LONDON, 13 January 2003 — The Saudi Arabian traffic department is reportedly accepting compulsory third party motor insurance certificates issued by all insurance companies operating in the Kingdom. Curiously, the insurance certificates will serve as a bail bond preventing the traffic police from arresting motorists or ensuring their prompt release from police custody, in case of an accident.
Motor insurance (rukhsa) became mandatory on Nov. 20, 2002, following the establishment by the Shoura Council of the National Cooperative Insurance Council (NCIC) to oversee the supervision of the insurance sector. Prior to that a cooperative insurance scheme had already been approved and offered in other areas by the National Company for Cooperative Insurance (NCCI), effectively the monopoly for so-called co-operative insurance.
Cooperative insurance has been deemed as operating under Islamic financial principles, underpinned by two fatwas (religious rulings) given by an Assembly of Prominent Islamic Scholars in Saudi Arabia in April 1976 on “The Permissibility of Cooperative Insurance and its Coping with the Principles of Islamic Shariah”; and the Jeddah-based Islamic Fiqh Academy of the OIC on “Insurance and Re-insurance” passed in December 1985.
However, the shambolic introduction of the rukhsas has led to confusion, and seriously questions the competency of the Ministry of Transport officials responsible for policy implementation.
Firstly, the NCCI claimed that its rukhsas were the only legal ones, although drivers could apply through National Commercial Bank, Al-Rajhi Banking and Investment Corporation (ARABIC), and through driving schools. In reality, the police are accepting such certificates issued also by other insurance operators, who were unhappy about NCCI’s monopoly position. Insurance operators also regret the fact that the government, the Saudi Arabian Monetary Agency (SAMA), and the NCIC did not adequately consult the insurance sector on the structure, procedures and introduction of the mandatory motor insurance. For instance, they point to the fact there is only one representative from the insurance sector on the NCIC, that from NCCI.
There is no economic reason why NCCI should have a monopoly of an estimated SR1.5 billion motor insurance market, which is set to increase significantly over the next few years. On the contrary, such a monopoly could affect the Kingdom’s ongoing negotiations for entry to the World Trade Organization (WTO).
Also, the policy, according to some Saudis, was implemented without an appropriate consumer education and motor insurance promotion campaign. TV ads regarding the rukhsa, for instance, did not adequately clarify application procedures; and online services have been slow and bureaucratic. The rukhsa insures the license holder against human vehicle and property losses incurred by third parties in the case of an accident. It is primarily meant to cover the so-called “blood money” of a person killed by the insured driver in an accident. In the absence of a rukhsa, the police used to detain drivers involved in a fatal accident until the blood money or a “bail bond” was posted.
Ironically, this supposedly acted as a deterrence to reckless driving. In reality though, Saudi Arabia has one of the highest incidence per capita population of road accidents and deaths in the world. According to official estimates, some 267,000 traffic accidents occurred in the Kingdom in 2001, in which some 4,500 persons died, and 32,000 suffered various injuries. Only 21 percent of motorists are estimated to have been insured before the rukhsa was made mandatory last November.
As such, some Saudi insurance operators fear that younger drivers (by far the biggest category to be involved in serious accidents) will de tempted to drive even more recklessly because they will perceive that they are covered by the rukhsa in the case of an accident or death. This would have a knock-on effect and lead to a greater incidence of road accidents and fatalities. Also, the cost of the rukhsa is modest by international standards — SR350 for those over 21 years; and double that for those under 21 years.
These insurance operators, stress that the rukhsa should be accompanied with a complete overhaul of the driving tuition and test sector; and a much more rigorous monitoring and enforcement of traffic regulations and laws. This would mean greater training and ongoing education of traffic department officials and police. Several Saudi-based insurance operators represent global giants such as Norwich Union, Axa, and Royal Sun Alliance.
Other insurance operators also complain about the terms of the NCCI rukhsa which require that in the event of an accident or claim (third party only), all other insurance cover should be exhausted before a claim on the NCCI policy could be made. If this is true, then its smacks of an motor insurance “Apartheid” policy — a situation which the Insurance Council, SAMA and the government has to clarify urgently.
In effect it is a double whammy — NCCI claims that its motor insurance policy is the only legally acceptable one, thus drivers who already have such a policy with other operators have to take out an NCCI rukhsa in addition. But in the case of an accident, the NCCI terms dictate that the claim should be first on the other operators’ policy (which technically is not legally acceptable). This sounds like a form of indirect taxation which both the other operators and the Saudi motorist are being forced to pay.
Failure to do so, would mean that the Kingdom operates a discriminatory policy which in turn might harm its efforts to attract foreign investment, which suffered significantly in 2002 because of the impact of 9/11. Other insurance operators already report a flight of customers to NCCI because of the perception that the latter is the sole legal provider of the rukhsa. The government should similarly urgently clarify the monopoly position of NCCI. Needless to say that competition would largely be healthy for the economy and the Saudi motorist.
Perhaps the biggest confusion is whether cooperative insurance is Islamic Takaful insurance or not. NCCI to be fair has never claimed to be Islamic although the Saudi public perceive them to be such, especially as cooperative insurance is perceived as Islamic. This is further exacerbated by the fact that many Shariah scholars also see cooperative insurance as Islamic. If this is so, as one Takaful operator stresses, “then all mutual companies in the UK, US, Japan and elsewhere must also be Islamic.” The point is that you can have cooperative insurance in Takaful, but it is not necessary to have Islamic insurance principles in cooperative insurance.
According to one Takaful operator, Takaful must have an underlying contract to the product sold. The most suitable one is the Wakala (agency) contract. There has to be a clear distinction between the Takaful operator and the participant. All investments must be Sahriah-compliant. Tabarru (charitable donation) must replace the premium of a conventional contract in order that gharar (uncertainty) can be avoided. All insurance coverage must be on a cooperative or mutual basis. The operator must have a Shariah Advisory Board which must issue a fatwa regarding the acceptability of the contract and must issue regular (quarterly or annual) Shariah compliance certificates relating to the products and operations of the operator.
It is up to the National Cooperative Insurance Council and NCCI to confirm whether their rules and regulations comply with the above requirements or not. Otherwise confusion in the Saudi market regarding cooperative insurance will persist to the detriment of the consumer.