basem Kamel Odeh, Chairman of the Insurance Executive Committee (IEC), an industry body equivalent to an insurance association. “The good news was that insurers started pricing prudently based on technical standards, while the unhealthy competition has decreased notably, and this has been reflected in better market results. In addition, regulatory procedures addressing motor and medical actuarial pricing have been enforced. So there has been a general correction in the sector.”
Mr Adel Al Eisa, Chairman of Awareness & Training Sub-Committee & Media Spokesman for Insurance Companies, said companies’ 2015 results have improved in terms of GWP and profits, though marginally and not for all operators. Yet, there are still major shortcomings, especially seen in the number of loss-making companies increasing since 2014.
“Profits remain concentrated with certain companies, while several others are making losses. The losses of some operators have exceeded 50% of their capitalisation, indicating that the market needs more time to improve,” he said. Provisional market results revealed that there were 14 loss-making companies against 12 in 2014.
He added that compulsory lines need to be expanded in order to minimise the concentration in motor and medical. This could include insuring public places and large commercial entities. “There have been discussions in the past two years in this regard, but so far nothing has been implemented.”
Regulatory intervention
Mr Odeh said a major development this year was SAMA’s enforcement of new instructions based on last year’s property circular. The instructions include new requirements in assessing risks, aimed at amending market practices in setting insurance terms, and surveying risks before issuing policies. These include setting proper deductibles and guaranteeing the insureds’ contribution to managing risks by getting them to use the necessary tools.
“SAMA is expected to issue a new circular soon addressing engineering insurance, setting minimum requirements that will further discipline the market. Hopefully, 2016 will see more positive developments which would be reflected in the market’s results,” he said.
Mr Odeh noted that SAMA’s circulars and decisions are made after thoroughly consulting the sector. “Insurers have the opportunity to share their views, and SAMA is working hand in hand with the sector. Self-regulation is still very weak and our market still needs the regulator’s enforcement.”
He added that the recent developments have been hailed by reinsurers and would encourage those who pulled out from the market to reconsider their decision.
It has been reported over the past two years that several international and regional reinsurers pulled back from writing business in the market because of rising losses, especially in the fire line, with even the local reinsurer, Saudi Re, following suit. Fire losses in 2014 reached SAR232 million (US$62 million), recording a loss ratio of 82%, higher than medical’s 79%.
Motor under fire
Motor premiums have increased to SAR10.3 billion from SAR8 billion according to market sources, a jump of around 29%, attributed by some to the increase in prices. As Saudi Arabia is a tariff-free market, each company adjusts its prices individually based on its actuarial assessment, as per SAMA’s instructions. It has been estimated that prices of motor insurance in Saudi have become the highest in the GCC, if not MENA altogether.
Mr Al Eisa said several factors led to rising prices, including the fact that around 50% of vehicles in Saudi Arabia are uninsured. “Increasing the pool of motor premiums would boost profit margins and could solve many issues, including increasing prices, a matter which has been causing public uproar and complaints.” Other factors include the increased number of accidents, the skyrocketing costs of repairing cars, expanding the range of coverage in the unified TPL motor policy since about five years ago to almost having no exclusions, and increasing blood money from SAR100,000 to SAR300,000.
He added that prices will continue to increase in accordance with actuarial instructions, depending on companies’ results. “We are discussing with the traffic authorities to find better means to insure the uninsured cars and activate the compulsory motor TPL. The fines for uninsured vehicles are modest, compared to the motor premium.”
Generally, said Mr Al Eisa, other official parties share responsibility for the sector’s soundness, not only the regulator. “There are other stakeholders such as the traffic department, civil defence authority, and others which need to activate their role in enforcing compulsory lines.”
Alternatives to increasing prices
Raising prices is not necessarily a solution to the problems in motor, pointed out Mr Odeh. He said that Najm for Insurance Services (Najm), a body established and owned by insurance companies to help settle material damage accidents and other motor-related issues, has been working on creating a database allowing insurers to exchange information about drivers and identify those who cause accidents. “The system is in the last phase of obtaining regulatory approval and is expected to help set accurate prices based on drivers’ performances.”
This year, Najm launched a campaign financed by insurers as part of their social responsibility to increase public awareness on traffic safety. “We are moving on several fronts to help curb accidents because otherwise, motor insurance prices will continue to rise.”
He added that the figures are alarming as Saudi Arabia has the second largest number of deaths – among Arab countries – caused by traffic accidents, with an average of 27 deaths per 100,000 people. “Last year, more than 9,000 people lost their lives and tens of thousands were injured, not forgetting material losses which are estimated by some experts to have reached over SAR20 billion.”
Medical faces challenges
Medical insurance has been a driver of growth in the Saudi insurance sector as well as the largest line of business, with premiums of around SAR19 billion or 53% of business in 2015, and growth of almost 7%.
Despite the increase, medical insurance in 2015 witnessed some setbacks as some companies were trying to cut costs by changing their employees’ insurance programmes from corporate to individual, which includes less benefits, said Mr Odeh. “The regulators have taken note of this leakage from corporate to individual, and are planning to take steps to deal with it in coordination with industry.”
In addition, amongst those covered by compulsory medical schemes, around four million are uninsured, such as domestic helpers and families of employees, he said. “There will be efforts to enforce the law in the coming period, especially since there is an automated system to find violating cases.”
As to whether locals will be included in the compulsory scheme, he said it is being thoroughly studied by the relevant authorities as such important decisions require many issues, including scope of cover, financing, and adjusting public hospitals to private sector’s standards to be resolved.
Positive developments in zakat
Some companies have raised objections against imposing zakat charges over statutory deposits, a 10% of capital each company reserves at SAMA’s bank account, which receives its returns. “A positive development this year was when the Zakat Appeal Committee issued a recent ruling in favour of one company, exempting it from paying zakat on this deposit. This is a breakthrough and saves a lot of money, as some companies’ statutory deposits can reach up to SAR100 million. Therefore, annual savings as a result of adopting this principle may reach SAR2.5 million,” noted Mr Odeh.
Need for consolidation
M&A is seen as the way forward, with acquisitions being preferred as merging troubled companies would lead to more bigger troubled bodies, said Mr Al Eisa. “However, it is not sensible for successful operators to acquire troubled ones, especially since the sector’s general investment environment is not attractive. There should be incentives to push companies in this direction, but SAMA is not expected to take radical solutions in the foreseeable future, and still considers it a free market.”
Impact of oil price slump
The drop in oil prices could impact the insurance sector indirectly, but not in the short term, observed Mr Al Eisa. “Most businesses concentrate on medical and motor, which are not sensitive to the fluctuation in oil prices, unlike energy lines, which account for a small share of the business. However, they can affect the engineering business, especially since there are no new projects going forward.”
He said that probably the biggest indirect impact of the fall in oil prices will be seen on the investment side, where there has been a notable drop in the stock markets – locally and globally – and this would influence companies’ investments.
Another possible effect is that big businesses might try to cut corners and expenses, including their insurance premiums. “This should push insurers to seek alternative means to sell and innovate new products, besides addressing larger segments of personal lines. Some companies rely on big accounts to achieve profits, but this leaves them vulnerable.”
Mr Al Eisa is hopeful that companies will improve their results and think out of the box, “because if we continue in the same trend, we will reach nowhere. Increasing prices as a standalone strategy is not the answer to the market challenges. It was demonstrated in 2015 that this has not helped all companies”.