Introduction
The insurance system is an important sector and it plays an integral role in the economic growth of a country. This system guarantees the social security of the population and leads to notable and positive effects on economic growth by directly enhancing the financial system of the country. In order to increase the benefits of the insurance industry in the country, the Saudi Arabian insurance industry has demonstrated significant developments in the last two decades. The Saudi government has taken measures to ensure that the country’s insurance industry is robust and up to international standards. These measures have been in the form of reforms that have created an effective insurance industry in the kingdom. This paper will engage in a detailed discussion of the insurance industry in Saudi Arabia with a particular focus on the reforms that have contributed to the immense growth of the industry in the past decade.
Historical Background
Compared to the developed nations of the world, the Saudi Arabian insurance industry is relatively young having begun less than 60 years ago. The first insurance companies in Saudi Arabia were foreign companies, which opened up to provide insurance goods to a niche market. As such in its early years, the Saudi insurance industry existed at a modest scale serving a marginal segment of the population. Zaid observes that the increasing pace of economic and industrial development over the last two decades led to real demand for insurance products by the Saudi market (28). Self-starting insurance organizations and foreign insurance companies that operated through local agents quickly met this demand. These insurance players provided the essential insurance services and they were able to satisfactorily supply the insurance needs of Saudi Arabia.
For most of its history, the insurance industry in Saudi remained largely unregulated and it was only in 2003 that a central regulatory authority was implemented. With no insurance law in place, the Saudi insurance industry operated through the voluntary efforts of the various players. Even though the government provided some guidance through the Chambers of Commerce and Industry, the industry was not ideal due to the lack of standardization, which led to disparate levels of values among the companies.
Reforms in the Insurance Industry
The new insurance law promulgated in 2003 charged the Saudi Arabian Monetary Agency (SAMA) with the role of transforming the massive and unregulated insurance sector in Saudi Arabia. The SAMA was issued with authority as “regulator of insurance activities in Saudi Arabia” (Zaid 31). The complete overhaul of the industry required sweeping reforms to be enacted in the vibrant Saudi insurance market in order to increase the benefits accrued from the sector to both the government and the consumers. Since the ambitious reforms were begun in 2003, the insurance industry in Saudi Arabia has exhibited remarkable growth. A growth rate of 27% and 33.8% in 2008 and 2009 respectively was observed and this was largely attributed to the government regulations imposed on the industry (Zaid 29).
The Saudi government opened up its insurance markets even further to foreign investors following the 2003 reforms. This deregulation resulted in a rapid expansion of the insurance industry as new investors came to take advantage of the growing market in the country. Insurance companies are allowed to make outsourcing arrangements with domestic or foreign third parties as long as these arrangements do not affect the compliance with laws and regulations governing the Saudi Insurance Market.
In 2005, the Saudi authorities enacted the “Law on Supervision of Cooperative Insurance Companies” which articulated the control and supervision that insurance companies would have to face in the Kingdom. Zaid states that prior to this legislation, there was no central regulatory authority and the insurance companies entered and exited the market at will, which lead to losses by policyholders (29). Thanks to the new laws, existing and aspiring insurance firms would have to meet stringent financial solvency and technical requirements which were meant to ensure that policyholders would not be exposed to unnecessary risks. In February 2010, the Saudi Arabian Monetary Agency (SAMA) issued a statement barring all insurance companies that operated in the kingdom without authorization to cease their operations. Such companies were required to stop issuing insurance policies or renew existing ones unless they obtained authorization.
Requirements for Insurance Firms
The Saudi government through the Ministry of Commerce and Industry stipulates the minimum capital requirements for insurance companies. The SAMA dictates the minimum capital requirements, which is a “statutory deposit of SR 10m for an insurer or SR 20m for a reinsurer” (SAMA, Principles 2). This statutory reserve ensures that companies are financially solvent enough to engage in the provision of insurance services to the public and absorb any losses that might arise during operation. The government also requires companies to employ at least 30% of their staff from Saudi from the start of operations and this figure should rise to 70% in 8 years. Such requirements ensure that the insurance industry plays a significant role in the economy by directly employing the kingdom’s citizens.
Insurance deals with money and the industry can be used as a front for money laundering or financing terrorism. With these considerations, the SAMA has set out regulations to ensure that money laundering and terrorism financing is combated in the Saudi insurance sector. The SAMA dictates that all insurance operators must identify their customers and obtain all the necessary information about them and any transactions that they engage in (Anti-Money 4). The Saudi authorities require insurance companies to report any suspicious transactions to the Financial Intelligence Unit for further information. To assist companies to implement effective measures against money laundering and terrorism financing, a number of best practices have been proposed by the Financial Action Task Force (FATF). The SAMA highlights that these FATF recommendations include a detailed list of measures, which all insurance companies are required to take to prevent money laundering and terrorism financing through their firms (Anti-Money, 11).
