Since Saudi Arabia started to regulate its insurance market a decade ago, business has boomed. But there are doubts over how many firms are making money

Prior to the implementation of the Cooperative Insurance Regulations in Saudi Arabia in the mid-2000s and the subsequent establishment of licensed insurance companies, insurance-based options for businesses in the region were limited.

Businesses operating in one of the most volatile regions in the world could take out conventional insurance either overseas in markets like Lloyd’s or the USA, or with an unlicensed provider in Saudi Arabia.

These insurance products were largely unenforceable in Saudi Arabia on the basis that they contravened Shari’ah law, so the unlicensed insurer was not subject to any regulation.

Another option for businesses was to take out co-operative insurance with Saudi Arabia’s former state monopoly provider, the National Company for Cooperative Insurance, now known as Tawuniya.

Since regulations were implemented in 2004, the Saudi market is operating more effectively and efficiently. However, some market insiders have expressed concern about actual versus perceived market stability.

Ernst & Young head of insurance for MENA, Justin Balcombe, says in Saudi Arabia, unlike the UAE, there are structural weaknesses in the way in which insurance companies operate and the way in which the market allows them to operate.

“Effectively there is a strong regulator but a weak market, and that doesn’t work,” he says. “It is starting to show that, because a large percentage of insurance companies are not making the right sort of money, and therefore out of 30-plus insurance companies, only three or four of them are truly making any profits.”

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The story

Regulations pave the way for growth
Rapid development of the insurance industry in Saudi Arabia has spurred growth across the entire financial services industry in the region. The introduction of insurance regulations for the first time in 2004 stabilised the industry and opened the doors for more Western insurers and brokers to move into the region for business.

Region’s insurance market is born
The concept of takaful, and by extension, re-takaful, has been practised for more than 1,400 years. The word originates from the Arabic word kafalah, meaning ‘guaranteeing each other’. Modern takaful has developed into three basic models applicable to all areas of the market: mudharaba, wakalah and waqf. Moving forward, the biggest challenges for takaful insurance is overcoming inherent misconceptions, integration into Western insurance and creating an efficient operating standard.

What happened

The insurance sector in Saudi Arabia was unregulated prior to the Control of Cooperative Insurance Companies Law, which came into force on 20 November and is enforced by the Saudi Arabian Monetary Agency. 

Implementing regulations, in conjunction with the passing of the Cooperative Insurance Companies Law, are published on 23 April. Together the two form the Cooperative Insurance Regulations.

The introduction of stronger regulations spurs growth as gross written premiums hit record levels - up 27% in 2008, rising to $2.9bn (from $2.3bn in 2007).

The rapid development of the sector is reflected in a string of insurers undertaking IPOs in Saudi Arabia, including ACE Arabia and AXA Cooperative.

What’s next

Market experts have predicted that Saudi Arabia’s GWP will reach $8bn by 2015. This growth has been triggered in part by the introduction of compulsory insurance, particularly in the health sector. A cross-territory approach to regulation across the Middle East will further strengthen the region’s
ties to more established western markets.