Insurance Markets in Saudi Arabia

Introduction

Saudi Arabia is the leading oil producer and exporter in the world whose Gross Domestic Product is highly dependent on the revenue from oil and hydrocarbon. Over the recent years, the prices for oil have sharply declined, to an all-time low, which has affected the economic system of Saudi Arabia and other oil exporters. This has led to the slow economic growth of the country while the government’s influence has reduced. The government has therefore used financial buffers to avoid the financial shocks arising from the decline in oil prices. In order to maintain its economy, Saudi Arabia has been obliged to maintain its production level (Jones, 2014). To reduce the economic and financial risk, the government of Saudi Arabia has also gone ahead to diversify its economy by expanding areas like the insurance sector with an aim of attracting foreign investment.

Saudi Arabia has a low economic and financial risk while its political risk is considered moderate. However, the political instability from the neighboring nation, Iraq, has prompted the need for citizens to secure their properties from terrorist attacks. In addition, unpredictable natural disasters, for example, earthquakes, that have occurred recently, have resulted in the growth of insurance industry as the population purchase insurance covers their properties against nature phenomena. Medical and health insurance are the most common in the country with life cover and non-life insurance starting to take root in the economy. Motor vehicle insurance is expanding due to the increase in the number of motor vehicles in the country. This has led to the increase in the number of premiums in insurance companies. Healthcare insurance, on the other hand, is considered the most important sub-sector in Saudi Arabia. It has increased over the years due to the increase of inflation in terms of health care costs and treatment costs for such long term illnesses as cancer. New healthcare regulations have been set in an attempt to ensure the Saudi Arabia citizens’ and domestic workers’ independence of health insurance (Al-Darwish et al., 2015). This has led to the steady growth of the insurance market especially in sectors like health and motor industry.

Insurance market of Saudi Arabia is considered to be below average as compared to its economic growth and other market sectors of Saudi Arabia. This under-development is greatly attributed to the inconsistency in regulations (Mirah & Masa’deh, 2014). Research studies carried out have proven that the growth and development of any industry are attributed to rules and regulations implemented and monitored. Saudi Arabian Monetary Authority (SAMA) is the agency tasked with the role of regulating the insurance industry in Saudi Arabia. It carries out supervisions and amends the regulations in place in an attempt to improve and strengthen the financial sector of Saudi Arabia while encouraging the growth of the insurance industry. Reforms that have been set by Saudi Arabia Monetary Authority in the insurance industry have attributed to the significant growth of the sector, as people are forced to get insurance by government regulations. Recently, the agency has insisted that every citizen is obliged to have health insurance and third party motor insurance (Moody’s Investor Service, 2015).The agency went ahead to place compulsory pricing for insurance risk criteria, in order to minimize competition which has contributed to the growth of the insurance sector.

The development of the insurance sector is beneficial to any county’s economy since it contributes to the increase in Gross Domestic Product. Governments’ should, therefore, put in place regulations that would boost this industry. Expansion of health insurance improves the health care of the population which ensures that workforce remains healthy. The young population should also be encouraged to play a role in the growth of this sector by investing in life and health insurance sectors. This will lead to the continued expansion of insurance industry, making it an essential sector for the country’s economic growth.

Benefits to the Economy

Increase in Investment

The on-going growth of insurance industry has made the Saudi Arabia industry the largest in Sharia-compliant industries globally. The transition to the insurance industry caused by the decline in oil prices has boosted the sector, further developing the industry and making it more competitive. This has, in turn, attracted domestic and foreign investors into the country. It has also increased the number of insurance companies into the market, making it easy for citizens to exercise choice by choosing companies that in their opinion offer favorable premium rates. The common insurance companies in Saudi Arabia are Tawuniya, Medgulf, and BUPA Arabia. However, the growth of the market has attracted other companies who are licensed by SAMA, Saudi Arabia Monetary Authority.  In addition, it has increased the number of insurance advisors; insurance claims settlement specialists and loss assessors who advise companies and individuals on their insurance claims.

