Introduction
In the last seven years, Saudi’s insurance industry transformed from a small sector to an organized industry with stable regulation and growth (Saaty 5048-5055). This transformation is attributed to the government of Saudi Arabia, which streamlined the industry by establishing institutional and legal frameworks to guide its growth. The insurance industry plays an important role in Saudi Arabia because it enables the government and private economic entities to manage financial risks. This paper will analyze the profitability of insurance companies in Saudi Arabia. In particular, the profitability of Saudi-based insurers will be compared with those of their United States counterparts. Additionally, the factors that determine the performance of Saudi Arabian insurance companies will be analyzed.
Insurance Industry in Saudi Arabia
Saudi Arabia’s insurance industry is divided into two main sectors namely, life and non-life insurance. The life insurance sector has two main segments namely, annuity and mortality protection. The non-life insurance sector has several segments, which include health, accident, property, motor, and casualty insurance. Currently, the industry has over 30 insurance companies (Saaty 5048-5055). Additionally, the industry has several insurance agencies, loss assessors, and surveyors. The insurance companies are required to raise a minimum capital of SAR100 million in order to be licensed to operate in the industry.
Saudi Arabian Monetary Agency (SAMA) regulates the insurance industry through policy formulation and supervision of insurers. In 2004, SAMA implemented radical reforms in the industry by introducing an insurance system that conforms to Islamic law (shariah). Concisely, SAMA introduced the cooperative system of insurance, which operates on the principles of mutuality and cooperation among stakeholders (Saaty 5048-5055). In this regard, policyholders contribute to a common fund for the purpose of sharing financial risks rather than making profits. SAMA also liberalized the industry by allowing foreign companies to join it. Consequently, more firms have since joined the industry, thereby increasing competition.
Saudi Arabia’s insurance industry recorded organic growth in the last ten years. In 2011, the total gross written premium (GWP) was $5 billion, up from $4.3 billion in 2010 (Al-Amri, Gattoufi and Al-Muharrami 362-380). The health insurance segment contributed 53% of the total premium in 2011. Motor insurance contributed 21%, whereas other general insurance products contributed 20% of the GWP. However, life and savings accounted for only 6% of the GWP. In 2012, GWP increased to $5.6 billion, up from $2.27 billion in 2007 (Al-Amri, Gattoufi and Al-Muharrami 362-380). This represents a growth of 147% in the last five years.
This high growth is attributed to the introduction of mandatory health and motor insurance in Saudi Arabia. However, the industry’s growth rate is expected to decline to 13% in 2013. Additionally, the industry’s growth rate is expected to reduce from a CAGR of 21% in 2011 to 5.2% in the next five years. The decline is attributed to the maturity of the industry and low uptake of non-compulsory insurance products.
Profitability of Saudi Insurers Verses the USA Insurers
Most Saudi Arabian insurance companies have been making losses since 2010, due to low economies of scale and intense competition. In 2011, 18 out of the 31 Saudi-based insurance companies controlled less than 2% of the market. Additionally, most of the small companies in the industry incurred losses. By contrast, “Tawuniya and Medgulf, which are the two largest companies in the market, were able to make profits” (Al-Amri, Gattoufi and Al-Muharrami 362-380).
These companies accounted for over 75% of the industry’s total profits in 2011. Similarly, a few small insurers were able to make profits in 2011. For example, Al-Sagr had a return on equity (ROE) of 12.6%. Other small companies that were able to make profits include Arabian Shield and Wala’a. However, the combined income of these firms accounted to less than 10% of the industry’s total net profit in 2011.
Apart from the top two largest companies, other large insurers made very low profits while others incurred losses. Allianz Saudi Fransi, which is the fifth largest firm in the industry, reported a pretax loss in excess of SAR 8 million in 2010. By contrast, the company was able to increase its revenue by 30% in 2011, thereby making a pretax profit of SAR 1.6 million (Allianz Saudi Fransi). However, the company reported a net loss of SAR 300 million after paying Zakat, which amounted to SAR 1.9 million.