The Saudi government through the SAMA came up with a code of conduct and regulation of the insurance market. This code was meant to stipulate the general principles and minimum standards that all actors in the insurance industry were meant to adhere to (SAMA, Insurance Market Code 3). Insurance companies are supposed to develop and implement their own internal controls for monitoring if company conduct is in compliance with the SAMA codes. Each company is required to keep a record that can be used in the future as evidence of compliance. If a company is in violation of the code, enforcement action might be taken and this might include stringent penalties including the revoking of the operating license (SAMA, Insurance Market Code 4). Companies are exhorted to follow internationally accepted best practices in their dealings with customers and they are required to at all times fulfill the obligations they owe to their customers. Through the code, the Saudi government has been able to promote high standards of business conduct within the insurance industry thereby bringing the Saudi Arabian Insurance sector to international standards.
The insurance industry deals with risk and the ability of insurance and reinsurance companies to effectively manage their risks is integral to the growth and stability of the industry. With these considerations, the SAMA has issued a code of general principles and minimum standards that are meant to ensure that all actors in the industry effectively manage their risks. All companies operating in the Kingdom are required to have comprehensive risk management strategies to help them understand and manage any risks that may arise from their business operations (SAMA, Risk 5). Unlike in the period before the 2003 reforms when the company management carried out a risk assessment at its leisure, the SAMA requires all companies to assess the risks that the company is exposed to on a regular basis and engage in mitigating and monitoring measures. All players in the insurance industry are required to write up a risk management policy that is to be approved by the relevant government authority (SAMA, Risk 5). To enhance risk management, companies are required to have a well-defined organizational structure with clearly marked out levels of authority and power. In recognition of the fact that disasters are sometimes inevitable in the industry, the Saudi Arabian government demands that all companies have contingency plans to counter events that have dire consequences for the individual business. The SAMA stipulates that his plans should serve as early risk warning signals, detail course of action to counter disasters, establish roles and responsibilities, and give a reporting procedure for internal and external notifications (Risk 7). Companies are required to involve actuaries when setting product prices to identify the adequate premium rate that does not impede business profits or burden the consumers.
Insurance companies make extensive use of agents and brokers who act as intermediaries. The insurance agents represent the insurance company and solicit, procure, and negotiate insurance contracts on the company’s behalf. Insurance brokers are “the entity that for compensation negotiates with the insurance company in order to conduct insurance services for policyholders” (SAMA, Insurance Intermediaries 4). The Saudi authority has set up strict regulations to govern the conduct of these intermediaries who play a crucial role in the insurance market. Intermediaries are required to act in an honest, transparent and fair manner towards clients and to fulfill all the obligations that they are mandated to carry out. SAMA stipulates that intermediaries should abide by industry best practices and demonstrate professionalism in their conduct (SAMA, Insurance Intermediaries 5). Intermediaries are expected to reveal all the relevant information to their clients, an imposition that is of great importance since intermediaries might be tempted to withhold relevant information in order to increase their profits at the expense of the native client. Before the reforms, intermediaries acted in an unregulated manner. They expanded their operations and opened new branches in a haphazard manner. This led to the presence of many branches that provided sub-standard services in Saudi Arabian provinces. Following the enactment of the insurance reforms, branches are obligated to meet the set requirements for opening branches (SAMA, Insurance Intermediaries 10). These restrictions have increased the level of professional standards by intermediaries and improved service provision by the industry.
The prevalence of online communication all over the world has made online insurance activities widespread in most industrialized countries. The Saudi insurance industry has also ventured into this sector in order to benefit from the advantages accrued by online dealings. The SAMA has issued specifications for insurance companies that operate over the internet. To begin with, insurance companies engaging in online insurance activities are required to set up appropriate internal controls and procedures to ensure compliance with the related laws stipulated for insurance companies and insurance service providers (SAMA, ONLINE 4). The insurance company that wants to engage in online insurance activity must, first of all, submit a request to SAMA. The request should include a business plan that includes a risk analysis associated with online business and a contingency plan by the company. Only by obtaining written approval from SAMA can the insurance company engage in online insurance activities (SAMA, ONLINE 8).
Mandatory Insurance
To make the benefits of insurance more expansive, the Saudi government declared a number of insurance classes mandatory.
Health Insurance
Saudi Arabia implemented a comprehensive health insurance program that was meant to reorganize and improve the health care system of the country. Before the reforms, the government was responsible for financing health care, which made funding of health care services a major challenge for health care providers due to the rapidly increasing population and higher price of new medical technology (Almalki and Fitzgerald 790). The cooperative health insurance scheme is to be rolled out in three stages. So far, only the first stage, which requires employers of non-Saudis and Saudis in the private sector to pay for health cover costs of their employees, has been implemented. The profound changes in health insurance have led to an increase in the effectiveness of providing health care for the kingdom’s population.
