The below text is taken from the Middle East Insurance Review Article.

The Saudi insurance market demonstrated a satisfactory performance in the first half of 2020, with GWP increasing by almost 5% to SAR20.7b ($5.5bn), along with a 186% hike in pre-zakat profits amounting to SAR1.2bn against SAR426mn in the corresponding period in 2019. A key factor contributing to this encouraging outcome is the drop in paid claims in 1H2020 because of the lockdown, which was enforced to limit the spread of COVID-19. A slower pace of economic growth has accompanied this though, with GDP growth expected to decline by more than 6% in 2020, according to the IMF. Despite the big challenges posed by the COVID-19 crisis, the insurance sector has continued to develop (in terms of top line and profitability), with several initiatives launched this year, noted chairman of awareness & training sub-committee and media spokesman for insurance companies Adel Al-Eisa. “Despite the overall economic slowdown caused by COVID-19, the insurance sector has maintained its expansion by introducing new products to meet consumers’ emerging needs. At the same time, the regulatory bodies had forged ahead with several initiatives to support the sector’s growth, and this should be reflected positively on the companies’ performance in the coming period,” Mr Al-Eisa said.

The Saudi Arabian Monetary Authority (SAMA) introduced several initiatives this year to drive growth in the sector. “New initiatives like the Hajj and Umrah scheme and inherent defects insurance will lead to an increase in premium volumes,” said Badri Management Consultancy managing director Hatim Maskawala. However, the impact of these initiatives may not be seen in the immediate future because the pandemic has derailed the progress of various activities – including this year’s Hajj and Umrah season, he said.

The challenge to sustaining momentum

“Overall, the first half results are promising but the challenge is to sustain the positive outcome until the end of the year. The quarterly results are not necessarily a precise indicator,” said Mr Al-Eisa. The sector has faced big challenges in the past few years (particularly following the plunge in oil prices in 2014) but 2019 recorded an improved performance with 8.2% growth for GWP to SAR37.9bn from SAR35bn in the previous year, and a notable increase in net profit to SAR858m from SAR183m. The growth in profit is attributed to better underwriting results, which increased to SAR952m compared to SAR295m in the past year.

Presenting the broker’s point of view, ACE Insurance & Reinsurance Brokers GM and executive VP Osama Abu Ghazaleh said there are over 80 brokers in the Saudi market, and this crisis has had a major impact on many of them. “The larger brokers in the market have suffered to a lesser degree as they have the resources and contingency plans to better deal with a crisis; at ACE our remote working capability allowed us to achieve the targets we have set prior to COVID-19,” he said. One challenge broker’s face is on the receivables end as they rely on receiving their commissions once clients have settled their premiums, he said. “Companies in industries that have been severely hit like hospitality, retail and construction have had difficulty in meeting their financial obligations, which has had a trickledown effect on brokers.”

Mixed 1H profit performance

Though the interim consolidated financial results for the sector have shown an improvement in profitability in the first half of 2020, there have been discrepancies in companies’ outcomes. While 16 out of the market’s 31 operators continued to be profitable, six insurers reported losses. Meanwhile, seven insurers managed to turn around their operations, recording profits in the first half of this year. The remaining two operators however slipped into the red in 2020 after being in the black the previous year. Bupa Arabia generated a pre-zakat profit of around SAR569m, while Tawuniya achieved SAR295m – both commanding 71% of the market’s total profit. On the top line side, 19 operators grew their premium income with Aljazira Takaful reporting the largest growth rate of 120%. Fluctuating investment income will weigh on the sector’s performance. By the end of the first quarter, investment income saw a massive drop of 37% (to SAR181m from SAR285m), however, operating income managed to outbalance the drop as losses retreated to SAR99m from SAR168m. The current high profitability is mainly because of lower claims due to COVID-19, pointed out Mr Maskawala. “This is especially for the motor lines. I do not see this growth in profits being sustainable and expect it to reduce as we progress during the year.”

As for GWP, the increase i n VAT (from 5% to 15%) and custom duties will lead to an increase i n claims costs, which will force premiums to increase, he said. Yet, one factor which i s going to pull premiums down is competition, he pointed out. “Due to the current economic conditions and the high profitability seen due to the COVID-19 lockdown, insurers have started giving discounts.” In general, due to the various initiatives, which the government has implemented, Mr Maskawala expects the total volumes to grow this year in excess of 10%.

Lines affected

As with all industries, most insurance lines have been affected in one way or another, said Mr Ghazaleh. “As a result of the crisis, companies are now looking to reduce costs. For example, whilst it is compulsory to buy medical insurance, companies have revisited their medical plans and amended the benefits and hospital networks to reduce the premiums they would be paying. This has caused a drop in medical insurance premiums, and that in turn has led to a drop in commissions to brokers,” he said. Specialty lines have seen dramatic increase in rates due to COVID-19, he added. “Data breaches are becoming more and more prominent as the world continues to move towards further digitisation, accentuating the importance of cyber liability insurance for organisations.” He cited a recent report titled ‘Cost of a data breach’ by IBM, which shows that there has been a significant increase of data breaches in 2020, with the Middle East seeing a 9.4% increase of cases. The report also shows that cyber insurance had a mitigating influence, where 51% of organisations with cyber insurance used claims to cover the cost of third-party consulting and legal services. “Directors & officers insurance on the other hand, has also seen a dramatic increase in rates and reduced market capacity. We are seeing this on other specialty lines as well where markets are reducing their participation and imposing higher rates and more restrictions,” he said.

