Saudi insurance sector poised for increased M&A activity in 2021: analysts

Saudi Arabia’s insurance market is set to witness consolidation, with mergers and acquisitions (M&As) gaining pace during the year, according to analysts.

“We expect continued M&As in the insurance sector. However, given the pandemic is still ongoing, we consider that some potential M&A activity could take more time to complete,” Panagiotis Toskas, Associate Director – Insurance, Fitch Ratings, told Argaam.

In January, the Saudi Central Bank (SAMA) reiterated the need for insurance companies to look at M&A deals since the sector is a key driver of the Kingdom’s economy and a pillar of the Financial Sector Development Program.

The mergers of Walaa Cooperative Insurance Co. and Metlife AIG ANB Cooperative Insurance Co., as well as Gulf Union National Cooperative Insurance Co. and Al-Ahlia Insurance Co., reflect efforts to organize and develop the sector, and boost financial solvency by improving the insurers’ capital, the apex bank said.

A combination of factors will drive further consolidation in the market, analysts said.

“Firstly, the expected changes in the regulatory landscape will probably increase the required minimum capital of insurance companies. This, combined with the potential introduction of a risk-based framework, could push up capital requirements,” Toskas noted.

As of end-2019, seven out of 32 insurance companies in Saudi Arabia have a shareholders’ equity of below SAR 200 million, according to Fitch.

Secondly, the market is highly fragmented among smaller firms. The four biggest companies have a 66% market share, whereas the remaining 28 are competing for approximately one-third of market premiums.

“As a result, we are likely to see more consolidation of the smaller peers,” Toskas asserted.

Although the Kingdom’s insurance industry closed the financial year 2020 on a high note, KPMG Saudi Arabia predicts an increase in M&A activities.

“We have not only observed attempts for ‘strategy refresh’ but also increased focus on internal capabilities and sustaining margins; in an attempt to foster possible multiple merger and acquisition (M&A) activities in 2021,” stated Khalil Al Sedais, Office Managing Partner – Riyadh, at KPMG in Saudi Arabia.

The insurance industry will be driven by customer experience, data and technology, the advisory firm said, noting companies will be required to enhance their resilience to business risks and remain compliant with evolving requirements in protecting policyholders and shareholders’ interest.

Talal Bahafi, Chief Market Officer, Marsh Saudi Arabia, part of the global financial services group Marsh & McLennan, acknowledged that the Kingdom’s insurance sector is likely to see more consolidation in 2021, driven by insurers looking to streamline costs, boost efficiency and increase optimization.

“This will benefit the overall sector, create stability in the market and improve the client experience.”

At a time when organizations are feeling the impact of transitioning insurance markets and are looking to recover and rebound from the effects of the pandemic, Bahafi stated the need for businesses to build resilience and rethink their risk management strategies.

“Companies should be looking to define their risk profile to purchase the most appropriate insurance coverage and create an insurance program that meets the risk appetite of their organization and ensures they are no gaps or overlaps in their coverage.”

Meanwhile, Fitch’s Toskas said that a market with fewer participants, who are better capitalized, could improve the insurance sector in Saudi Arabia as the competition and pricing could be more rational.

“An updated regulatory framework closer to Solvency II along with the updated actuarial regulations for insurance companies could increase technical sophistication while setting up controls to ensure policyholders’ protection,” he concluded.

Write to Parag Deulgaonkar at parag.d@argaam.com