Tuesday, September 23, 2014

Saudi insurance market improves, but only for selected few

Islamic Finance news Alert

Tuesday, 23rd September 2014

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Daily Cover

SAUDI ARABIA: When the Saudi Arabian Monetary Agency (SAMA) commissioned all insurers to undergo an actuarial review of the technical pricing of both medical and motor insurance last year, industry players, more particularly smaller operators, were wary of the implications (See IFN Report Vol. 11 Issue 04). Despite looking to increase the profitability of insurers, the new actuarial pricing model places underperforming companies at a loss, due to their lack of economies of scale in supporting their price competitiveness in an oversaturated and overly skewed market. However, the first half of 2014 has shown positive signs of recovery from the year before which was marred with severe losses.

Big players boost market
“It is evident that the actions taken by the regulator to improve market-wide operating performance have had a positive effect on the first two quarters of 2014,” noted AM Best Company in its latest special report on the Saudi insurance market.

Health and motor coverage continue to be main driver for growth as price increases on these lines, contributing to a return to profitability in the first half of 2014 by the market. Gross written premiums for the first half grew 24% year-on-year and the industry registered a profit of SAR169 million (US$45.05 million), largely due to Saudi’s leading operators: Tawuniya, Bupa Arabia and Medgulf. Holding a 53% market share, all three insurers managed to enhance capital and surplus by 11%, 2% and 10% respectively. However these market leaders had the advantage of economies of scale which remain elusive to the majority of other players.

Small players sit out
About half of the market participants were producing underwriting losses for the January-June period, with underwriting performance being distorted by differing timing of reserve strengthening by companies. The kingdom’s low interest rate environment and conservative investment policy adhered to by insurers did not materialize in sufficient investment returns which led to many operators being unable to mitigate the shortfalls in underwriting performance. Despite market loss ratio improving significantly to 82% (first half of 2014) from 94% (full-year 2013), AM Best opined that: “Risk-adjusted capitalization for many market participants is likely to remain under pressure, as retained earnings are not sufficient to bolster shareholders’ equity in line with insurers’ growing risk profiles.”

Capital woes
Pressure on risk-adjusted capitalization also meant that many of these Takaful players have not been able to meet regulatory capital requirements and have not able to distribute dividends to shareholders; Arabian Shield was the only operator in 2014 which paid out dividends. The minimum capital requirements set by SAMA remains an ongoing concern for the Saudi insurance industry; as many as nine operators have reported capital and surplus below SAMA minimum capital requirements (SAR100 million (US$26.66 million)) and reinsurance players (whose minimum regulatory capital requirements are twice as high as those of direct insurers) may seek to relinquish their reinsurance license in order to alleviate pressure. “Given the competitiveness of the market, it will be difficult for companies to rebuild capital through retention of earnings; they will need to seek capital injections from existing of new shareholders,” said AM Best.

New focus needed
Nonetheless, it is imperative for Saudi insurers to adopt prudent underwriting practices to bolster earnings instead of relying on capital injection which would only improve capital adequacy over the short-term. Product diversification away from motor and medical lines is also needed; this is especially true for smaller operators whose capital adequacy and operating performance remain under strain despite improving market conditions buoyed by the new actuarial regulatory action.


Project & Infrastructure Finance: An IFN Correspondent Report

Corporates turning to Sukuk for construction projects in Turkey
In Turkey, the number of entities issuing Sukuk to finance infrastructure projects has been increasing. At present, Dogus Group and Agaoglu Group plan to raise up to US$670 million through Sukuk to fund their construction projects.
Data Round-up

IFN Deal Summary: Dollar denominated deals close the gap
The past week has seen the issuance of four early awaited Sukuk. REBECCA SIMMONDS examines their effect on the global Sukuk landscape.
Today's IFN Alerts

US: American involvement in Sukuk market likely to remain minimal, says industry player

JORDAN: Interested parties are submitting Sukuk applications to the Jordan Securities Commission, confirms chairman

MALAYSIA: Affin Investment Bank and Hwang DBS Investment Bank move forward with merger

BANGLADESH: Bangladesh Bank offers new refinancing scheme for excess funds held by Shariah-based banks

BAHRAIN: Central Bank of Bahrain's BHD36 million (US$94.95 million) Sukuk Salam oversubscribed by 190%

EGYPT: Abu Dhabi Islamic Bank Egypt to purchase 1.36 million shares in Adiles Leasing

MALAYSIA: Profit payment due for HSBC Amanah Malaysia RM3 billion (US$925.43 million) multi-currency Sukuk

QATAR: Qatar Exchange announces changes in Al Rayan Islamic Index constituents

BAHRAIN: Ithmaar Bank launches website upgrade with new features to improve user experience

OMAN: Ahlibank names Dur Mohammed al Balushi as new assistant general manager – head of IT

UAE: The Central Bank of the UAE appoints CEO of Emirates Investment Authority as new governor

TANZANIA: Head of product development and Shariah compliance at Amana Bank to leave end of this month














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