In 2012, the profits of most large firms continued to decline, whereas majority of the small insurers made losses. For instance, Tawuniya’s net profit declined from SAR 405.76 million in 2011 to SAR 319.5 million in 2012 (Tawuniya). In the first quarter of 2013, the company recorded a net loss of SAR 60.6 million. Similarly, Al-Sagr’s net profit decreased from SAR 204.8 million in 2011 to SAR 172.6 million in 2012.
Nonetheless, some companies were able to report an increase in their profits in 2012. For instance, Allianz Saudi Fransi’s net profit for the first nine months of 2012 was SAR 5 million compared to a net loss of SAR 600 thousand in the first nine months of 2011 (Allianz Saudi Fransi). The reduction in profits is mainly attributed to high competition that has forced firms to lower their premiums. This has led to a reduction in profit margins. Similarly, the demand for motor and health insurance, which accounts for over 70% of GWP, is declining because majority of the citizens have already purchased these products.
Unlike Saudi Arabian insurers, most insurance companies in the United States have been recording steady growth in profits in the last five years. However, the level of profitability varies from segment to segment. Health insurance has been the most profitable segment of the market in the last decade. In the first six months of 2011, health insurance companies recorded a combined profit of $7 billion. The top five largest companies, which “include UnitedHealth Group, WellPoint, Aetna, Cigna Corp, and Humana, had a combined net profit of $13 billion in 2011” (Laster and Raturi). Overall, the profits in the health insurance segment grew by 150% in the last ten years. The high growth is explained by the ability of the USA insurers to charge high premiums and to reduce their expenditure on real health costs.
The life insurance segment of the USA market has been recording poor performance. The combined revenue for the industry reduced at a rate of 6.2% per annum in the last five years (Lesch and Byars 411-431). The decline is attributed to falling demand for life insurance products and reduction in premium. Additionally, life insurance companies have been making losses from their investments in securities and real estate. In 2012, the top four largest life insurance companies accounted for 11.8% of the industry’s total profits. In 2013, most life insurance companies are expected to record a small growth in profits due to the anticipated increase in their returns on investments in securities.
Property and casualty insurance companies’ profits have been relatively stable in the last five years. Major players in this segment include AIG, Allied World, and Montepelier. In 2012, AIG managed to repay the full $182 billion it received from the government of the USA during the recent global financial crisis (Laster and Raturi 36-47). Additionally, it recorded an increase in its earnings per share by 21.9%. Property and casualty insurers attribute their profitability to high prices and the use of improved predictive analytics to manage claims.
Factors that Affect the Performance of Insurance Companies in Saudi Arabia
Compulsory Insurance Policies
In the last half a decade, growth in Saudi Arabia’s insurance industry was driven by the purchase of compulsory insurance policies. Demand for health and motor insurance products have increased significantly (accounting for over 70% of GWP) because they are compulsory policies. The high demand has led to the increase in GWP in the Saudi market. However, the sudden reduction in the growth of premiums for health and motor policies from 33.8% in 2009 to 12% in 2010 is an indication that the market is becoming saturated (Al-Amri, Gattoufi and Al-Muharrami 362-380).
As a result, the revenue of insurance firms is expected to decline in the next five years. Though demand for health and motor insurance is high, most firms have not been able to make profits in these segments due to high claim rates. In this regard, insurers should improve their claim assessment procedures in order to reduce the losses associated with fake claims.
