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The Actuary The magazine of the Institute & Faculty of Actuaries
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Insurance: Emerging market

Five years ago, there was only one officially recognised insurance company in Saudi Arabia. At the time of writing, there are 20, with at least another eight in the process of achieving full authorisation. Saudi Arabia is the largest country in the Middle East by land area, occupying most of the Arabian Peninsula between the Red Sea and the Arabian Gulf. It is over eight times the size of the UK with less than half the population. The main industry and source of wealth is oil. Saudi Arabia has over 20% of proven world oil reserves and the oil sector accounts for 45% of GDP, 80% of budget revenues and 90% of export earnings. Almost 40% of the population is under 15, and unemployment among Saudi males is estimated at almost 9%. With this background, the government has a long-term policy of diversifying the economy and stimulating opportunities for the training and employment of Saudi nationals.

Market surveys by the Saudi Arabian Monetary Agency (SAMA) in 2007 and 2008 showed a total 2008 market of $2.9bn (£1.8bn) in gross written premiums, an increase of 27% from the 2007 figure of $2.3bn (£1.4bn). The largest five companies together had a market share of over 50% in both 2007 and 2008. The share of the top five increased from 2007 to 2008, having fallen a little in 2007 from 2006. The fastest growing lines of business in 2008 were health and life, although life business made up only 5% of total gross written premiums. Health insurance accounted for 44% of total premiums in 2008 and motor for 23%. The third largest class was property at 7%. I

n 1986, the state-owned National Company for Co-operative Insurance (NCCI) was founded and became the only officially recognised company in the market, soon gaining a market share of around 50%, partly due to preferential access to government business, including that of state-owned industries. The company was partially privatised in 2004 and is now quoted on the stock exchange. It recently changed name to Tawuniya.

Alongside NCCI, there were unregulated companies operating in the market, said to number over 100. All the unregulated companies were registered offshore and ranged from small local companies of doubtful quality to the local operations of established international groups. Some of the small local operations were little more than agencies for reinsurers while others acted as branch offices for a parent company outside the kingdom.

In 2005, the process of change continued with the enactment of the Co-operative Insurance Companies Control Law, quickly followed by the Implementing Regulations, setting out for the first time a legal framework for the transacting of insurance business in the kingdom and making SAMA the insurance regulator, in addition to its roles as the central bank and the bank regulator.

Pace of change
The changes in the insurance industry over the last five years can only be described as astonishing, with a transformation from an almost completely unregulated market of mostly offshore companies to a growing number of domestically incorporated companies operating under a system of regulation aspiring to match international standards. To assist in achieving this objective, the regulator has benefited from the assistance of advisers including the UK Government Actuary’s Department (GAD). GAD has focused on technical matters including the assessment of business plans, product approvals and reinsurance structures.

The law requires that insurers must operate on a co-operative basis, using the Tawuniya structure as their model. The Implementing Regulations require that 10% of the profit from insurance operations must be returned to policyholders. Some companies promote themselves under the Takaful banner and plan to use a Takaful model as the basis for profit-sharing with their policyholders, but profit shares must be no less than those determined by the cooperative model.

Some of the new companies established under the regulations have international associations, but most are either connected with regional groups or are independent Saudi companies. Many of them are transformations of the better-run offshore companies that were previously operating in the kingdom. The whole process was something of a shock to all companies, with many of the previous operations simply closing down. Only the more organised were able to cope with the transformation needed. Another result of bringing the insurance industry into a regulated environment through locally established companies is the increase in employment opportunities for Saudi nationals. The percentage of the insurance workforce represented by Saudi nationals is targeted to increase. The insurance industry is expected to provide significant employment opportunities to the growing population of Saudi Arabia.

An interesting requirement of the newlyregulated system is that companies must be quoted on the Saudi stock exchange with at least 25% of the listed shares offered to the public. In most cases, the listed shares comprise 40% of the total capital. The minimum required capital of SR100m (£16m) is high by international standards, but the entry of the new insurance enterprises has added to the capitalisation of the stock market, the range of businesses that it includes and the depth of the market.

One of the newly authorised companies is a pure reinsurer with SR1000m (£166m) of capital. The government wants to see more business reinsured in the local market and the establishment of Saudi Re will add to the domestic capacity available, in addition to the capacity previously available from the exchange of business between direct companies. One result of increasing the local reinsurance capacity is the enhancement of local technical skills. Other reinsurers active in the market include most of the wellknown international groups, together with several regional reinsurance companies.

New developments
Alongside the formation of new companies, other developments have taken place to establish an insurance industry on a sound footing for the future. Motor insurance was made compulsory in 2002 with a prescribed form of insurance covering the driver rather than the vehicle. This did not prove to be entirely successful and was soon replaced by compulsory vehicle-based insurance. A motor claims processing and administration organisation called Najm has been established, with shares subscribed by most of the local insurance companies writing motor business. The aim is to streamline the process of claims assessment and settlement.

Medical expense insurance is now compulsory for all expatriate workers and their families. The number of people insured is estimated to be around six million out of a total population of 28 million. There is some prospect of compulsory insurance coverage being extended to Saudi nationals in the future. Minimum terms of coverage are set down by a new organisation, the Council of Co-operative Health Insurance which is a government body set up to regulate compliance with the compulsory health insurance requirements.

In addition to the initial legislation, SAMA has implemented regulations for insurance companies on money laundering, risk management, anti-fraud, market conduct and reinsurance over the last few years and has also published draft regulations for consultation on foreign branches and actuarial services. All the regulations and the initial law are available on SAMA’s website www.sama.gov.sa.

The draft actuarial services regulation provides for the introduction of an appointed actuary who may be an employee but would be barred from holding a position of director or chief executive. An independent actuary would review the work of the appointed actuary. The roles cover life and general insurance business separately and include pricing sign-off for general insurance premium rates.

Under the new regulations, actuaries need to be licensed and approved by SAMA along with firms of loss adjusters, brokers and other insurance service providers. The requirements for appointed and independent actuaries will put a strain on local resources, as companies involved in both life and general business will most likely need two appointed actuaries and there are only two local actuarial firms, both of which are fairly small.

The actions taken by SAMA to develop the insurance market in Saudi Arabia have been impressive, although there is still some way to go. For insurers and actuaries in Saudi Arabia these are certainly interesting times.

Michael North and Colin Thurston are consulting actuaries working in the insurance section of the Government Actuary’s Department