Saudi insurance market faces consolidation

Tightening solvency requirements are likely to drive consolidation in the Saudi Arabian insurance market in the next few years as weaker companies merge with stronger rivals, according to a Fitch Ratings report.

Regulatory reform could also help fuel growth, particularly in motor insurance.

Fitch believes that the Saudi insurance market is already subject to strong regulatory oversight, as demonstrated by conservative rules on investments and the regulator's willingness to suspend firms from issuing new policies when deficiencies are identified. Analysts expect capital requirements to be raised further and rules on internal risk controls to be tightened in the coming years.

Tougher regulations will put smaller companies at a disadvantage and the fragmented nature of the Saudi insurance market means consolidation is the likely outcome. There are 33 insurance firms listed on the country's stock exchange, and 26 of them have a market share of less than 3 percent. Consolidation should strengthen profitability in the sector as the new larger firms will be able to benefit from economies of scale and reduced competition. Foreign participation in the market is also increasing. Recent examples include BUPA's increased investment in BUPA Arabia and Allianz Group's increased holdings in Allianz Saudi Fransi Cooperative Insurance.

Insurance penetration remains relatively low despite strong growth over the last decade, and the sector is highly focussed on just two product lines, motor and health. Additional regulatory reforms, including the decision to allow women to drive from 2018 and measures to more effectively enforce compulsory motor cover, are therefore likely to fuel further growth. However, this will be offset in the near term by the sharp decline in new car sales in the first quarter of 2017.