Dominance of compulsory lines

Market dynamics remained the same with mandatory lines such as health and motor generating almost 82% of the market GWP in the first quarter of 2020; both lines sustained the same growth trend observed in the previous three years. Health insurance grew by almost 10% in the first quarter of 2020, propelled mainly by the inclusion of the Saudi local workforce in the private sector and their families in the compulsory healthcare scheme. “This move has boosted growth of health operations. There remains room for growth in this line but it is not as simple as it used to be,” said Mr Al-Eisa, noting that there will be more focus given now to the SMEs.

Another growth driver is that the industry has seen increases in loss ratios on health, which will cause premiums to rise in the future, said Mr Maskawala. This explains the drop of loss ratio for health insurance by seven percentage points to 86% in the first quarter of 2020 against a loss ratio of 80% for the whole market. For motor, premiums have dropped by 12% mainly because of the decline in prices caused by heavy discounts insurers have been offering, and the overall slower commercial activity in the motor sales industry.

Generally, motor insurance remains far from its full potential with almost half of the vehicles in the country being uninsured, said Mr Al-Eisa. This will change in the coming period as the new rules, issued in August, state that if a vehicle is involved in any traffic violation, the authorities will automatically check to see if it is insured. This will boost motor premiums, said Mr Maskawala. “Motor insurance cover is now mandatory. Previously, the insured could purchase a policy for one year and since the vehicle registration is three years they would not renew the insurance for the next two years. This led to a large number of vehicles being uninsured. Now, there are penalties which are being applied, forcing everyone to buy insurance.” However, Mr Al-Eisa pointed out it will take at least one year for the market to assess the impact and see the difference because the new procedures are linked with traffic violations.

An ambitious blueprint for life

Life insurance has been the weakest link in the Saudi market. Protection and savings accounted for around 3% of the market premium income over at least the past five years with an average annual growth rate hovering around the same percentage as well (3%). By 2019, by 2.9% from the preceding year. By the first quarter of 2020, this line saw a big leap of almost 34%, reaching SAR305m from SAR228m in the corresponding period in 2019. Though this growth trend will not necessarily sustain until the end of the year because most group business renewals are concentrated in the first quarter, it still shows notable progress. “There are interesting plans which target growth in the protection and savings line,” said Mr Al-Eisa.

He added that there were plans to launch extensive awareness campaigns to promote life insurance and individual covers. “However, the pandemic has put a pause on these plans but hopefully they will be reactivated next year. I think that going forward we will witness notable growth rates of protection and savings which will provide the market with substantial amount of additional premium income. This is in line with the government’s plans to create healthy saving schemes for the public. There will be more focus on individual lines and companies should put the necessary effort and resources to invest in this area since profitability is higher than it is in lines such as motor and medical.” By the end of the first quarter, around 69% of the market GWP came from corporate business, 18% from SMEs, 3% from micro enterprises and less than 10% from retail operations.

Fragmentation of the market

The market’s top five insurers command over 70% of GWP while around half of the players control a meagre percentage ranging between 0.5% and 1% each. “This indicates there is a huge gap in the market,” said Mr Al-Eisa. He said there is a need to create stronger operators to improve the standards of the sector and make insurance business a worthy investment. “Notwithstanding the top line inconsistencies, profitability is a major concern. Some companies have accumulated losses which could reach up to 50% of their capital while others continue to generate modest profits. Such players need to look into mergers as a strategic necessity rather than an option. Some companies might resort to alter their capital so as to adjust their market position. However, this is not practical compared to mergers which will create stronger entities and are healthy for the marketplace.” In March, a merger deal was sealed between Walaa Cooperative Insurance Co and MetLife-AIG-ANB Cooperative Insurance Co. There are two other mergers in the process at this point. “We expect more mergers to see the light this year, or at least MoUs to look into mergers. But we also hope to see merger activities that would combine more than two operators,” said Mr Al-Eisa.

With profitability taking an uptrend recently, it is unlikely for solvency ratio to be affected, said Mr Maskawala. The solvency ratio of the sector reached 157% by the end of the first quarter of this year, up by around four percentage points from the first quarter of 2019. However, asset values have seen a plunge and companies may need to rethink their asset allocation strategies, he said. “While M&A looks like a good option to consolidate, the subsequent operational integration issues which come up could result in the synergies not bearing fruit as expected.”

COVID-19 as an opportunity

COVID-19 will alter the face of the market, said Mr Al-Eisa. “The pandemic is a wake-up call for business owners to realise the nature of risks surrounding them. Their perception will definitely change and there will be more appreciation to the concept of insurance and risk management.” From an insurer’s perspective, providers must seize the opportunity and roll out new products that match the new needs of consumers. Encouraging signs have been witnessed this year with SAMA granting insurer’s approval for products that cover cancellation of live events. Moreover, the regulator allowed coverage for drones licensed for a specified activity.

It has not all been doom and gloom, said Mr Ghazaleh. “As our ways of working and interacting have changed as a result of our situation, companies have had to adapt, evolve and innovate to rise to the market challenges. The pandemic has been a catalyst for digital transformation. “For many of these companies, they achieved in a record time what may have taken them two to three years normally. We now rely on technology for our virtual meetings, we use e-signatures, and everyone is connected fully. At ACE we had 100% of our workforce working remotely at the height of COVID-19. The success of the work-from-home model will also have a permanent effect on the way we do business. It has demonstrated that productivity increases when people are working in their home environment and given some flexibility,” he said.

2020: So far, so good

The first half of the year has been fruitful for most insurers and the sector will continue to benefit from the various initiatives the regulatory authorities roll out. There are further compulsory covers under consideration in the coming period, said Mr Al-Eisa. “The authorities are planning to expand the range of compulsory covers as part of their intentions to create a broader community safety net. This will definitely benefit insurers, yet they need to think out of the box and not rely on compulsory lines, where profit margins are diminishing.” He said the market remains attractive and full of potential. “The future looks promising and serious players will reap the benefits.”

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