Pressure for insurance consolidation builds in Saudi Arabia

The kingdom’s insurance market is overcrowded and dominated by three big insurers. Smaller firms are struggling to survive. Published in MEED, 4 April 2013

Insurance is all about evaluating and managing other people’s risks, but some Saudi insurance firms are also facing the risk that they might not be able to survive for much longer on their own.

The problems are most acute for smaller firms, many of which are loss-making and struggling to establish critical mass in what is a crowded and competitive market. At the other end of the scale, the top three insurers account for more than 53 per cent of the total market in terms of gross premiums written, and even more of the profits. The indications from the regulator, the Saudi Arabian Monetary Agency (Sama), are it would probably prefer to see fewer, more profitable companies.

Among the elite group, Company for Cooperative Insurance (Tawuniya) is the clear leader, with SR5.6bn ($1.5bn) of premiums last year, or 27 per cent of the total. The next two in terms of size are Mediterranean & Gulf Cooperative Insurance & Reinsurance Company (Medgulf), which wrote SR3.3bn of premiums last year, 16 per cent of the total, and Bupa Arabia for Cooperative Insurance, part owned by the UK’s Bupa, which wrote SR2.2bn of business, 10.5 per cent of the market total.

Fast-growing market

Only one other company, United Cooperative Assurance Company, managed to write more than SR1bn-worth of premiums. The other 29 companies had to make do with far less, although at least one other firm could soon join the leading pack. Al-Rajhi Company for Cooperative Insurance, part of the Al-Rajhi Bank group, has seen its business grow from premiums of SR230m in 2010 to SR493m in 2011 and more than SR600m last year. Its losses have also gradually reduced over the period and it almost broke even last year.

Few can hope to match Al-Rajhi’s pace, but the market as a whole has been growing fast in recent years. This has been helped by a strong macroeconomic performance, as well as the introduction of compulsory health cover for private sector workers and their families in December 2011. Gross written premiums were up 27 per cent in 2008 and 34 per cent in 2009, before falling back to a still healthy increase of 12-13 per cent over the past three years. The level of insurance claims has also been rising steeply, from SR4.1bn in 2007 to SR13.5bn last year, but that still leaves room for profit.

When it comes to who makes that profit, however, size matters in the Saudi market. The top three insurers accounted for 69 per cent of the entire industry’s profits in 2012, while eight of the bottom 10 firms posted a loss. Overall, 11 of the 33 companies made a loss.

The pattern of profit and loss is a sign of just how competitive the Saudi market is these days, to the extent that some insurers have been pricing their policies extremely low. For some newer entrants, this approach has been taken in an effort to generate the cash-flows needed to cover their basic operating costs, such as salaries and the cost of setting up a branch network.

All this has in turn caused some concern at Sama, which is also Saudi Arabia’s central bank. It is one of three insurance market regulators, the other two being the Council of Cooperative Health Insurance, which focuses on the health insurance sector, and the Capital Market Authority, which has a role as all insurance companies are obliged to list their shares on the Saudi Stock Exchange (Tadawul).

Pricing challenges

To tackle the problem of loss-making firms, Sama has been encouraging providers to price their policies at levels that ensure some profits are made. In his most recent intervention on this topic, central bank governor Fahad Abdullah al-Mubarak urged an audience of insurance firms at the Saudi Insurance Symposium in Riyadh in late February to manage their risks by, for example, reinsuring more policies.

“One of the most important tools that contributes to ensuring companies’ stability and development of their works, is good risk management,” he said. “Another important tool for management of insurance companies’ risks is appropriate pricing of their products. Prices should be fair, balanced and based on technical and actuarial basis.”

That pressure to sell insurance products at a realistic price is important for the health of the sector, but not all companies are as well placed to meet the regulator’s demands as others. According to David Anthony, a credit analyst at US ratings agency Standard & Poor’s (S&P), the pressure to increase prices plays into the hands of the bigger firms.

