Saudi Arabia: The Ongoing Regulation of the Saudi Insurance Market

Last Updated: 25 November 2010
Article by Peter Hodgins

Since the promulgation of the Law on Supervision of Cooperative Insurance Companies (the Insurance Law) in the Kingdom of Saudi Arabia (KSA) in August 2003, the Saudi Arabian Monetary Agency (SAMA) has been one of the most proactive and progressive insurance regulators in the Middle East. A number of rules and regulations have been issued in the subsequent years on a broad range topics relating to the insurance industry in KSA, including risk management, fraud and anti-money laundering. Earlier this year SAMA published a draft of the Outsourcing Regulations for Insurance and Reinsurance Companies and Insurance Service Providers (the Outsourcing Regulations), which were closely followed by the issuance in October 2010 of a new Regulation of Reinsurance Activities (the Reinsurance Regulations), which had previously been published in draft at the end of 2008.

The Reinsurance Regulations

The Reinsurance Regulations provide the "general principles and standards" applicable in relation to reinsurance in KSA. They apply to all insurance and reinsurance companies and to "insurance related service providers" (including insurance and reinsurance brokers). However, in practice the majority of the regulations concern insurance companies and their reinsurers. The onus is on all companies to establish appropriate internal controls to ensure and monitor compliance with the Reinsurance Regulations and to maintain records to demonstrate compliance.

The Reinsurance Regulations need to be read in conjunction with the Insurance Law and the Implementing Rules of the Control of Cooperative Insurance Regulations 2004 (the Implementing Regulations). It remains the position, pursuant to the Implementing Regulations that insurance companies in KSA must retain not less than 30% of the total written premiums and cannot cede more than 40% of its premiums to reinsurers outside of KSA without SAMA approval.

Key Features

Key requirements of the Reinsurance Regulations include:

  • The Board of Directors of insurance and reinsurance companies must approve and document the company's reinsurance strategy. This strategy must be submitted to SAMA for approval on an annual basis. The Reinsurance Regulations specify the key elements that the reinsurance strategy must address, including per risk / per event retentions, treatment of known and unknown accumulations.
  • Internal controls must be established to monitor the company's reinsurance arrangements. The key requirement in this regard is for the insurance company to appoint a reinsurance officer who is responsible for updating the reinsurance strategy and reporting any failure to comply with the reinsurance strategy to the company's compliance officer.
  • Reinsurance treaties must be submitted to SAMA in accordance with the requirements of the Implementing Regulations issued pursuant to the Insurance Law.
  • Insurance companies must submit a report on the financial implications of their reinsurance programs to SAMA, including details of profit sharing commissions, loss sharing mechanisms, the cap on the reinsurers' total liability and aggregation limitations, reinstatement provisions.
  • Insurance companies must also produce an annual scenario testing report addressing the impact of multiple claims arising from a single event. The scenarios will be specified by SAMA annually but will include consideration of an earthquake / flood / hurricane, large scale terrorist attack, widespread epidemic, large drops in asset values, impact of currency exchange rate fluctuation and serious transport accidents.
  • Insurance companies must establish and maintain a reinsurance claims register.
  • All reinsurance must be placed with reinsurers of a rating of not less than S&P BBB (a requirement that had previously been contained in the Implementing Regulations) and SAMA approval is required to place reinsurance with a foreign reinsurer domiciled in a country with a sovereign debt rating of less than S&P BBB. The cedant is obliged to notify SAMA "immediately" if one of its reinsurers ceases to satisfy these requirements.

Documents for Submission to SAMA

The Reinsurance Regulations provide that the following documents must be submitted by the Insurance Company to SAMA in relation to its reinsurances:

  • The reinsurance strategy;
  • The report on the financial implications of its reinsurance strategy;
  • Reinsurance treaties;
  • A quarterly report on all risks written by an insurance company that are not acceptable under its proportional treaties because of the premium rates charged; and
  • The annual scenario testing report.

Policy Wordings

The Reinsurance Regulations put significant emphasis on the wordings of all reinsurances. Insurance companies will be required to demonstrate that their own insurance policies are on terms "no wider" than those contained in its relevant reinsurance protections. Thus, for example, all exclusions contained in the reinsurance wording must be reflected in the direct policy issued. This reflects the previous requirement of the Implementing Regulations that required insurance companies to reconcile the coverage provided with its reinsurance protections on a quarterly basis. This requirement does, however, emphasise the need for full policy wordings to be issued in respect of reinsurance programs in a timely manner.

A key challenge for insurance companies will be to ensure consistency in their reinsurance programs. Where different reinsurers participate on different layers of the program there will be a risk that different terms and conditions will apply and the direct insurance policy will need to reflect the most restrictive coverage purchased.

