Overview

Rationale

S&P Global Ratings' insurance industry and country risk assessment (IICRA) for the property/casualty (P/C) and health insurance sector of Saudi Arabia (A-/Stable/A-2) is intermediate, reflecting moderately high country risk and moderately low industry risk. The P/C and health insurance sector in Saudi Arabia remains profitable, supported by low product risk, high barriers to entry, modest growth prospects, and strict regulations. At the same time, our assessment of country risk reflects high economic and geopolitical risks.

Based on moderately high country risk and moderately low industry risk, our default IICRA assessment is moderately high (fourth highest on a six-point scale). However, we apply a positive adjustment to arrive at an intermediate assessment (third highest on the six-point scale), since we believe that the country risk factors are less relevant for the growth and profitability of the Saudi insurance industry.

Our industry risk assessment of Saudi Arabia is comparable with a number of other P/C and health insurance markets globally. Within the Gulf Cooperation Council (GCC), we also assess P/C industry and country risk in the United Arab Emirates, Kuwait, and Qatar at the same level.

Chart 1

Country Risk

Our moderately high country risk assessment reflects elevated economic risks, ongoing fiscal pressures, and high geopolitical risk. Low oil prices and the COVID-19 pandemic are taking a toll on Saudi Arabia's economy and budget; we expect GDP to contract by 4.5% in 2020, and the general government fiscal deficit to rise to 11% of GDP. However, from 2021, we expect GDP growth, oil prices, and oil volume exports to rebound as global conditions improve. For further details, see "Sovereign Risk Indicators," published Dec. 14, 2020, and "Saudi Arabia 'A-/A-2' Ratings Affirmed; Outlook Stable," published Sept. 25, 2020, on RatingsDirect.

Industry Risk

Our moderately low industry risk assessment reflects satisfactory profitability, supported by low product risk, high regulatory and operational barriers to entry, modest growth prospects, and strict regulations.

Factors supporting profitability

High barriers to entry.   We view regulatory and operational barriers to entry as supportive of the profitability of insurers in the sector. The insurance regulator, Saudi Central Bank (SAMA), previously known as the Saudi Arabian Monetary Authority, continues to actively encourage companies in the sector to merge in order to create a market with fewer, stronger players. A number of mergers and acquisitions have been initiated over the past few years, with two completed in 2020 and some others in advanced discussions. On the other hand, we understand that a small number of foreign insurers have applied for a license to operate in the kingdom. In our view, these entities will only be granted a license if the authorities believe that they will add value to the market and meet the regulatory requirements.

Low potential for earnings volatility from product risk.   About 80% of insurance policies sold in Saudi Arabia relate to motor and medical cover. This means that losses are relatively predictable and have a short tail. Occasional losses from natural catastrophes, in the form of seismic activity, flash floods, or occasional hailstorms, are typically limited to the west of the country. Similar to the other GCC markets, most high-value energy and marine business is ceded to the international reinsurance market, while medical and motor business is largely retained by local insurers. The government in Saudi Arabia has covered the majority of the cost of medical care related to COVID-19, which improved the underwriting performance of insurers in 2020. On the asset side, bank deposits and fixed income instruments are the sector's principal asset class. The sector has limited exposure to risky asset classes such as equity and real estate, which together contribute less than 20% of total investments.

Modest growth prospects despite intense competition.   The Saudi P/C and health insurance sector grew by about 8% in 2019, primarily driven by growth in health and general insurance lines. The extension of mandatory medical cover to a wider part of the population boosted health insurance premiums, while rate increases on commercial lines of business triggered growth in general insurance. Furthermore, some large previously lossmaking insurers successfully repriced their policies, which not only resulted in top-line growth, but also improved their underwriting performance.

During the first nine months of 2020, the market's gross written premium (GWP) grew by about 4%, despite the pandemic and a likely sharp drop in consumer spending and economic activity. As motor and medical GWP remained broadly stable, premium growth primarily came from general insurance lines. We expect the market's premium growth rate for 2020 to remain around 3%-5%. This also indicates that the market's premium growth rate is not directly corelated with the GDP growth rate, which we expect to decline by 4.5% in 2020.

Premium growth in 2021-2022 will likely be driven by the implementation of mandatory medical cover for Hajj and Umrah pilgrims, a rate increase in commercial lines, and authorities' efforts to reduce the number of uninsured cars. We believe the Saudi insurance market is still underinsured, with the insurance penetration rate below 2%, and therefore carries modest growth prospects in the short-to-medium term.

The Saudi P/C and health insurance sector's average net combined ratio has been in the range of 95%-98% over the past couple of years. (Lower combined ratios indicate better profitability. A combined ratio of greater than 100% signifies an underwriting loss.) Although pricing conditions for motor and medical policies will remain tough, we believe the market will remain profitable and report net combined ratios in the range of 95%-97% and a return on equity of around 5% in 2021-2022.

Chart 2

Evolving institutional framework.   Saudi Arabia's insurance sector is robustly regulated, in our view, by the principal regulator SAMA and by the Council for Cooperative Health Insurance for medical cover. In addition, all insurers are listed on the local stock exchange (Tadawul) and are required to follow the rules of the Capital Market Authority.

The minimum capital requirement for primary insurers is set at Saudi riyal (SAR) 100 million, and we expect this to be raised in the near future. However, in practice, increasingly sophisticated risk-based capital and other models are being used to monitor the solvency of insurers in the sector. Although some companies still operate with low solvency margins, they must follow strict solvency recovery plans or face temporary suspensions. SAMA has strongly encouraged consulting actuaries to enforce actuarial pricing and reserving and any deviations from actuarially recommended rates have to be explained.

IICRA adjustment

Although we do not expect it, we may revise our IICRA assessment downward to moderately high by removing our positive adjustment if economic or geopolitical risks weaken the sector's profitability. We could also remove our adjustment if high competition led to a sharp decline in GWP growth and profitability over the next two years.

Related Criteria And Research

Related Criteria

• Insurers Rating Methodology, July 1, 2019
• Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013

Related Research

• GCC Insurers In 2021: Robust Capital Supports Credit Quality, Feb. 22, 2021
• Sovereign Risk Indicators, Dec. 14, 2020