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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.
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