Restrictions on Reinsurance

The Reinsurance Regulations explicitly prohibit both finite reinsurance and reinsurance of the investment element of life insurance business. No definition of finite reinsurance is provided. However, the term is traditionally used to refer to reinsurance contracts where the risk transfer element is limited in some way such as, for example, by agreeing pre-determined loss ratios in a given year. Typically such finite reinsurances are multi-year and often contain dynamic pricing based on the claims experience. Such finite reinsurances have been subject to criticism in Western markets as they have been used to illegitimately smooth insurers' earnings and to distort their financial results. There are also concerns as to whether they involve genuine risk transfer (and there are cases where they have effectively been treated as a disguised loan).

The Reinsurance Regulations anticipate that treaty reinsurance will be utilised by insurers more commonly than facultative reinsurance. Facultative reinsurance is to be used where a risk exceeds the size of the insurance company's treaty protections or for risks where no protection is in place. However, SAMA's approval is required before writing any risk that exceeds the capacity of the insurance company's treaty by more than 3 times.


The Reinsurance Regulations impose a significant sanction for non-compliance by insurance companies. In the event that satisfactory reinsurance protections are not in place, SAMA has the power to withdraw approval in respect of the products of the insurance company. This is in addition to sanctions which may be imposed under the Insurance Law which include:

  • A fine of SAR1 million and/or imprisonment for a period of not more than four years;
  • The power for SAMA to appoint an advisor to consult with the insurance company;
  • The power for SAMA to suspend a director or employee of an insurance company;
  • The power for SAMA to prohibit the insurance company from accepting new investors; and
  • The power to take any other steps that SAMA deems necessary.

Saudi Reinsurers

Licensed Saudi insurance companies wishing to write facultative reinsurance must be authorised to write reinsurance business by SAMA and be licensed to write the type of business being reinsured. In addition, such companies are required to:

  • Check that the underlying insurance product has been licensed by SAMA (where the facultative reinsurance is in respect of a Saudi risk) or that SAMA has confirmed that risks may be written from the jurisdiction in question;
  • Establish that it can cede the risk to its own retrocessional protections; and
  • Establish that its catastrophe protections will cover the risk.


Brokers are expressly prohibited from approaching the reinsurance market without written instructions from the insurance company which they represent. In addition, the insurance company must have agreed the commission levels to be paid to the broker.

It is not permitted for the same broker to place both the primary insurance and the outwards reinsurance in respect of the same risk. This is subject to an exception where there is full disclosure to the original insured of all commissions earned. The insurance company is required to obtain a written statement from the original insured confirming that this is the case.

Where a broker wishes to place both the primary insurance and facultative reinsurance in respect of a risk, it is required to document why there is no conflict of interests and justify the use of facultative reinsurance rather than co-insurance.

In addition, brokers who act in such a dual capacity are required to carry higher professional indemnity coverage of SAR12 million (the Implementing Regulations require a reinsurance broker to carry SAR6 million of professional indemnity coverage and an insurance broker to carry SAR3 million).

The Outsourcing Regulations

Earlier this year, SAMA circulated a draft of the Outsourcing Regulations. The consultation period ended on 14 September 2010 and the industry is awaiting the issuing of the Regulation, which is anticipated to be largely on the same basis as the draft. The Outsourcing Regulations are extremely progressive and recognise that in practice the arrangements are in place to ensure that insurance companies in KSA have access to international expertise to support and develop their businesses. In this regard, the Outsourcing Regulations explicitly recognise that outsourcing arrangements may be with foreign entities as well as entities operating within KSA.

It is apparent from the Outsourcing Regulations that the key principle is to ensure that any outsourcing arrangement "does not reduce the protection available to policy holders and is not used as a way of avoiding compliance with regulatory compliance." SAMA has full access to data and information that may be held by the third parties to whom work is outsourced.

What the Outsourcing Regulations cover

The Outsourcing Regulations cover outsourcing arrangements that are intended to be entered into, as well as outsourcing arrangements already in place between licensed insurance companies, reinsurance companies and other insurance service providers (ISPs) and domestic or foreign third parties.

For these purposes outsourcing is defined as:

"an arrangement under which a third party undertakes to provide [an insurance company, reinsurance company or ISP] a service previously carried out by itself or a new service to be offered by it."

The Outsourcing Regulations refer to "Material Outsourcing Arrangements" in respect of which SAMA's prior written approval is required. The Outsourcing Regulations include a non-exhaustive list of examples for what may be classed as 'material'. These include accounting functions, application processing, back office management, claims administration and handling, actuarial services, information system management and maintenance and investment management. All companies wishing to outsource functions that may be considered material are advised to consult with SAMA in advance.

For non-material outsourcing arrangements (which include items such as external audit, legal services, credit and background checks etc), it is not necessary to obtain SAMA's prior written approval. But there are other obligations, as set out in the following paragraph, which apply to all outsourcing arrangements.

