Saudi insurance sector set to grow 14% in five years

Muscat: Saudi insurance sector is set to maintain a strong annual growth rate of 14 to 17 per cent during the next five years, fuelled mainly by the enforcement of regulations, according to Arqaam Capital, the specialist emerging markets investment bank.
Jaap Meijer, managing director and head of equity research at Arqaam Capital said, “We expect the Saudi insurance sector to be the least affected by weaker oil prices, budget cuts and the tightening liquidity as the enforcement of existing regulations will propel motor and medical premiums growth at a rate of 15 to 25 per cent and 14 to 16 per cent respectively.”
“We estimate that SAMA’s (Saudi Arabian Monetary Agency) enforcement of mandatory medical and Third-Party Liability (TPL) insurance would account for half of the growth during the next five years, adding 3.5 million medical policyholders and 3 million insured vehicles,” Meijer noted.
“Motor holds the most growth potential as it lags considerably behind medical in enforcement, pricing and penetration. Compared to the current regulation, enforcement rate in medical of accounts for.70 to 75 per cent, motor TPL enforcement stands only at 40 per cent. There is a potential for the number of motor policyholders to double in size but at a lower average of SAR 1,200 per policy instead of the current sector average of SAR 1,750. We see the segment doubling premiums by 2018 on re-pricing, cost of inflation and additional two million insured vehicles,” he added.
“But the Saudi insurance sector has still to grapple with a number of issues. A key weakness of the sector is its inadequate pricing, which means that more than half of insurers incur underwriting losses. Many barely profitable insurers rely on investment income or unwinding claims to remain profitable. We expect higher interest rates to boost earnings by 5 to 8 per cent as well. Furthermore, participation in the government bonds program, if allowed by SAMA, may offer the largest upside potential,” the expert explained.
SAMA made actuarial pricing compulsory for all insurance companies in 2013, mandating insurers to price premiums in line with clearly defined risk criteria after intense competition pushed prices down, weighting heavily on underwriting profitability.
“The fragmentation of the sector and the depletion of capital are two other major challenges with many small insurers falling short of securing the necessary scale to generate sufficient profits and to maintain top-line growth in line with the market, ceding market share to insurers with more robust solvency and better economies of scale. In our view, consolidation in the sector could be a viable option in the future,” Meijer concluded.