Consolidation of KSA insurance market on the cards

Riyadh: With an increase in price competition and capital erosion, PwC expects the KSA insurance market to move towards consolidation of the industry to ensure long term financial viability and narrow the performance gap between the top three insurance performers and the rest of the market. The KSA insurance market is highly fragmented with three out of the 35 insurance companies generating 53% of GWP (Gross Written Premium) in FY14 – the smallest 10 companies share less than 5% of the market.

Fahad Al-Mubarak, the Governor of the Saudi Arabian Monetary Agency (SAMA), said that the agency was currently working closely with the insurance companies’ management teams to put together new plans to help re-structure and return to profitability and to price their services based on the actuarial studies.

It was also quoted in different publications that SAMA welcomes M&A requests if they meet all the requirements for consolidation and lead to positive results to all policyholders, shareholders, the general public and the rest of stakeholders.

“This disparity within the industry is not sustainable for the future, with many smaller companies unable to achieve the scale required to generate a profit,” Raymond Hurley, Financial Services Deals Leader, PwC, Middle East at launch of PwC’s Middle East Financial services “Point of View” on insurance reform and M&A prospects in KSA, said. “This has led to insurers competing on price, rather than service. With demand for insurance products mostly made up of compulsory lines, where competition has pushed down pricing, some insurers are unable to balance their portfolio with other more profitable lines,” Hurley, added.

One solution to market fragmentation is consolidation, which can be done either through putting in place regulatory measures to compel M&A combinations or alternatively using regulatory inspections and oblige management teams to assess the long term viability of certain business models.

Existing foreign insurers (typically the global majors) in the region and aspiring entrants remain poised to take advantage of the right investment opportunities that would give them access to the key growth markets such as KSA.

While some have made successful acquisitions and investments in 2013, M&A activity in 2014 appears to have been subdued. Expectation gaps around valuations, poor quality portfolios, unwillingness to forego control by family owned insurers and restrictive upper limits on foreign ownership are some of the factors that are cited for the lack of M&A activity.

Whilst many of these factors may persist in the short to medium term, a more proactive intervention by the regulator could help create the right environment for more consolidation and M&A deals to come to the market.

Those insurers that haven’t managed to achieve scale will need to enhance their risk-based pricing models to ensure sustainable underwriting and a path to profitability in order to maintain stakeholder support.

“A focus on improving underwriting processes, loss ratios and expense ratios will be essential to survival. Those that can make this work may be more attractive for foreign insurers looking to gain market share, and therefore maximise value for shareholders,” he said.

There will however be those insurers that are either unable (or unwilling) to participate in M&A, or those that aren’t able to manage risk appropriately. Over the medium term, this will inevitably have an impact particularly for smaller insurers’ susceptibility to adverse selection of poorer quality underwriting risks.

In 2014, 10 out of the 35 listed insurance companies approached the Saudi Arabian Capital Market Authority (CMA) for a capital increase, a clear sign that the sector continues to deplete capital. 13 out of 35 companies reported a loss in 2014, resulting in an aggregate loss of SAR0.5bn in 2014 (2013 saw 21 out of 35 companies reporting losses, resulting in a combined loss of SAR1.65bn).

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