JEDDAH, 23 January 2006 — As a result of its accession to the World Trade Organization (WTO), Saudi Arabia has agreed to open its insurance sector to foreign investors and to allow foreign insurance companies to open and operate branches in the Kingdom.
The insurance sector in Saudi Arabia is still underutilized and at present, the sector’s contribution to the Saudi gross domestic product (GDP) is estimated at 0.7 percent. With the government decision on limiting foreign ownerships in the operating companies to only a 60 percent stake and requiring them to offer the remaining 40 percent to the public, the insurance sector is set to spur the country’s economic development.
The benefits of issuing and trading new stocks of insurance companies to the financial sector are immense since the sector can absorb the entire excess surplus in the stock market. This in turn will decrease random speculation in the stock market and diversify the Kingdom’s financial investment channels.
The major obstacle for insurance companies remains, however, in complying with Saudi Arabian government requirements for insurance providers to form incorporated cooperative joint-stock companies. Saudi Arabia has declared that a commercial presence will be permitted for insurance companies which operate according to the cooperative insurance system and have a paid-up starting capital of not less than SR100 million ($26.6 million). The government is also requiring insurance companies to allocate 20 percent of their annual profits to be added to their reserves until the reserves equal the entire paid-up capital. Because of these conditions, all operating insurance companies in the Kingdom are in the process of transforming their business operations and structures; some are also exiting the market.
The government is giving a three-year transition period to existing foreign insurance companies either to convert to a Saudi cooperative insurance company or to a direct branch of a foreign insurance company. During this transition period, existing foreign insurance providers will be allowed to continue business operations, as well as to offer new products and to service new clients.
At this point, there is only one company in Saudi Arabia that is permitted: The National Company for Cooperative Insurance (NCCI). All remaining companies are still under consideration by the Saudi Arabian Monetary Agency (SAMA). SAMA reported that there were 24 insurance companies whose cases it had completed studying. The companies’ files have been sent to the Ministry of Trade and Industry in order to complete evaluation and grant the required licenses. The 24 companies, according to SAMA, are in an advanced stage and they are in good position to receive approval as soon as possible. Among the companies are Saudi British Bank (SABB) Takaful Company, BUPA Arabia, Saudi United Cooperative Insurance Company (AMITY) and Saudi Indian Insurance Company.
SAMA also reported that there were seven companies still being considered before sending them to Saudi Arabian General Investment Authority (SAGIA) and afterward to the ministry. Among the seven companies are Takaful Taawuni Co. of Bank AlJazira, Kingdom Cooperative Insurance Company, Arabian American Insurance Company (AAICO) and American Life Insurance Co. (ALICO). SAMA announced that there were two companies that have withdrawn from the Saudi market and have complete withdrawal plans. The companies are Abu Dhabi National Insurance Company and the Saudi Aman Insurance Company.
Abdul Ilah Saaty, chairman of the insurance council at Jeddah Chamber of Commerce and Industry (JCCI), said that the licensing process of insurance companies was taking time because it involved so many parties; therefore, a call for a single specialized authority to handle the licensing is important. The list includes SAMA, the Insurance Council, the Ministry of Commerce and Industry, SAGIA and the Traffic Department. He expects the Saudi insurance sector to contribute 3.7 percent of the GDP whereas SAMA estimated the sector’s contribution at 2 percent. Saaty expects the Kingdom’s insurance market to triple from SR8 billion to SR24 billion within the next ten years.
