Published: Sep 09, 2014
Source: Saudi Gazette

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Kingdoms’ insurance industry outlook bright as SAMA moves to end price war

The insurance price war that raged in Saudi Arabia during 2012-2013 has now largely ended, although competition to win large, prestigious corporate accounts remains intense, according to Standard & Poor’s Ratings Services.

In a report titled “Insurance In Saudi Arabia: The Price War May Be Over But The Fight For Market Share Continues”, S&P said that anecdotal evidence suggests that market tariffs for the sector’s principal lines of group medical and motor insurance have risen by an average of some 20 percent so far in 2014. Several companies have told the international ratings agency that policyholders have accepted price hikes of up to 40 percent on persistently loss-making accounts.

So far in 2014, motor insurance appears to have experienced the strongest recovery, but pricing in medical insurance is also significantly improving. Only the larger corporate accounts still achieve the best terms when purchasing group medical cover.

The substantial reserve strengthening of late 2013 is also likely to distort the insurance sector’s 2014 results If, as many insurers still maintain, a sizable proportion of the extra reserving that external actuaries demanded was overly prudent, then we may well see reserve releases boosting the third- and fourth-quarter results for 2014.

But on the back strong economic recovery and improved operating conditions, a few weaker companies apart, S&P expects that on average across the Saudi Arabian insurance sector, the market recovery is even stronger than current interim and even year-end 2014 results may suggest.

“Anecdotal evidence suggests that market tariffs for the sector’s principal lines of group medical and motor insurance have risen by an average of some 20 per cent so far in 2014, and several companies have told us that policyholders have accepted price hikes of up to 40 per cent on persistently loss-making accounts,” said David D Anthony, Primary Credit Analyst at S&P.

Despite ongoing competitive pressures between the local 34 insurers in the sector, we expect insurers to maintain today’s stronger pricing into 2015 and beyond because the insurance regulator, Saudi Arabian Monetary Agency (SAMA),has taken a number of steps to encourage the maintenance of reasonable pricing and prudential reserving.

After a number of modest initiatives failed to turn the decline in tariffs around in 2013, SAMA ultimately dealt the price war a fatal blow by openly reminding the kingdom’s licensed consulting actuaries of their duty to ensure prudent reserving at the companies with which they work. This had an immediate effect as all Saudi Arabian insurers are obliged to have their reserves signed off by a consulting actuary, and external auditors cannot contest the actuaries’ calculations.

Despite ongoing competitive pressures between the local 34 insurers in the sector, S&P expects insurers to maintain the current stronger pricing into 2015 and beyond because the insurance regulator, Saudi Arabian Monetary Agency (SAMA), has taken a number of steps to encourage the maintenance of reasonable pricing and prudential reserving.

After various more modest initiatives failed to turn the decline in tariffs around in 2013, SAMA ultimately dealt the price war a fatal blow by openly reminding the Kingdom’s licensed consulting actuaries of their duty to ensure prudent reserving at the companies with which they work. This had an immediate effect as all Saudi Arabian insurers are obliged to have their reserves signed off by a consulting actuary, and external auditors cannot contest the actuaries’ calculations.

As a result, the 2013 year-end accounts at most Saudi Arabia-based insurers and reinsurers saw very significant reserve strengthening both in respect of incurred liabilities and the unexpired risk of insurance policies that were still in force, many of which are now regarded as severely underpriced. SAMA has also recently implemented a requirement that new clients provide insurers with their claims history.

The 2013 year-end accounts at most Saudi Arabia-based insurers and reinsurers saw very significant reserve strengthening both in respect of incurred liabilities and the unexpired risk of insurance policies that were still in force, many of which are now regarded as severely underpriced. SAMA has also recently implemented a requirement that new clients provide insurers with their claims history.

“We believe the enforcement of actuarial pricing by external consulting actuaries will allow larger insurers to factor their economies of scale into premium quotations. Their generally lower overall expense ratios (expenses as a percentage of premium income) should permit large, cost-effective companies to apply actuarial pricing that is below the rate calculated as appropriate for smaller peers that have higher fixed costs relative to turnover. We therefore expect expense control to become just as important to most insurance management teams as market share has been in the recent past,” said Anvar Gabidullin, an analyst at S&P

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