Economic Benefits

The development of insurance industry has been steady over the years, gradually increasing the amount of Gross Domestic Product of Saudi Arabia. Expansion of the insurance industry has contributed to the economic growth of Saudi Arabia due to in the increase of profits from investments of insurance companies. The Saudi Arabian government passed a regulation that requires that everyone in the country should have health and motor insurance. This regulation has increased the amount of profits earned by insurance companies. Additionally, availability of capital for domestic insurers has made it easy for other companies to join the market which has resulted to equity in the market (Das Augustine, 2015). Insurers have also greatly benefited from the strong economic environment in the country. This is due to the significant economic and financial strength of Saudi Arabia. This has made the insurance industry a major contributor to the national economy of Saudi Arabia.

Job Creation

The increase in the number of companies has increased the capital investment and profit in the market. This has resulted in the creation of job opportunities for both local and international workforce. Young citizens have taken advantage of the career opportunities created for them, with more than 2000 professionals entering the industry yearly (Best, 2012). This has resulted in the economic development of the country as it has reduced the unemployment rate in the country.

Challenges Faced by the Industry

Increased Competition

Increased investment in the sector can be regarded as a positive step towards the development of the sector. Consumers have taken advantage of the increase in the number of insurance companies by deciding to choose the company that in their opinion has the most appealing payment rates. This diversification and rapid expansion have however contributed to the fragmentation of the market. The increase in the number of insurance companies has increased the competition in the market, therefore, reducing the amount of profit that each company makes while also eroding the amount of capital available to domestic companies. Low profits and insufficient capital have greatly contributed to the closure of some companies (Arab News, 2015).

Failure of Regulations

The regulatory insurance agency of Saudi Arabia has failed in creating an environment that would encourage insurance companies to invest significant capital into the sector. This has lead to the lack of capital aimed at encouraging the development of human resources which is fundamental for the industry. This lack of a homogenous regulatory environment that would provide opportunities for the insurance companies in the region is holding back the development of insurance industry of Saudi Arabia. The regulations in place are based on conventional insurance modes, increasing concerns on behalf of consumers and investors as for is the sustainability of the sector. This has contributed to the lack of confidence of the public, making the sector underperform despite its potential (Fakhroo, 2015). Saudi Arabia Monetary Authority also went ahead to introduce compulsory motor and health insurance, which was taken as a positive improvement by insurance companies. However, the increase in profit that had been expected was not achieved.

Devaluing of Assets

Insurance companies use tools, quantitative models, and past data to estimate the price of assets before they offer insurance cover for the assets. This makes it easy for the customer to pay insurance premiums that estimate the actual value of the asset. However, many properties covered by insurance companies are greatly underestimated. This inadequate pricing of properties has increased the amount of losses incurred by the insurer when there is such risk. Losses increase the amount of pressure on the net financial reserves of the insurance companies. If the current pricing of properties continues, insurance companies will not be able to absorb losses.

Lack of Society Awareness

Many of the people in Saudi Arabia are resistant and unsupportive to the insurance industry. The region is very conservative based on its Islamic background where traditions and lack of social awareness of insurance market are major factors of decline. This has made it difficult to create opportunities in the market that would ensure that the market share is expanded (MEIR eDaily, 2015). Lack of public awareness limits any company’s growth and expansion. Increasing involvement of locals will help to integrate the uninsured into the industry.

Lack of Transparency

The development of the industry is being accused of lack of transparency which makes the public reluctant to be part of the sector. Most of the companies do not meet the globally established financial and marketing standards in the sector. Lack of financial information dissemination, performance reports, and the investment profiles are making the insurance sector sluggish (PWC, 2015). 

