Saudi Arabia: The Saudi Arabian Cooperative Insurance Market: The Premier League Of Islamic Insurance?

At the time this article was originally written, the English football Premier League was nearing the end of the 2011/2012 season... In one of the most exciting seasons of recent years there remains everything to play for going into the final games; the league champion is still to be determined, as are the teams qualifying for the European tournaments and the teams to be relegated. The season has also seen controversy, with growing scrutiny of referees' decisions and calls for the introduction of goal line technology. The 2011/12 "season" for the Saudi Arabian cooperative insurance market has been equally eventful. Much like Premier League's status in the football world, it is at the forefront of global Islamic insurance. Throughout the season there has continued to be a focus on the role of the "referee", the insurance regulator (the Saudi Arabian Monetary Agency), the changing "rules of the game" as new regulations are introduced and the financial health of the players in the market.

The Premier League

The Ernst & Young World Takaful Report 2012 states that takaful premiums increased by 19 per cent in 2010 with global contributions totalling USD8.3 billion. The GCC accounted for USD5.6 billion of these contributions of which Saudi Arabia cooperative insurance market accounted for USD4.3 billion (or 51 per cent of global contributions).

The Kingdom does have an obvious advantage as a league. In the Islamic insurance world it is the only market which does not also have a conventional insurance market. Since the State monopoly on insurance was ended in 2004, it has been mandatory for insurance companies to operate in accordance with the cooperate model.

Although Islamic in nature (hence the inclusion in the World Takaful Report) there are fundamental distinctions between the cooperative model used in Saudi Arabia and the takaful models used elsewhere in the world insofar as:

  • the cooperative model does not require a segregation of ownership of policyholder funds from the shareholder funds
  • cooperative insurance companies are not required to invest in accordance with the principles of Shariah
  • cooperative insurance companies are not required to appoint a Shariah Supervisory Board.

Many companies in the Kingdom do nevertheless operate in accordance with the Takaful model, particularly in the family takaful sphere.

Goal Line Technology

The rules of the modern game of football were invented by the English Football Association in 1863. However, they have continued to develop in the subsequent 150 years, and this season has seen especially vigorous debate about whether to permit goal line technology. Regulatory developments have also been a hallmark of the Saudi Arabian market in recent years and have included:

Online Insurance Activities Regulation

The Online Insurance Activities Regulation came into force in December 2011, presenting insurers with a series of regulatory obligations and reporting requirements that must be considered in advance of, and on an ongoing basis, whilst transacting online business. Undoubtedly, as online activity gains prominence in companies' business models as part of their efforts to increase market penetration in more cost-efficient ways, correspondingly, SAMA's scrutiny of these activities will only increase. Prior to undertaking business online, cooperatives must now submit a business plan to SAMA describing their online operations. Additionally, the Regulation sets out requirements relating to the outsourcing of online insurance activity, as well as matters concerning customer identification, post sales services and complaints handling.

Investment Regulation

February of this year saw the introduction of the Investment Regulation, which stipulates requirements as to companies' investment policies, information to be disclosed to SAMA regarding authorities held internally for the purposes of making investments, responsibilities of the companies' Boards and Investment Committees as well as procedures for the monitoring and controlling of investment risks.

Anti-money Laundering & Combating Terrorism Financing Rules

Around the same time as the Investment Regulation, SAMA brought into force the Anti-money Laundering & Combating Terrorism Financing Rules. These set out requirements (intended to align with the Financial Action Task Force's recommendations) obligating cooperatives to comply with certain "know-your-client" and due diligence procedures prior to accepting customers' business, including the documents to be obtained from each type of customer entity or person, the enquiries that should be made of those customers, as well as listing those types of customers which should be automatically classified as high-risk. There are also requirements regarding the screening of prospective employees, and provision for training of all employees in the identification and prevention of suspicious transactions.

Forthcoming regulations

Further regulations are anticipated for 2012, with three draft regulations already in circulation - the Actuarial Work Regulation, the Audit Committee Regulation and the Outsourcing Regulation, which in the case of the latter will affect third parties dealing with cooperatives, as well as cooperatives themselves.

The Referee

 Unlike in the Premier League, the Saudi Arabian Monetary Agency as  the primary regulator of the insurance sector and its linesmen - the Capital Markets Authority and the Council for Cooperative Health Insurance - has not been the subject of extensive criticism. SAMA is widely recognised as being proactive in its oversight of the cooperative insurance market in the Kingdom and in the introduction of new regulation (see further below).

A key concern for SAMA for future seasons, is likely to be the volume of information that is required to be submitted to it by the industry. Most of the new regulations imposing requirements to provide periodic reports and/or to seek SAMA's approval for operational matters. For example:

  • The Investment Regulations require SAMA's approval for each insurer's investment policies and any material changes thereto. Insurers are also required to submit an annual report to SAMA describing its investment activities, investment values and performance as well as any supplementary information requested by SAMA.
  • The Online Business Activities Regulations require that an insurer develop and submit a separate business plan for its internet business to SAMA. Each product to be sold online is required to be separately approved by SAMA. Each insurer is also required to report to SAMA in the event that its website is subject to damage and cannot be repaired within 24 hours.
  • The Actuarial Regulations require that actuaries are required to be approved by SAMA and that each insurance company must obtain SAMA's written approval before appointing an actuary. The reports of the company's actuaries must be submitted to SAMA within 10 days of them being provided to the Board. The insurer must also notify any corrective actions taken in response to the actuaries report. There are also annual and mid-year reports to be submitted by the responsible actuary for each insurer.

This begs the question of whether SAMA can keep up? Like football referees as the game has speeded up, SAMA risks simply being unable to review the volume of documentation that is required. 

The Players

Premier league teams thrive on the quality of their players. However, like the wider GCC, Saudi Arabia continues to face a shortage of qualified insurance practitioners. Saudization requirements require a minimum percentage of Saudi nationals be employed by the cooperative insurance companies (typically starting at 30 per cent for start-up operations and rising incrementally in subsequent years).

The big issue is whether companies invest in training staff much in the same way that football clubs operate their youth squads. However, the risk remains of these staff being poached by their competitors and there is little that the companies can do to prevent such risks without further fuelling salary inflation.

The Financial Health of the League

In combination with stricter regulations and the broader economic recession, there will likely be a slow down in the number of companies seeking to set-up and be licensed in the Kingdom. However, the total number of companies in the Kingdom means that competition remains fierce. Factors such as sub-optimal scale, aggressive pricing strategies, over-focus on motor and health risks, and inability to retain risk, especially on large commercial risks, continue to affect profitability. This factor continues to be exacerbated as companies seek to recoup the set-up cost.

The "television" money

The Premier League's position at the forefront of the footballing world is unarguably the result of the influx of cash from the sale of television rights. The cooperative insurance market, like many in the Middle East, is heavily dependent upon the availability of reinsurance. However, Saudi Re aside, there is a lack of dedicated reinsurance capacity within in the Kingdom itself.  This issue is compounded by the existence of mandatory retentions stipulated by the Reinsurance Regulations.

The development of regional reinsurance (and retakaful) will hopefully assist in the further development of the Saudi market.

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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