By Mohammed Sadullah Khan
Background
A decade prior to the Regulation of Insurance Industry in Saudi Arabia, I met one of the Professors from a highly developed nation at a Dental college for insuring his new car. I inspected his car and explained to him about the coverage offered by us and collected the premium with a valid receipt. His vehicle was standing outside the Garage and in the college campus. I told him that now he has full insurance coverage and he can drive his vehicle into the Garage which was hardly 10 meters away from the garage. But the professor was not comfortable to drive, in-spite of my verbal confirmation and receipt. He wanted me to fax a confirmation stating that his vehicle is insured, then only he was willing to drive his car. In contrast I met another person of the same country, an Executive working for a local Company and after a lengthy discussion; he decided that he is not interested in insurance. On further exploration he informed me that he was driving his car for over a decade without any Insurance.
The Saudi Arabian Insurance Market is the largest market in the GCC. The legislation process of the Insurance Industry started in the year 2006 and as of today no Company is authorized to deal in insurance without proper licensing. Prior to this legislation there were over 80 Insurance Companies operating in the Kingdom of Saudi Arabia. Most of the Companies were registered outside the Saudi Arabia and were operating through their agencies. The legislation has brought about stability to the market and many "fly by night operators" have vanished from the market. As per the latest list provided by SAMA, 21 insurance companies are fully licensed to operate in the Kingdom. In addition, 9 Insurance Companies have obtained the approval from the council of Ministers. The listing also includes 36 Brokers, 5 Insurance Advisors, 10 Agencies, 6 Loss Assessors and Adjusters, 3 Third Party Administrators and 1 Actuary. So far 21 companies are listed on the Saudi Stock market. The SAMA (Saudi Arabian Monetary Agency), which is involved in the licensing process, has played its role very well during the processing of licenses for the Insurance Providers. A new governmental body, the Council of Co-operative Health Insurance (CCHI) was formed to look into the various aspects of Health Insurance. They have prescribed the basic mandatory wording for Health Insurance. They also monitor the proper implementation of its policies and also register various Insurance Providers based on their requirements. The mandatory motor insurance regulation helped fuel the motor insurance premiums to a high level. It also helped in the standardization of their coverage and services in line with the regulation. But once the law was fully implemented the growth in this sector got stunted and only an incremental growth is expected. Subsequent regulations pertaining Medical Insurance, which was made mandatory for the expatriates in three phases spurted the growth of Medical Insurance Premiums.
The insurance penetration in 2007 was 0.61% and it increased to 0.62% in 2008. The insurance penetration of the developed countries usually is closer to a double digit figure. This reveals that there is a huge potential of Insurance in the Saudi Market. The lower penetration is mainly due to lack of awareness of the Insurance. The making of compulsory medical and motor insurances will help in bringing about the much needed awareness of the Insurance and help in fuelling the demand for other Insurance Products.
NCCI, leader of Saudi Insurance Industry was the only company registered locally and was popularly known as "Tawuniya" its monopoly was broken by Malath Insurance Company, which was a new entrant to the market and was able to get the first license after NCCI. NCCI later on changed its official name to Tawuniya. After the end of their monopoly, they are facing stiff competition from the existing as well as new players. The increase in oil prices and the fluctuating steel prices had a major impact on the businesses operating in the Kingdom of Saudi Arabia. The Global Recession which has swallowed many corporates and is squeezing many companies globally had a limited effect on the Saudi Arabian Industry so far. The Insurance Industry is not in the core sector, hence the chances of it taking a direct hit is low. However the GCC markets are also reeling under recession. To some extent the impact of global recession has its impact on the Saudi Arabian Insurance Industry. The lack of further prospects of new business has put on hold many Insurance Companies dreams of full fledged operation immediately on getting Licenses. The year 2009 may not give a big growth in premiums. However the year 2010 is expected to bring in some boom to the market. The medical Insurance for Saudi's is not yet made compulsory. Once this is made compulsory, then the medical Insurance premiums are expected to explode to new heights. The expected Medical Insurance premium in this sector of business is estimated to be around SR. 20 billion. The overall insurance market will grow by almost 200%.