A Price Driven Market

The insurance market of Saudi Arabia is faced with high competition between companies which try to out-class the prices of their competitors lowering the industry price. A price-driven market leads to price competition and price undercutting. This makes economy unhealthy as it leads to poor delivery of services while driving some companies out of the market. The shift from price is driven to quality and service driven market continues to be a major challenge to the insurance industry.

Low Rates

Low commercial and interest rates as a result of increased competition in the market make the industry environment difficult to operate in due to the risks associated with it.  Low interest reduces the number of profits that the insurance companies make. There are a lot of barriers to the entry in the market which if adjusted would lead to an upward adjustment.

Products Diversity

The public is driven towards certain compulsory products, namely health and motor insurance and insurance solutions, which had been introduced earlier. It is therefore very difficult for the insurance company to introduce new products and insurance solutions like a public liability to the customers and for them to accept them. It has however been challenging to get approval from the regulation agency of various insurance products developed by insurance companies. If these products are accepted, they will increase the market stability and growth.

Recent Trends and Developments

Regulation Changes

Saudi Arabia Monetary Authority has been enforcing regulations in the insurance markets that have created opportunities for expansion in the country. These regulations have attracted investors into the market increasing the economic growth of the country. The governments’ contribution in making health and motor insurance compulsory has also boosted the performance of insurance companies. Improvement and development in this sector have been seen as a step towards improving the confidence of the public in the industry (Al-Darwish et al., 2015).

Customers Awareness

Lack of social awareness and expectancy of insurance has been one of the greatest barriers towards the development of insurance industry in Saudi Arabia. The use of social networks has made insurance market system very popular breaking the traditional barriers that have been holding back the development of the region. Insurance market continues to develop since it is viewed as a mutual agreement aimed at assisting and helping others in case there is an event of loss as well as encouraging cooperation among people.

Emerging of Distribution Channels

New insurance distribution channels have recently emerged and this has made it easy for residents to access insurance. Insurance brokers who have been licensed by the Saudi Arabia Monetary Authority and the use of online distribution have become more favorable channels (Abu-Hussin, Muhamad, & Hussin, 2014).

Government Policies

The government has made health and motor insurance mandatory for every local citizen. This was done with an aim of providing healthcare to the less fortunate residents who are not able to pay for the medical expenses. The use of e-health and telemedicine services has made it easy for customers to access medical care despite the distance to ensure customer satisfaction. The government is also trying to impose regulations that would make other products compulsory, which will help develop the market even further.

Conclusion

Saudi Arabia has been highly dependent on oil revenues to run its economic developments. However, the price for oil has decreased drastically over the years affecting oil dependent countries’ economies. Saudi Arabia has gone ahead to promote the growth of other sectors like the insurance industry in order to maintain its Gross Domestic Product. The industry has been rapidly developing due to the changes in reforms and regulations. The development of the industry has lead to the creation of jobs and increases in investments that have resulted in the growth of the sector. The development of this sector has contributed to the economic development of the region. The industry has been faced with a number of challenges that are holding back its development. The main challenge is increased competition that has lead to fragmentation and decline in profits for companies.

The insurance industry is not very common in developing countries due to the lack of awareness and perception of the industry by the public. The government can, however, change this situation and make the industry a major source of revenue. The regulatory body is to enforce stricter rules on rates, reserves and liquidity in order to ensure the development of industry. It is also tasked with the responsibility of injecting technical discipline into the market. Insurance companies have to pay close attention to their cost structures and the ways of pricing certain risks. Addressing such issues will make them more competitive in the market while also protecting policyholders’ and the shareholders’ value. The management should make tough decisions after reassessing certain cases and know which sphere of insurance they want to operate in. This will help reduce the amount of risk they face. The young population can be encouraged to be part of the industry not only through job opportunities but also by encouraging them to insure their properties. Undertaking research to find out what the public prefers and enhancing the relationship with the public and the industry will help boost the industry. Current trends have enabled consumers to secure their properties not only against fire and accidents but also against the risks of terrorist attacks and earthquakes.

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