“There has been some very aggressive pricing, particularly on the bigger ticket medical accounts for about 18 months, which, in addition to high fixed costs relative to turnover for some of the smaller players, is why almost a third of the market has been declaring losses. It’s easy to get top-line growth, but it can come at a cost,” he says.

“The way Sama is forcing the whole market to charge an economic price for insurance cover is good news for the big players. Given their economies of scale, they can make an underwriting profit at a lower unit cost per insured head than smaller players, which have a higher relative fixed-cost base, and so are having to charge more. The market leaders will pull further away in terms of performance from the rest of the pack, which raises questions over the smaller players already declaring losses. It’s hard to see what they can do.”

Mortgage law

There is a chance that some small companies could benefit from the introduction of the kingdom’s first mortgage law, which was approved in 2012 after a long gestation period. In this case, it is more likely to be the insurance firms linked to banks that will benefit most.

The law could boost activity in several ways. It should provide a spur to house-builders, which will in turn necessitate more insurance of materials needed to construct new houses. Once the homes have been built and locals are taking out mortgages to buy them, their lenders are sure to insist they also have term life protection to cover the repayment of the loan in the event the borrower dies. The new home owners will also need to take out house and contents cover.

All this will provide some welcome diversification to the insurance market in Saudi Arabia, which is currently focused on a small number of areas. The main line of business is health cover. In 2011, the SR9.7bn of health policies written accounted for more than half of all premiums, according to the most recent insurance market report from Sama. Health insurance premiums tripled in size between 2007 and 2011.

The next biggest line of business was motor insurance, which accounted for a further 21 per cent, worth SR3.9bn. It was followed by property and fire, which, at SR1.2bn, made up just over 6 per cent of all premiums written in 2011. Other categories, which include marine, aviation, energy and engineering, are all in the single digits in terms of market share.

How quickly the new mortgage law will make a difference is unclear. Most observers suggest it will take several years before banks become comfortable lending significant sums into the market and developers start building many properties at the lower end of the market, where demand is high, but margins are thin.

“How quickly the housing market will respond remains to be seen,” says one local economist. “But the mortgage law is an important element of the broader development of financial services in Saudi Arabia. If it is done right, it will create new products in securitisation and insurance.”

If insurers linked to banks do manage to take advantage of this opportunity, it will be good news for Al-Rajhi’s insurance arm, but also for the insurance arms of other banks such as Sabb, National Commercial Bank (Al-Ahli) and Alinma Bank.

While they wait for that market to take off, the insurance sector is, in any case, benefiting from wider growth in the local economy. Regional projects tracker MEED Projects estimates there are $910bn-worth of projects planned or under way in the Saudi market. S&P points out that high levels of government infrastructure spending means the amount of insurable activities is expanding. Partly as a result of that, S&P expects the value of premiums to rise this year at a similar level to last year, at about 12 per cent.

There are other reasons for supposing companies should be able to find plenty of room for organic growth. Despite having the largest economy of the six GCC states, Saudi Arabia is only the second-largest insurance market in the Gulf. According to a market survey published by Qatar Financial Centre Authority in May 2012, Saudi Arabia accounts for about 32 per cent of total non-life premiums in the region compared with 47 per cent for the UAE.

Market consolidation

While growth will be welcome for all market participants, other changes may prove more painful and difficult to manage.

S&P predicts that consolidation will have to come to the Saudi insurance sector at some point and it suggests the eventual market landscape could look similar to that of the banking industry, where a dozen local institutions control the market. As with the mortgage market, insurance firms linked to the banks will be among the likely winners alongside the existing market leaders.

“There’s too much capacity, too many companies for the marketplace. It’s over-insured,” says Anthony. “I think the regulators would welcome some consolidation and if they are going to encourage consolidation, as seems to be the case, they will look to smaller companies merging with stronger, larger companies. Smaller insurers who do not have strong connections with a bank, or who don’t have any other strong, preferred access to the captive business of their shareholders, will find themselves increasingly challenged.”