UK: Saudi Arabian Post Legislative Spring: Opportunities For Insurers

Last Updated: 12 February 2013
Article by Peter Hodgins and Karim Fawaz

The draft implementing regulations of the Saudi finance laws are available for public comments. These drafts, despite not directly enforcing insurance requirements, open new opportunities for insurers and encourage the mergence of new insurance products which are necessary for various sectors, and especially in the Power and Energy sector, namely, solar energy.

On 19 November 2012, the Saudi Arabian Monetary Agency (SAMA) published on its website the draft implementing regulations to the Real Estate Finance Law, Financial Lease Law and the Law on Supervision of Finance Companies1. This article considers the impact of these laws in the context of the insurance sector and the opportunities in the expanding area of renewable energy.

Residential real estate and the wider economy

Initially it was envisaged that the new laws would be directed solely to solving the social economic issue of allowing greater Saudi home ownership. However, the bouquet of laws appear also to form the basis of a new era for securitisation, creates new forms of financial instruments for use in the Saudi market and, accordingly, a significant new area of insurable risks.

Opportunities outside of residential real estate

The Kingdom is preparing for a golden age of renewable energy. H.M. King Abdullah bin Abdulaziz Al Saud has issued his order No.A/35, 3/5/1431H (corresponding to 17/04/2010G) establishing King Abdullah City for Atomic and Renewable Energy (KACARE). The slogan of KACARE is "A new era of sustainable energy". Saudi Arabia has spent considerable time and money on studies of renewable resource and environmental measurement and monitoring. Whilst there have been discussions regarding windmills projects, it is likely that the KACARE initiative will start with solar energy, for the simple reason, sustainable energy requires sustainable source, and Saudi Arabia is gifted with extremely wide areas that can host solar panels. Solar energy projects are high cost and require large areas of land. It is unlikely that KACARE will bear the risk of these projects, and therefore, it is expected that developers and off-takers will utilise financing structures within the Kingdom to finance and insure their projects. Such financing is expected to be accompanied by the need for insurance in respect of the project assets.

We consider in the following paragraphs the insurance provisions in the new draft implementing regulations and the effect on the insurance sector in Saudi Arabia in the context of the project finance transactions under the KACARE initiative.

Insurance in the draft implementing regulations

The draft implementing regulations include a number of references to the insurance aspects of financing transactions, namely, Article 76 of the draft Implementing Regulations of the Law on Supervision of Finance Companies, Article 4 and 9 of the draft Implementing Regulations of the Real Estate Finance Law, and articles 9 and 25 of the draft Implementing Regulations of the Financial Lease Law.

Based on these provisions, an asset financed in accordance with the finance laws should be insured prior to the extension of the financing facility by the financing company. Furthermore, these implementing regulations also appear to envisage at least two distinct types of insurance coverage. One insurance covers the asset itself and another protects against the credit risks arising in the financing transactions.

Insurance covering the underlying assets will be a general insurance product, typically a property all risks policy, which Saudi insurance companies already offer. Insurance covering the financing risk, however, can take a number of forms including credit insurance, accounts receivable insurance, bad debt insurance and others. Whilst the real estate and lease financing structures are recently founded in the KSA, it is difficult to find a Saudi registered insurance company which have credit insurance products that are approved by SAMA and ready to be offered in the Saudi market. Any insurance product is required to pass through the File & Use process of SAMA prior to being offered by the insurance company. This process would require a minimum of 3 months from submitting the application to SAMA, but may take significantly longer, as SAMA will be receiving File & Use requests from many insurers.

Insurance and project finance in solar projects

D&O insurance cover

Finance Companies established in accordance with the Law on Supervision of Finance Companies will require Directors & Officers Liability (D&O) insurance cover2. However, awareness for this type of insurance in the KSA is still in an embryonic stage. Saudi registered insurance intermediaries therefore have a key role in advising their clients on the importance and necessity for D&O insurance.

One area where D&O insurance has, historically, been utilised is in the context of Authorised Persons (i.e. Saudi licensed financial institutions in accordance with the Authorised Persons Regulations) regulated by the Capital Market Authority (CMA). These financial institutions have previously obtained D&O cover as an extension for Financial Institutions Insurance which was required by Note 8 and Annex 6 of the previous draft of Prudential Guide Notes issued by the CMA. However, the new final Prudential Rules issued by the Board of the CMA on 30 December 2012 no longer expressly require such insurance. Instead, these Rules take into account specific sums insured for the calculation of the capital adequacy. Accordingly, some financial institutions have cancelled their D&O covers on the basis that is not specifically required by law anymore.

