Saudi Arabia Insurance Sector Poised for Growth

By Asma Alsharif | April 20, 2010

Saudi Arabia’s insurance industry is poised for growth in the coming years if customers overcome misgivings about compliance with Islamic law and companies consolidate to gain critical mass.

The world’s top oil exporter is one of the least-insured countries and has a fast-growing population of over 25 million, of which 70 percent are under the age of 30.

Insurance shares are hot bets on the largest Arab bourse with the sector index gaining more than 70 percent in the past year, outperforming gains in the banking index and benchmark of 18 and 34 percent, respectively.

Government plans to make health insurance mandatory for private sector employees in the Gulf Arab state should provide a fillip, after a similar move for expatriates.

“When health insurance becomes mandatory for all, and with a (planned) mortgage law housing insurance the sector will grow,” said Shakeel Sarwar, head of asset management at Bahrain’s SICO investment bank.

But the sector, which mainly consists of small players, needs to overcome obstacles to achieve stronger growth and make it more appealing for foreign stock investors.

Experts say the biggest challenge for the government is to overcome doubts among many in the conservative Muslim country that buying insurance does not mean a lack of faith and so contradict Islamic law, or sharia.

“If people’s perception of insurance is improved and the regulation is developed to be airtight, the sector will grow faster,” said Talaat Hafez, a member of the Saudi Economic Association think tank.

Clerics in Saudi Arabia in the past have spoken out against insurance policies but have approved certain forms of insurance that comply with Islamic law, or sharia, since then.

Resistance, however, still lingers in the mostly tribal society where clerics, wary of changes, have influence over the general public. Many still view insurance and other financial products, such as deposits that pay interest, with suspicion.

But several firms have been allowed to sell a sharia-compliant life insurance form called Himaya, or “protection” in Arabic.

“There is still some ambiguity regarding sharia compliance of some of the insurance products in Saudi, which is contributing to lower demand,” said Peter Hodgins, a partner at Clyde & Co law firm in Riyadh, who specialises in insurance law.


Despite being part of the biggest Arab economy, the Saudi insurance industry is still in early stages, with some 30 mostly small listed insurers vying for clients.

Saudi Arabia only started regulating the market in 2005 by licensing sharia-compliant insurers and has since seen a surge with the latest entry coming last week. Foreign firms HSBC, AXA and Calyon have entered the fray.

Insurance market penetration, as measured by the ratio of premiums to GDP, was just 0.67 percent in 2009. “That is…low compared to the United Arab Emirates which is about 2 percent and India which is 4.6 percent,” said Hodgins.

The volume of Saudi insurance premiums grew 27 percent to $2.9 billion in 2008, the latest official data show.

Despite the share jump, insurers are still attractively valued. The leading insurer Tawuniya, trades at 11.8 times 2010 net profit, cheaper than major Saudi lenders Riyad Bank or Al-Rajhi, according to Reuters data.

But to make it more appealing to foreign investors the mostly small firms with limited reach or low market value will have to merge with more mature firms, insiders say.

“We will see a lot of acquisitions, probably not in 2010 but maybe the year after,” said Aly Al-Ayed, chief executive of Malath.

His is one of the bigger insurers but still small by international standards with a market value of around $200 million, according to Reuters data. Even bigger rival Tawuniya, with a value of $1.2 billion, is tiny compared with, say, AXA, which has a market capitalisation of $52.6 billion.

Many of the listed insurance firms had to resort to capital increases after incurring major losses due to delays of their operations or licenses for their products.

“Insurance companies have to be well-capitalised. These companies cannot survive due to a constraint on their paid-up capital… so their option is to increase their paid-up capital or merge with someone else to create a sustainable financial institution,” said Ayed.

(Editing by Ulf Laessing and Sitaraman Shankar)

Was this article valuable?

Here are more articles you may enjoy.