The Saudi insurance sector is set to maintain a strong yearly growth of 14-17 per cent during the next five years fuelled mainly by the enforcement of regulations, said an industry expert.

“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 15-25 per cent and 14-16 per cent respectively,” explained Jaap Meijer, managing director and head of Equity Research at Arqaam Capital, specialist emerging markets investment bank.

“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,” he added.

“Motor holds the most growth potential as it lags considerably behind medical in enforcement, pricing and penetration. Compared with the current regulation enforcement rate in medical of c.70-75 per cent, motor TPL enforcement stands only at 40 per cent,” Meijer continued.

“There is a potential for the number of motor policyholders to double in size but at a lower average of SR1,200 per policy instead of the current sector average of SR1,750. We see the segment doubling premiums by 2018 on re-pricing, cost of inflation and additional two million insured vehicles.”

“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 5-8 per cent as well. Furthermore, participation in the government bonds program, if allowed by SAMA, may offer the largest upside potential,” Meijer 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,” concluded Meijer. – TradeArabia News Service