Risk Areas
On the riskier side, Vehicle Insurance is one of the major portfolios of the Insurance Companies. The record of Saudi Arabian roads is very bad. Earlier this year the traffic chief, Maj. Gen. Fahd Al Bishr had said that Saudi Arabia suffered a massive economic loss of SR100 billion as a result of road accidents during the 10 year period. Every year we lose about 6,400 precious lives in road accidents. “About nine million traffic violations are recorded annually causing material losses of more than SR13 billion. Every 90 minutes someone dies in a traffic accident and after every 15 minutes one person is injured,” Let us have a look at the recent headlines,
· 29 feared dead in road accident
· Worker killed in fire accident
· Fire destroys Makkah warehouse
· Indian expat’s 2-1/2-year ordeal ends (Lack of Insurance and Lack of capacity to pay blood money)
· Blaze destroys TV station in Makkah
· Doctor ordered to pay SR. 50,000 for patient's death
These headlines are definitely nightmares for the Insurer as well as the general public. However inspite of these, the profile of the risk in Saudi Arabia is one of the best in the world. The Third Party liabilities under Motor Insurance is very low in Saudi Arabia, unlike other countries where there is unlimited liability causing acute claims under liability section of the motor policy and damaging the motor portfolio. On the side "Perils of God", there are very few natural calamities in Saudi Arabia even though certain zones are prone to flooding, earthquakes and sandstorms. The theft risk, which has increased in the last few years is still considered to be low compared to the world standards. We also find an element of fraud but it is very low in severity compared to other markets. Fire, which is also one of the major exposures and it engulfs many promising businesses. Medical Insurance is poised to become the largest portfolio in the entire Saudi Insurance Market. It is one of the attrition classes of business. Currently the portfolio has a major exposure of expatriate worker and local workers who get into the employment after a series of medical tests. Hence most of them age wise are younger and health wise better, hence the current medical Insurance portfolio is much healthier form the insurer point of view.
SAMA Report
The Saudi Arabian Monetary Agency has released their latest report on "The Saudi Insurance Market Survey - 2008". It gives an insight into the various figures of Insurance Industry in details and it is one of the few authentic reports on the state of Insurance Industry in Saudi Arabia. The report provides the figures for the year 2008. There has been a growth of 27% compared to 2007 figures. The GWP for the year 2007 was SR. 8.6 billion and it was SR. 10.9 in 2008. Motor Insurance which is a Mandatory Insurance grossed SR. 2.5 billion and constitutes 46% of the portfolio. There may not be a steep rise beyond this figure in the coming years. Health Insurance which grossed Sr. 3.1 billion in 2007 has increased to SR. 4.8 billion in 2008 this portfolio stands at 44% of the total insurance market. Protection and Savings, which represents 5% of the market has shown a growth of 82% compared to year 2007. It increased from SR. 0.33billion to SR. 0.59 billion. One of the main reasons for this growth is the tie-up of the life products with the health insurance.
Role of Brokers and other Insurance providers
The study conducted by SAMA reveals that the involvement of brokers has increased in generation of the business. The commission paid to the brokers has shown a clear upward trend the business has grown by 27% whereas the commission has grown by 34% in the same period. Brokers have played an important role in the some of the key sectors of Insurance. Most of the Insurance companies operating in Saudi Arabia have their own restrictions, which may not allow them to provide a comprehensive package. This gives brokers a leeway to help the customer find a suitable package from multiple insurers. There are various specialty products like Hull Insurance, High value Industries, Import and export of Petrochemicals, Professional Indemnity Insurance, Directors and Officers cover, Aviation Insurance and coverage of Petrochemical Industry etc. which will be difficult for the single insurer to provide adequate coverage. Apart from the brokers there will be a demand for specialist Third Party Administrators (especially to cater to the growing segment of Medical Insurance). The Insurance Surveyors and Loss Adjusters will also be able to see a marginal growth in their services as the volume of Insurance business increases. Currently there is scope for individuals who can act as consultants, but the registration process is acting as a deterrent in the pursual of their goals. The system of individual agents with a nominal agency fees and responsibility of the Insurance Company to train these individuals will help in the easy development of Insurance business.
Takaful Insurance
Saudi Arabia is one of the largest markets for the takaful insurance. Many multinational Insurance companies are also offering their Takaful products in the International markets. It will be easier for them to replicate their experience in Saudi Arabia. This sector is highly promising and a high growth arena. Apart from Saudi Arabia, Malaysia is able to provide a substantial growth in this sector. There is a need for an International Takaful Regulatory body, which can act as a watchdog and provide certification in respect of Takaful Companies and their products. It will provide a type of security to the customers of these Takaful Companies.
Personal Lines and Bancassurance
Another area which has fascinated the insurers who have worked in the developed countries is the Personal Lines Market. This is one of the niche markets. But as far as Saudi Arabia is considered many companies have tried to tap in this market unsuccessfully. Some of the reasons for the failure to tap in this market were lack of awareness in the public about insurance, high cost of servicing, lack of continued focus, wider distribution of individuals and lack of utilization of IT resources. Bancassurance, which is a word coined for selling of Insurance by Banks. This is a successful concept in most of the developed and developing countries. However few insurance companies have been trying to develop this business for over a decade but have not been successful in justifying their investments. Almost all the Banks in Saudi Arabia have a major shareholding in one or more Insurance Companies or maintain a strong relationship with their Insurer. Bancassurance in the Personal Lines sector need a high level of E-transactions and awareness of Insurance. It may take a few more years for this sector to develop. Motor vehicle insurance is a mandatory insurance and it is compulsory for anyone driving motor vehicle to have a Third Party or liability Insurance.
