In terms of relative maturity and the depth of its internal processes, Saudi Arabia’s insurance industry has a long way to go before its full potential can be attained. While the kingdom has in many ways been a pioneer in the adoption of mandatory minimum health insurance, it has lagged in creating opportunities for some of the other key lines, such as motor insurance, and particularly in regard to insurance and Takaful regulation.
All Saudi Arabian insurance legislation stems from the cooperative insurance regulations of 2003 that provided the basis for all insurance and Takaful operation in the country. Prior to that the Saudi Arabian insurance sector was largely unregulated as conventional insurance was deemed impermissible under Shariah law and the only coverage offered was through a monopolized state-run cooperative.
This cooperative system has had a lasting effect in that no specific Takaful legislation currently exists and as such, Takaful operators are only subject to the aforementioned law with no regulatory framework. It has however meant that the government has been able to quickly roll out mandatory insurance edicts, such as that seen for life insurance.
Takaful is further impeded by a lack of guidance from the Saudi Arabian Monetary Agency (SAMA) which, having offered strict guidelines on product development and Shariah compliance, has had limited impact on the operational standards and procedures of Takaful companies. Overseas entities wishing to enter the Saudi Arabian market must do so through highly restrictive partnership agreements, which place numerous barriers on their activities and product suites.
These gaps are being filled gradually, and the entry of more players into the Saudi market is part of that process. However, the opening up of the market means that the need for increased scrutiny of the sector is now greater than ever.
However, this dearth of operational guidelines is now being turned into an advantage by the Saudi Arabian authorities. Even as new players are being created, the kingdom is putting in place a much-needed regulatory regime that is set to place a high standard on operational procedures, backed by strict guidelines on compliance. The size of Saudi Arabia’s population, combined with its favorable demographics, should mean that in a relatively short timeframe, Saudi Arabia could quickly become the premier insurance and Takaful market in the GCC.
The latest regulatory reform relates to the setting up of an ‘audit committee’ by all insurers and reinsurers operating in the kingdom. Put out in July 2011, the draft regulation calls on all players to create internal systems to maintain records and thus be in compliance with all new regulations. Companies must establish suitable written controls and procedures to ensure and monitor compliance.
It is not yet clear what impact these regulations will have on Takaful operators and if concessions will be given to the Takaful model. Non-compliance will lead to enforcement action by SAMA, though at this point it has not been spelt out as to what this will entail.
There is a highly optimistic outlook for the Saudi Arabian insurance sector as there is strong inherent growth potential within the market. Ernst and Young (E&Y) back up this assertion, claiming that Saudi Arabia is the largest Takaful market in the GCC, seeing nearly US$8.9 billion in contributions over the course of 2010. The country is also expected to see the largest growth going forward, as favorable demographics and oversaturated insurance markets in neighboring countries hinder growth. Should the Saudi Arabian authorities be able to offer a well-regulated domestic insurance sector, it will prove to be a welcome external market for many of the larger Takaful players in the UAE and Bahrain, not to mention the larger international players faced with increasing domestic competition.
The Saudi Arabian insurance industry has emerged as one of the fastest growing insurance industries across the world with the kingdom’s insurance industry exhibiting tremendous growth during the past few years, providing lucrative opportunities for both existing and new market entrants, specifically regarding motor insurance which according to RNCOS will grow at a CAGR of over 33% during 2011-2013.