Key Features

Amongst other obligations, insurance companies, reinsurance companies and ISPs must:

  • Establish appropriate controls and procedures to ensure compliance with the Outsourcing Regulations and maintain adequate records to demonstrate such compliance. This will require that the risk management framework, including the internal audit procedure is modified to take into account the requirements of the Outsourcing Regulations
  • Put in place an outsourcing policy, or if such a policy already exists, ensure that it is in compliance with the Outsourcing Regulations and provide a copy to SAMA
  • Ensure that all outsourcing arrangements are properly documented in a written and legally binding contract. Such contract may be subject to a choice of foreign law, but the preference will be for Saudi law to apply
  • Review existing outsourcing contracts and if assessed to be material outsourcing arrangements, seek post facto approval from SAMA
  • Submit details of all existing Material Outsourcing Arrangements to SAMA
  • Ensure that all outsourcing arrangements are free from any conflict of interest. This will effectively involve the company assessing whether such arrangements are at arms length and are in the best interests of the company. Such a process will be assisted by ensuring that the outsourcing policy properly specifies how outsourcing contracts will be awarded and the eligibility and qualification criteria that will be applied when determining whether to enter into such arrangements. In this regard, the Outsourcing Regulations require that the company assesses the suitability of the third party in order to assess the technical and professional background and the impact on the company of such arrangements. For Material Outsourcing Arrangements such assessment will be required to be more thorough and comprehensive
  • Notify SAMA in the event of any legal or regulatory violation in their outsourcing arrangements (although no time limit is mentioned)
  • Rectify and remove deficiencies from existing outsourcing contracts within 365 days or on the renewal date of the contracts
  • Ensure that external auditors and SAMA have data related to the outsourcing and to the business premises of the third party outsource provider
  • Put in place effective means of assessing the third party outsource provider on a yearly basis and to ensure that the necessary expertise is available to supervise them
  • Put in place a complaints mechanism for dealing with complaints about outsourced service
  • Establish a contingency plan to address the sudden termination of an outsourcing arrangement and/or the inability of the third party outsource provider to fulfil its functions. Such contingency plans should also consider the availability of alternative providers and/or the scope to bring such functions in-house

Outsourcing Contracts

The Outsourcing Regulations also set out the basic clauses an outsourcing contract must incorporate as well as the requirements needed to safeguard policyholders' data confidentiality.

The Outsourcing Regulations specify that the outsourcing contract must include service level and performance requirements. Such provisions are crucial to the smooth operation of the outsourcing contract as they set the parameters of the agreement and ensure that the parties' expectations are clear. It is, however, important that the standards be capable of being objectively measured and that the remedies for non-performance are clearly specified.

The Outsourcing Regulations also require that the outsourcing contract include express termination provisions which allow for an early termination of the arrangements. Such provisions are likely to be difficult to negotiate in practice, but do properly reflect the need for the company to retain control over the outsourced activity. Irrespective of the terms of such provisions, the Outsourcing Regulations provide SAMA with the power to terminate any outsourcing contract in the event of non-compliance with the Outsourcing Regulations.

Overseas Outsourcing

The Outsourcing Regulations explicitly recognise that insurance companies, reinsurance companies and ISPs may wish to outsource certain functions to entities domiciled outside of KSA. To some degree this reflects the existing practice of many insurance companies in KSA, which effectively outsource certain functions through technical service agreements to foreign insurers who are shareholders in their business.

There are additional requirements imposed by the Outsourcing Regulations where policyholder or financial data or Material Outsourcing Arrangements are envisaged with a non-Saudi third party outsource provider.

Data Protection

In addition to the rules requiring approval of Material Outsourcing Arrangements, insurers/ ISPs must seek SAMA's permission before they outsource to any third party arrangements which involve the transmission, processing and retention of policyholder data or financial data.

Any insurance company, reinsurance company or ISP must put in place proper safeguards to protect the confidentiality of policyholder and financial data. This will include ensuring that the terms of any outsourcing contract:

  • only permit disclosure of such information on a need-to-know basis;
  • provide for such data to be held confidentially by the third party outsource provider;
  • require such data to be segregated from the other data of the third party outsource provider;
  • require such data to be returned or destroyed upon termination of the outsourcing contract; and
  • allow SAMA access to the premises of the third party outsource service provider in order to inspect all records relating to the services provided.


Responsibility for compliance with the Outsourcing Regulations is with the board of directors and the management of each insurance company, reinsurance company and ISP. A breach of the Outsourcing Regulations is considered to be a breach of the Insurance Law and may result in the sanctions outlined above being imposed upon these individuals.

Why outsource

Besides the obvious cost reasons for outsourcing functions such as claims' administration and handling, the Kingdom's insurers will be able to strengthen their core competencies and focus on innovation. It may be easier to service back office functions from countries such as the UAE and to find skilled staff.

A main argument against outsourcing is the perceived loss of control, especially since the way in which a client is treated when a claim is made forms part of the package that he or she has paid for. This would suggest that insurers should keep a tight control over the way claims are handled, and on the face of it, this means keeping the work in-house. However, a detailed service agreement with a third party claims' handler, with penalties and the threat of the termination of the agreement, if the service doesn't reach a required level (also covered by the Regulation), would solve this. It is also far more difficult to penalise an in-house claims department should it perform poorly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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