Modest growth and consolidation forecast for Saudi insurance market

The Saudi insurance market is expected to see only modest growth at best in 2017, according to Standard & Poor’s Ratings. It also said 2017 may be defined by mergers and acquisitions, as the market finally starts to see consolidation. Insurers have been insulated from the changes to Saudi Arabia’s economy caused by the fall in oil revenues, which has led to budgetary deficits. But despite the sector's overall underwriting profitability, S&P lowered its credit ratings on several Saudi insurers during 2016 due to company-specific factors, including product, process and solvency issues. S&P said any growth would be largely fuelled by the authorities’ pursuit of motorists, since around 55% of the vehicles currently on Saudi Arabia's roads are not insured, and employers have so far not taken out the cover required under Saudi law. S&P also said that Saudi authorities estimate that about 2.5 million Saudi nationals are working in the private sector without being provided with medical cover by their employers, in breach of regulations. The budgetary deficits have resulted in a decline in infrastructure spending across the kingdom and a consequent fall in construction-related insurable activity. Premium volumes for construction-related lines such as engineering have declined. S&P said that gross premium written across the sector grew by just 0.5% in 2016, while net income improved by 139% to SAR2.5bn, although neither premiums nor profits are spread evenly across the sector. Domestic gross premium written for 2016 is estimated at SAR35.8bn ($9.5bn), based on the sector's most recent results, which are still unaudited. Enforcement of actuarial pricing has hit smaller insurers more than others, by largely removing their ability to compete on price, said the agency, which has exacerbated the disparity between the market leaders and the rest. The main business lines of Saudi Arabia-based insurers are compulsory group medical and motor third-party liability covers. Of the 33 insurers that were operational in both 2015 and 2016, 14 reported net losses totalling SAR707.7m in 2015, while the remaining 19 reported profits totalling SAR1,751.2m. By contrast, only six insurers reported net losses in 2016 (totalling SAR244.7m). The remaining 27 reported combined profits of SAR2,741m. S&P said it remained concerned that Saudi Arabia has too many insurance companies, with a number that are too small to compete effectively with their larger peers. “If insurers were to consolidate, their greater size would help dilute the impact of high fixed costs, and would likely help promote greater competition across the whole market. However, the complexity and occasional ambiguity of local law and regulation means that economic logic alone may not be sufficient to support the case for consolidation. We therefore anticipate that the government will agree to act as a facilitator,” said S&P. It noted that the regulator, the Saudi Arabian Monetary Agency, has taken this role in the past, successfully promoting the consolidation of the domestic banking sector to just 12 banks.

Modest growth and consolidation forecast for Saudi insurance market

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