In the decade since Saudi Arabia›s Cooperative Insurance Law came into full force, the kingdom has turned what was an unregulated industry into the largest non-life and health insurance market in the Gulf Cooperation Council (GCC) region, and the most actively regulated insurance market in the Middle East, S&P Global Ratings said in a report. Domestic gross premium written (GPW) for 2016 are estimated at SR35.8 billion ($9.5 billion), based on the sector›s most recent results, which are still unaudited. In a report, S&P Global Ratings observed that the sector›s remarkable progress owes much to its principal regulator, the Saudi Arabian Monetary Agency (SAMA), which has regularly introduced new initiatives over the past decade. For example, since 2013, «actuarial pricing» has been strictly enforced (that is, tariffs must be approved by actuaries based on loss and expense expectations, so as to deliver an underwriting profit in normal circumstances) across all compulsory lines, notably motor, group medical, and liability. Consequently, unlike most neighboring markets, Saudi Arabia has largely avoided excessive price competition in recent years, despite the often intense rivalry between the sector›s 34 licensed insurance companies. Of these, two (Weqaya and Sanad) are currently closed to new business, with trading in their shares suspended. Although gross premium written across the sector only grew by 0.5% in 2016, net income improved by 139%. Actuarial pricing and a sharp increase in yields on cash deposits over the past 18 months have enabled certain insurers to make striking gains. However, neither premiums nor profits are spread evenly across the sector. "Despite the sector›s overall underwriting profitability, we lowered our credit ratings on several Saudi insurers during 2016 due to company-specific factors, including product, process, and solvency issues," S&P aid. The sector›s net income for 2016 rose 139.2% to SR2.5 billion (2015: SR1.0 billion). Pricing on medical improved, despite falling volumes, and motor tariffs nearly doubled during 2015 and 2016. Until the end of 2015, the effect of improved pricing was depressed by residual losses and unexpired risk reserving from the 2013 and 2014 underwriting years. In effect, it was only high expense and tax ratios that prevented many companies from reporting strong results last year, as loss ratios were generally satisfactory. Not only did more insurers turn a profit in 2016, the sector›s net income also more than doubled. "We expect these trends to continue in 2017. Of the 33 insurers that were operational in 2015 and 2016, 14 reported net losses totaling SAR707.7 million. The remaining 19 reported profits totaling SAR1,751.2 million. By contrast, only six insurers reported net losses in 2016 (totaling SAR244.7 million). The remaining 27 reported combined profits of SR2,741 million. We also calculate that total shareholders› funds for the sector increased by 17.6% in 2016 to SR13.7 billion. Although retained earnings and the revaluation of some investments contributed to this growth, we consider that it largely stemmed from the industry›s many insurance rights issues over the past couple of years. Even if we assume a conservative sector average for shareholders› funds of about SR13.5 billion in 2016, we calculate that the indicative average post-tax return on equity would be about 18.5%. This implies strong performances in a market where prevailing returns on three-to-six-month cash are now about 3.5%." Actuarial pricing significantly constrains the flexibility of motor insurers› pricing. Tariffs, which are highly regional, now reflect the high cost of car repairs, a persistent undercurrent of fraudulent claims, and the still-growing number of incidents on the Kingdom›s roads. Although it depends on the provider, in 2016, the typical cost of compulsory third-party liability (TPL) cover rose to about SR800-SR1,500 ($213-US$400) a year. This indicates that many insurers have implemented massive increases in recent years and are charging consumers double the average price prevailing in some neighboring markets, for an otherwise similar risk. — SG