Regulatory Pressures
Saudi Arabia’s insurance industry is subject to intense regulation. Insurers are required to “maintain onshore operations, list on Saudi Arabia’s stock exchange, and to have majority of Saudi ownership” (Al-Amri, Gattoufi and Al-Muharrami 362-380). Maintaining onshore operations limits insurers’ ability to supplement their revenues through offshore investments. Additionally, the minimum capital requirement set by SAMA strains insurers’ resources. For instance, 12 firms were not able to raise the required minimum capital of SAR 100 million, thereby exposing them to the risk of losing their licenses (Al-Amri, Gattoufi and Al-Muharrami 362-380). In this regard, the firms focused on utilizing their scarce resource to raise the minimum capital rather than to improve their profitability.
SAMA also regulates the distribution of insurance products through the internet by verifying product offerings and online marketing plans before approving them. The benefit of this regulation is that it improves data security and transparency (Lesch and Byars 411-431). However, it increases the time taken to develop and to launch or distribute insurance products through the internet. Consequently, insurance companies have had to revert to traditional distribution channels such as personal selling, which are very expensive.
High competition
The industry has a large number of insurers who are competing for the same clients. The entry of large international insurers has resulted into intense competition. Consequently, insurers have had to compete in terms of price rather than differentiation in order to penetrate the market (Saaty 5048-5055). This involves lowering premiums, which results into low profit margins. Demand for non-compulsory insurance policies is very low because Saudis believe that insurance is against Islamic teachings.
This limits insurers’ ability to diversify their product portfolios away from the compulsory policies in order to increase their profits. Thus, SAMA and insurers should intensify their marketing campaigns in order to convince Saudis that cooperative insurance conforms to Islamic teachings. This will improve the demand for non-compulsory policies.
Human Resource Challenges
Insurers in Saudi Arabia have to adhere to Saudization policies. In particular, majority of their employees must be Saudis. However, Saudi Arabia lacks adequate supply of underwriting skills and expertise in insurance and risk management. Approximately 60% of the sales executives in the industry are fresh graduates from high schools (Saaty 5048-5055). Thus, they lack adequate experience and skills in marketing insurance products.
Moreover, over 70% of underwriters in Saudi Arabia lack specialized degree qualifications in insurance. This reduces the competitiveness of Saudi insurers in terms of product development and risk management. Thus, Saudi-based insurers should improve the quality of their human resources through intensive training in order to boost their productivity (Hanna and Burns 1167-1177).
Conclusion
The profitability of Saudi Arabian insurers rose significantly in the six years to 2010. The rise in profitability was attributed to improved regulation and the introduction of compulsory insurance policies. However, demand and profitability reduced significantly in the last three years due to intense competition and the slow growth of the industry. The challenges facing Saudi-based insurers include regulatory pressures, intense competition, and scarcity of underwriting skills. In light of these challenges, Saudi-based insurers should focus on improving their competitiveness through innovative marketing strategies, as well as, staff training and development.
Works Cited
Al-Amri, Khalid, Said Gattoufi and Saeed Al-Muharrami. “Analyzing the Techniocal Efficiency of Insurance Companies in GCC.” Journal of Risk Finance 13.4 (2012): 362-380. Print.
Allianz Saudi Fransi. Annual Report: FY 2012. Allianz Saudi Fransi Insurance. 2012. Web.
Hanna, Backhouse and Nicholas Burns. “Linking Employee Behavior to External Customer Satisfaction Using Quality Function Development.” Journal of Engineering Manufacturing 218.1 (2004): 1167-1177. Print.
Laster, David and Mayank Raturi. “What Drives Financial Innovation in the Insurance Industry?” Journal of Risk Management 3.3 (2012): 36-37. Print.
Lesch, William and Bruce Byars. “Consumer Insurance Fraud in the US Property-Casuality Industry.” Journal of Risk Finance 15.4 (2011): 411-431. Print.
Saaty, Abdalelah. “Emperical Analysis of the Problems and Challenges Confronting Insurance Companies in Saudi Arabia: Executives’ Perspectives.” African Journal of Business Management 6.14 (2012): 5048-5055. Print.
Tawuniya. Financial Results: FY 2012. Tawuniya Insurance Company. 2012. Web.