To try to solve this problem, the government started health insurance reform initiatives in 1999. The Cooperative Health Insurance Act which contains the regulations concerning compulsory health insurance was issued in 1999 by a Royal Decree No M/10 and this health insurance program “aimed at covering ultimately the whole Saudi and non-Saudi population” (Barakah and Shakir 8). The Saudi health insurance program is based on Islamic insurance concepts (Takaful) which are in essence mutual assistance and cooperation principles. The program was structured in such a manner that it improves access to health care by all citizens without over-burdening them. The Cooperative Council for Health Insurance is the body charged with monitoring the implementation of the cooperative health insurance act and certifying cooperative insurance companies that offer these services to the public. Through this body, insurance activity is regulated and controlled with the SAMA acting as a technical supervisor guaranteeing compliance of the insurance company with applicable health insurance laws. The new health insurance program has had remarkable success with a significant increase being realized in health insurance premiums, which had grown to represent 44% of the insurance market as of 2008.
Motor Insurance
The new insurance law enacted in 2003 declared motor insurance mandatory in the kingdom. This new regulation had a positive impact on the insurance industry in the country. The growing demand for automobiles by Saudis created a huge business opportunity for the insurance companies that provided insurance services to meet the new government regulations. The government called for mandatory insurance for all motor vehicles and the insurance company is required to take liability for the physical damage caused by the insured party. SAMA documents that the insurance company is not allowed to disclaim third-party liability even when the insured driver has caused a violation (SAMA, Principles 4). The SAMA regulates the turnaround time for claim settlements for motor vehicles by the insurance industry. Insurance companies are required to appoint an assessor or loss adjuster within 3 days of receiving a claim from the insured party. The General Traffic Department or Najm Company for Insurance Services determines the claim amount, which is to be settled by the insurance company within 15 days (SAMA, Principles 7). Making motor insurance mandatory had the effect of increasing the level of insurance premium from 15% to a significant 36% of gross insurance premiums as of 2008.
Discussion
The insurance industry in Saudi Arabia has experienced significant reforms over the past 10 years. Insurance reforms in Saudi Arabia have made the industry more structured and controlled. The industry is also under greater government scrutiny, which means that customers are protected from unscrupulous insurers who may unjustly fail to pay legitimate insurance claims. Regulation and supervision of the insurance industry have increased the protection offered to the consumers of insurance products. These clients now stand a better chance of receiving the promised payments when the insured peril occurs and the likelihood of the insurance company defaulting due to insolvencies is decreased due to the stringent risk management requirements imposed by the SAMA. If an insurance company is unable to comply with the requirements stipulated by the SAMA, it can have its license to operate in the kingdom revoked.
The insurance industry in Saudi Arabia can be expected to grow even further as the country experiences higher economic growth and the population gains a better understanding of the need for insurance as a risk management tool. Government regulation has been able to weed out the unauthorized foreign insurance companies that previously operated in the kingdom through local agents providing the essential insurance and risk management needs of the population.
Conclusion
This paper set out to present an informative discussion on insurance in Saudi Arabia. It began by providing a historical overview of the insurance industry in the Kingdom. The paper has highlighted that the Saudi Insurance industry underwent significant structural changes in 2003. These changes were able to instigate the evolution of the Saudi Arabian insurance industry from a massive and unregulated industry into a well-regulated and high-performing insurance market. The relevant authorities enforce the stipulated regulations and constant monitoring is undertaken to ensure compliance. The paper has revealed that the government action of making health and motor vehicle insurance mandatory has led to an expansion of the Saudi market. The Saudi insurance industry has the potential to exhibit remarkable growth over the coming years. With consistent government regulation and investor enthusiasm in the sector, the insurance industry in the country will grow to rival that of the developed nations of the world.
References
Almalki, Mesa and Fitzgerald George. “Health care system in Saudi Arabia: an overview”. Eastern Mediterranean Health Journal, 17.10 (2011): 784-793. Web.
Barakah, Deena and Shakir Ahmed. The Cooperative Insurance in Saudi Arabia: a Nucleus to health Reform Policy. Singapore: IACSIT Press, 2011. Print.
SAMA. Insurance Intermediaries Regulation. 2011. Web.
—. Online Insurance Activities Regulation. 2010. Web.
—. Insurance Market Code of Conduct Regulation. 2008. Web.
—. Risk Management Regulation. 2008. Web.
—. Anti-Money Laundering and Combating Terrorism Financing Rules. 2007. Web.
—. The Unified Compulsory Motor Insurance Policy. 2007. Web.
—. Principles to be applied to the regulation of branches of foreign insurance companies established in Saudi Arabia. 2003. Web.
Zaid, Ahmad. “Analysis of the Impact of Reforms on Insurance Industry of Saudi Arabia”. Interdisciplinary Journal of Research in Business, 1.8 (2011): 28-37. Web.