Manpower and IT
The backbone of any insurance company is its manpower and IT. There is a definite lack of talent in the market. The manpower in the Insurance Industry is expected to be more than double from the current figure. It is hard to find qualified and experienced personnel, who has right exposure to the Insurance field in full perspective. Personnel from non Insurance sector are entering into Insurance field. This has its own advantages and disadvantages. If properly trained and given right resources they may become a productive part of the team. Saudization is one of the buzz words of Insurance Industry. Many companies have successfully implemented their Saudization quotas and are able to get the results out of their Saudization drive. Proper training and development of these staff will help them in appreciating the finer aspects of Insurance and help them in their job satisfaction. These personnel should be encouraged to acquire professional Insurance qualification. Unlike in the past, now the Saudis and expatriates have an opportunity to obtain professional qualification locally from the Institute of Banking, which was established by Saudi Arabian Monetary Agency and has been in the forefront for offering training courses and examinations for the Banking and Finance sector employees, is also offering professional qualification in Insurance to those who are interested in acquiring Insurance qualification. Apart from looking after the training and development needs of the staff, the personnel department has to build in proper job specifications and descriptions. They should also work-out right succession plans, personal development plans and reward system, which is lacking in most of the companies. It is the responsibility of the Shareholders to see that they put the right person at the helm of the affairs. On the IT front most of the multinational companies have their own systems, which get replicated with the suitable changes as per the local environment. However some of the IT companies offer packages to the Insurance Companies for their day to day operations.
Competition
Legislation of the Insurance Companies have brought them on a equal footing, with the growing competition they are becoming hungrier for business to justify their expenses. In such a scenario the Risk Management, which is the core sector of the Insurance Company is taking a back seat. Many new companies are chasing and acquiring the businesses, which otherwise is treated as a bad business from the underwriting point of view. Insurance field being a technical area getting any kind of business will not help the companies in long run. The trading sector is different, where selling anything in volume will increase the profits proportionately. In Insurance writing bad business to the books will increase the risk of loss proportionately. The result may not be visible immediately but will become transparent in 2-3 years of time based on the accounting system adapted. There is heavy competition in Motor Vehicle Insurance as it is a compulsory Insurance. Motor vehicle can also be cover against Comprehensive Insurance. There is also competition for Motor cycle insurance even though the demand is low. Motor cycle Insurance is coming under Motor vehicle insurance.
Insurance Summit
The 3rd Insurance Summit was held between 17th and 20th May 2009 at Riyadh Marriott Hotel, Riyadh. It was attended by the prominent personalities of the Insurance Industry. The summit was held amidst the global recession crisis. The opening address was given by the dynamic HE Mohammed Al Jasser, Governor of SAMA. It was followed by the panel discussions and presentations by various leading personalities of the Insurance Industry for two days and the workshops were held for the remaining two days. The Summit provided an ample opportunity for interaction within the Insurance Industry in Saudi Arabia. The presentations covered various interesting aspects of Insurance like the current state of the Saudi Insurance Industry, Primary Health Care role, effects of global financial crisis on the worldwide Insurance market, how is the formation of a competitive Saudi Insurance Industry being affected by the current economic conditions, Takaful Insurance, Health Insurance Market and other Management and Regulatory topics. It also served as a platform for networking and helped the Insurance Industry look at the challenges with a 360 degree vision
Promising Outlook
The mandatory medical and motor insurance is pushing the general public into interaction with the insurance companies. The Insurance Companies should avail this as an opportunity and engage it-selves in educating the general public of the insurance products and its benefits. A professional servicing of the current customers will help in creating awareness by word of mouth mode. Despite the Saudi Arabian Insurance Industry facing the challenges like downturn, anticipated closure of certain companies due to their lack of professionalism and foresight, intense competition for quality business, lack of insurance awareness, lack of right risk management tools, taxation on re-insurance premiums and lack of qualified manpower, the outlook remains to be positive. Many Multinational Companies are making their presence felt, as they feel confident that the well managed companies are bound to be successful in the safer and profitable Market. We have come a long way since the incident narrated in the first paragraph, today Insurance is considered as a necessary evil and sooner it will become a necessity. There is a potential of huge untapped market, the Personal Lines, Bancassurance and Medical Insurances are expected to boom in the coming years.
Mohammed Sadullah Khan, Faculty Member, Insurance Studies Unit, IOB, an MBA, is a Fellow of Insurance Institute of India and an Associate of Chartered Insurance Institute (UK). Has more than 23 years of experience in the Insurance Industry, of which 15 years in Saudi Arabia, is an expert in all classes of general insurance with special emphasis on property, medical, motor and bancassurance. He can be reached at mosakhan40@gmail.com.
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