Despite fierce competition, domestic insurers in the Kingdom of Saudi Arabia remain profitable, despite the effects of increasing competition and low interest rates, according to S&P latest report.
Standard & Poor’s Ratings Services said that the market has expanded very quickly in recent years as health insurance has become widespread. “Compared with insurers in Western markets, insurers in the Kingdom tend to focus more on achieving a return on equity through underwriting alone. Investment strategies are conservative, and contribute little to the industry’s overall good profitability. But we anticipate that it will be harder for companies to maintain underwriting discipline as competition increases,” it added.
“Because the Kingdom is an Islamic country that adheres to Sharia law, all its insurers must pay a “zakat” tax on their investments, including 2.5% of the value of their cash investments. While interest rates remain low, we estimate that insurers are paying more in zakat than their aggregate investment return. Therefore, until interest rates rise, domestic insurers must make an underwriting profit to break even,” it said.
The Saudi Arabian Monetary Agency (SAMA), which regulates insurance in the KSA, aims to maintain standards as the industry expands. SAMA rigorously enforces its requirements for reporting and disclosures, and demands that all insurance and reinsurance providers gain operational licenses and product approvals. Its processes create a barrier to entry for new participants, somewhat reducing the competitive pressures caused by the presence of 33 insurers chasing a fairly small, if growing, market.