Saudi Arabia’s underdeveloped insurance sector is set for a major boost over the next few years, thanks mainly to two important recent policy decisions by the government. However, the pace of development of the sector will depend on the type and acceptability of insurance schemes adopted in a country, where large sections of the population are still skeptical about the efficacy and ethical basis of the very concept of insurance.
If these policy decisions are followed by other Gulf Cooperation Council (GCC) states, the region will become a magnet for insurance companies. Some of the other Gulf states are already implementing their own schemes. But it is the 22 million people Saudi market that will attract the most attention.
To put the potential volume of insurance business in Saudi Arabia in context, the Kingdom currently has a paltry 0.01 percent Life Insurance Premium Income/Gross Domestic Product (GDP) ratio. This compared with 10 percent for the UK; 2 percent for Malaysia; and 5 percent for the world average. A mere 1 percent increase of this ratio in the Kingdom would unleash a life insurance market only in excess of SR300 billion.
According to the National Company for Cooperative Insurance (NCCI), the insurance market in the Kingdom in 1999 totaled a mere estimated SR10 billion, with gross insurance premiums totaling SR2,861 million. Experts such as Dawood Taylor, manager of Bank Al-Jazira’s Takaful Ta’awuni Program and Atsuhiko Ayabe, executive director, Operations & Product Development, at Hussein Aoueini & Company in Jeddah, concur that these are exciting times for the insurance market in the Kingdom, although market penetration and profitability will take some time to materialize.
The two major policy decisions announced last week concern motor car and health insurance. Car insurance, for instance, will become compulsory on all motorists in the Kingdom from Nov. 20 this year. “No Saudi or expatriate will be allowed to drive without an insurance policy,” stressed Maj. Gen. Saeed Al-Qahtani, director of police in the Makkah region. There are more than five million cars registered in the Kingdom. Demand for motor insurance has been increasing due to high rate of traffic accidents in the country.
Perhaps more importantly, the Ministry of Health also issued details of a mandatory scheme of medical insurance under the provisions of the Cooperative Health Insurance Law for some seven million expatriates and their families working and living in the Kingdom. The scheme becomes effective after three months, although the ministry is giving employers up to three years to introduce the scheme, depending upon the number of employees. The scheme covers most medical conditions but excludes AIDS treatment, mental disorders except chronic cases, organ transplants, and unnecessary cosmetic surgery.
The insurance policy decisions will have three major implications — firstly, it will help ease pressure on the Kingdom’s budget because currently the government pays for free medical services for the 22 million people in the country, which includes six million expatriates. The health insurance scheme is the latest in a series of economic reforms introduced by the government to reduce reliance on oil and to give the private sector a bigger role in the economy. Other reforms include a new foreign investment law, allowing foreigners to own 100 percent companies in the Kingdom in approved sectors; the introduction of a privatization policy; and the drafting of a new Capital Markets Law and a Law establishing and independent Stock Exchange.
Secondly, the National Cooperative Insurance Council, the body charged with overseeing the enforcement of the insurance schemes, has decided to use an interest-free Islamic insurance scheme called the National Cooperative Insurance System. As such, this will be the single most important boost for Islamic insurance (Takaful) anywhere in the world, especially in terms of market size and potential gross premium income.
Thirdly, it remains to be seen what impact the mandatory health insurance for expatriates will have on the FDI (foreign direct investments) flows into the Kingdom. Some potential foreign investors have stressed that provisions of the health insurance scheme would play a part in their investment decisions as an additional cost factor.
Companies at the forefront of pioneering Takaful products in the Kingdom include Bank Al-Jazira; Islamic Insurance & Reinsurance Company (IIRCO), the Bahrain-based insurance holding company of the Jeddah-based Dallah AlBaraka Group (DBG); Arab-Eastern Insurance Company (AEIC), a joint venture between Tokyo Marine & Fire Insurance Company and two prominent Saudi businessmen — Sheikh Ghassan Ibrahim Shaker and Sheikh Yousef Abdul Latif Jameel; the Bahrain-based Takaful International, in which Kuwait’s International Investment Group (IIG) and DBG are large shareholders.
Last December Bank Al-Jazira introduced its Takaful Ta’awuni Program, an Islamic life insurance product, which is the only Shariah-compliant insurance program to date approved by the Saudi Arabian Monetary Agency (SAMA) for distribution in the Kingdom. It is the first Takaful program to adopt the Wakala contract concept.
Takaful Ta’awuni, says Dawood Taylor of Bank Al-Jazira, is a full suite of products for individuals, families and businesses — including savings and protection plans for education; marriage expenses, a ladies’ savings plan, and capital savings plans. It also plans to launch a corporate product called group market retirement plan.
AEIC similarly announced that it was also launching a Family Takaful Program comprising a range of products including life insurance and a Children’s Takaful Plan. AEIC, through its Saudi general agent, Hussein Aoueini & Company, has also launched a Group Term takaful, a Group takaful for consumer loans and financings such as Murabaha, and aimed at private companies (on behalf of their employees) and any Islamic financial institution (on behalf of their borrowers).
As far as health insurance is concerned, only Malaysia has developed health Takaful products, including one launched a few weeks ago by Syarikat Takaful Malaysia (STM), the largest Islamic insurance provider in the country, called Takaful Wiladeh Plan which covers childbirth costs and provides benefits in the event of pregnancy complications, congenital birth defects, and a cash benefit in the event of the death of the mother or infant during or immediately after childbirth.
The Saudi Cooperative Health Insurance Scheme will apply to companies with more than 500 expatriate workers within one year, those with over 100 workers within two years, and the rest within three years. Medical insurance is a precondition to obtaining a legal residence permit, and the number of specialized insurance companies will be pre-qualified by the Ministry of Health to provide the medical coverage. Although it is mandatory for expatriates at present, Saudi officials privately stress that medical insurance would eventually be compulsory for all Saudi citizens.
It would be interesting to see how the major Western health insurance providers such as BUPA take up the challenge of implementing a Shariah-compliant health insurance product.
As such, regulation of the insurance market will be a major challenge for SAMA, not only in terms of the acceptability and cost of the products and their premiums, but also whether they are being sold ethically and adequately articulated to a nascent insurance market.