The new finance companies to be established pursuant to the finance laws represent an unusual challenge for the insurance industry. Such companies will not have any loss history or track record for underwriting purposes. As such, D&O Insurance premiums for the first year may be very high compared to the cover provided. Although these premiums will likely diminish with time and accruing history, pricing will be another obstacle to market this type of insurance. As such, it seems that the Saudi regulators, namely, SAMA and CMA will have to proactively enforce the requirement for insurance coverage until the Saudi insurance market sufficiently matures.

Property insurance

There are large portfolios of property insurance currently underwritten by Saudi insurers. These portfolios, however, have historically been limited to developed areas of residential and commercial properties. The new era of sustainable energy may well change this. The Real Estate Finance Law and its Draft Implementing Regulations are likely to encourage marketing wide areas of the Kingdom that are not attractive for residential property to serve as hosts for solar energy projects and photovoltaic cells. These vast lands would be acquired through special purpose vehicles in accordance with the aims of the KACARE initiative.

In a solar energy project, the developers will require project financing in order to acquire the land necessary for the project. Whilst undeveloped land would not typically require property insurance3, once construction work commences and power generating equipment are installed, Construction All Risks and Property All Risks insurance for high value contents will be required. In addition, the financing for the purposes of acquiring these lands will likely also be subject to insurance requirements. Credit insurance products for these purposes, are still not widely available in the Saudi market, and may not be simply structured in a cooperative Shariah compliant structure. Again, there remain challenges as to whether the developers and finance companies are fully aware of the availability of products for these purposes. There are also questions as to whether insurers will respect the requirements to obtain SAMA's approval prior to offering such products?

Further insurances

We expected to see Saudi Solar sukuk listed on Tadawul (the Saudi stock exchange) at a certain point in the maturity of these projects. The underlying structure of these financial instruments will very likely be a tranche of Ijara and another of a Mudharaba in accordance with the new finance laws and the Mortgage Law. These sukuk instruments may require insurance of financial instruments. Such insurance is typically structured as a form of financial guarantee which automatically pays out an insured loss without referring to typical defences to coverage levied by insurers in other contexts. In more developed markets, such coverage is often offered by monoline insurance companies as a specialty niche offering.

This is still not available in the Kingdom. However, it would not seem that such insurances are ready to be provided in the Kingdom at the time of writing.

Positive conflict of jurisdiction

How disputes arising in the context of renewable energy projects will be resolved is a further consideration.

None of the finance laws and their draft implementing regulations provide for any specific court to have jurisdiction over disputes and violations relating to any of these laws. However, Article 32 of the Law on Supervision of Finance Companies and Article 92 of its draft Implementing Regulations provide for appointing employees which have the capacity of public prosecution.

In contrast, pursuant to Article 20 of the Law on Supervision of Cooperative Insurance Law, the Committees for Resolution of Insurance Disputes and Violations are established to resolve disputes arising between insurance companies and their customers. However, in practice, the Insurance Committee has accepted jurisdiction in other forms of disputes arising in the context of subrogation proceedings.

Hence, dispute resolution is still not clear for transactions that are structured and insured under SAMA's regulations.


The new finance laws and draft implementing regulations provide detailed guidance in relation to the provision of finance facilities in Saudi Arabia. However, in our view, there is a significant gap in relation to the requirements for specific insurances to be purchased in such structures. The insurance market in Saudi Arabia is still maturing and regulators can not solely depend on intermediaries and insurers to advise on the covers required. In our view, the requirements for D&O insurance, CAR and PAR coverage and credit insurance should be explicitly addressed.

Furthermore, the finance laws and draft implementing regulations ought to have clear provisions on jurisdiction, dispute resolution and enforcement of judgments to encourage financiers, large scale projects developers and other parties in Project Finance to take daring steps towards big developmental projects.


1 This article is in continuation of "The Saudi Arabian Legislative Spring – towards an insured securitisation", available at: .

2 The draft implementing rules are available on SAMA's website at: .

3 For further reading on recent developments on D&O insurance, see, Beswetherick, M., "Directors' duties and the increasing requirements for D&O insurance in the UAE", available at:

4 The use of title insurance in KSA is unknown at the present time due to the limited land registration requirements.

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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