Assessing the risks and opportunities in the Saudi Arabian insurance market

Saudi Arabia flag

Sustained price hardening in medical and motor lines is set to add further fuel to the Saudi Arabian insurance market’s growth story throughout 2015, according to research from Moody’s.

The Saudi Arabian insurance market is going through a period of rapid evolution. It is the second largest insurance market in the Gulf Cooperation Council (GCC), and, with an eight-year compound annual growth rate of 20.3% in 2014, it is the second fastest growing insurance market in the region after Qatar. 

Key drivers for this impressive growth trajectory include a move from the insurance regulator [the Saudi Arabian Monetary Agency, or SAMA] to make health and third-party motor coverage compulsory; an increasing awareness of the need to purchase insurance products; favourable economic conditions; and what Moody’s terms prudent actuarial reserve modelling introduced by the regulator in 2013. 

“The Saudi market is dominated by the compulsory motor and medical lines of business,” said Mohammed Ali Londe, a Dubai-based analyst with Moody’s who authored the report. “Both these lines have benefitted from the industry wide premium rate increases following the implementation of actuarial reserves modelling in 2013.” 

In fact, price hardening in the medical and motor lines was close to 20% in 2014. “As a result of the price hardening in these lines, we expect the market to report good underwriting profits in 2015 and 2016, as it rebounded in 2014 with combined profit of SAR0.7 billion ($180m) compared to losses of over SAR1.4 billion in 2013,” Londe added.

Despite this significant growth, Moody’s reports that Saudi has the lowest insurance density (a ratio which reflects the per capita dollar spend on insurance) in the GCC at $264 and one of the lowest insurance penetrations in the region at 1.1% of gross domestic product (GDP) in 2014. This indicates potential for further growth in the Saudi insurance market.

Londe singled out three factors that are important in ensuring the continued growth of the Saudi insurance market. These are: the Saudi Arabian authority making more lines of business/covers compulsory; a continued increase in awareness of the need and benefits of purchasing insurance products; and, continued favourable economic conditions as previously experienced in Saudi with a GDP that has doubled since 2006.

Although the Saudi market is fragmented and focused on retaining medical and motor business, Moody’s sees strengths in the overall asset quality of the market and foresees a return of the market to its previous strong capitalisation levels. “With the favourable economic backdrop we expect the Saudi insurance market to continue to grow and be profitable, particularly for some larger more established insurers,” Londe told GR.

But said Londe, it may take the less sophisticated insurers a couple of years in getting the balance right between the premiums and risks they should underwrite and the level of reserves they should maintain.

A 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.

In 2014, the top five insurers by premiums included two international groups, BUPA Arabia and MedGulf, both of whom have reported good underwriting results in 2014 with combined operating ratios, on Moody’s basis, of 93%.

But excluding the top five groups, which write around 62% of the market’s premiums, the 2014 average premiums per insurer stand at approximately $96 million, which Moody’s believes indicates a considerable level of overcapacity in the industry.

“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,” said Londe. “This despite our expectation that the insurers in the market will benefit from the continued growth.”