Ceding reinsurance premiums to local market boosts role of local firms: Experts

Experts in the insurance sector confirmed that the Insurance Authority’s decision to obligate insurance companies to offer 30% of reinsurance premiums to local companies enhances the role of local reinsurance companies, as this allows them to expand their market share and boost revenues and reflects positively on all local parties.

This decision is a strategic step to enhance the national economy, support the local market and reduce dependence on foreign markets, as reinsurance locally after the market’s capacity has been exhausted reflects an attempt to achieve a balance between using local competencies and relying on international expertise in specialized risks, they told Argaam.

Sulaiman bin Mayouf, CEO of United Actuarial Services Co.

The decision was made to activate and update the local and foreign reinsurance mechanism, based on Articles (26) and (40) of the Executive Regulations of the Cooperative Insurance Companies Control Law issued on April 20, 2004.

The implementation of the reinsurance premiums ceding mechanism locally came to reactivate it, document and regulate this mechanism to be updated in the future to keep pace with market changes and needs, said Sulaiman bin Mayouf, CEO of United Actuarial Services Co.

The implementation of the mechanism from a technical standpoint aims to support local insurance and reinsurance companies, boost their participation in the Saudi market, reduce dependence on international companies and encourage them to increase their capacity, which allows them to retain a large portion of insurance premiums domestically, he told Argaam.

Bin Mayouf also indicated that the retention rates for some types of insurance for the year 2023 are very high, as the retention rate for health insurance is 98% compared to 96% for 2021, and the retention rate for vehicle insurance is 98% compared to 94% for 2021.

He added that there are other types of insurance that require reinsurance programs and agreements due to their risk and high insurance values, such as energy insurance, engineering insurance, aviation insurance, property and liability insurance, and marine insurance.

Bin Mayouf expected that the positive financial impact of this step will appear on the Saudi market at the end of the fiscal year 2025, and it is expected to contribute to a slight increase in companies' revenues compared to 2023.

Abdulrahman Al-Ghraimel, insurance expert

For his part, insurance expert Abdulrahman Al-Ghraimel said that the decision comes to achieve multiple strategic goals in line with the Kingdom's Vision 2030, most notably strengthening the local economy by keeping a larger percentage of insurance premiums within the Kingdom, which contributes to supporting the national economy and achieving sustainable development.

This step will help reduce the migration of premiums, as most of the premiums were directed to foreign markets, which led to the loss of local investment opportunities, Al-Ghraimel added in a phone call with Argaam.

He pointed out that the decision contributes to improving the stability of the insurance sector, as it reduces reliance on global reinsurance companies that may be affected by international economic crises, which enhances the ability of the Saudi market to confront risks using its local resources.

Al-Ghraimel also indicated that insurance companies will be obligated to record the reasons for the refusal of local reinsurance companies or their participation in lower percentages, which raises the level of transparency, enhances the development of the sector and motivates local companies to develop human capabilities, invest in technology, and expand their products to meet the diverse needs of the market.

Companies benefiting from the decision

Bin Mayouf said that the 26 companies operating actively in insurance and reinsurance in the Saudi market may be among the most prominent beneficiaries of the implementation of this mechanism, as it enables insurance companies to increase their capacity to contain new risks and reduce the cost of insurance.

The companies practicing reinsurance, which include a single reinsurance company and five companies practicing insurance and reinsurance activities, are Tawuniya, Walaa, Medgulf, LIVA and Gulf General, with a total capital of about SAR 4.2 billion, which represents 27.4% of the total capital of insurance and reinsurance companies.

That there are other beneficiaries such as reinsurance brokerage companies, reaching 11 companies, which design reinsurance programs that are compatible with the strategy of each insurance company individually and are in line with the market requirements and needs.

Bin Mayouf expected that ceding reinsurance premiums in the local market will lead to a relative decrease in the cost of reinsurance for local insurance companies, based on the supply and demand rule, and with the increasing availability of reinsurance services locally, this could lead to a reduction in the cost of insurance, which will spur competitiveness and fairness of the local market.

Al-Ghraimel expected that the decision will have a slight impact on the cost of reinsurance for local insurance companies, as the initial costs may be higher given that the local market is still in the development phase. He indicated that local prices may not be competitive currently compared to the international market, adding that the impact on customers is limited if the local market is able to improve its operational efficiency and reduce costs over time.

He explained that with the expansion of the local market and its increased competitiveness, reinsurance costs are expected to gradually decrease, and improving the operational efficiency of the local market may contribute to achieving more stable prices for customers in the long term.

Impact of reinsurance premium ceding mechanism on reliance on foreign markets

Bin Mayouf said that the mechanism's impact on reducing reliance on foreign markets will be limited at first, due to the limited capacity of the local market currently and the lack of local technical competencies in addition to the lack of sufficient local reinsurance solutions.

The market needs solutions that include establishing a competitive local reinsurance company with a capital of no less than SAR 40 billion and creating various insurance programs such as Hajj and Umrah insurance, hidden defects insurance and port insurance. This is in addition to the fact that increasing the capital of existing companies is inevitable, which requires mergers and acquisitions between small companies to form strong financial entities that fulfill their financial obligations towards beneficiaries to enhance stability and competitiveness in the Saudi market, he pointed out.

The decision will gradually reduce reliance on foreign reinsurance markets by 20-30% in the short term. The move towards local solutions will provide faster options and closer services for local insurance companies, while the need for international expertise continues for some major and complex risks such as aviation, energy, etc., Al-Ghraimel stated.

He further said that the decision stimulates the development of local capabilities to achieve a balance between the local and international markets, while reinforcing the technical and human efficiency of insurance and reinsurance companies, so that the local market is strong enough to meet local needs, with the possibility of leveraging international expertise when necessary.

Al-Ghraimel expected that the Saudi insurance market will witness an incentive for new investments, which will make it more attractive to local and international investors wishing to establish new reinsurance companies.

He explained that developing the local market may enable the Kingdom to transform into a regional reinsurance hub in MENA region, which will enhance its regional position, adding that improving the quality of local products will drive companies to offer more specialized products, such as reinsurance for cyber risks and natural disasters, which will enhance the competitiveness of the Saudi market.

Reducing reliance on foreign markets will mitigate the impact of global economic crises on the local market, making the market less affected by global fluctuations. The decision represents a key strategic step towards strengthening the national economy, developing local capabilities, and reducing dependence on foreign markets, despite the presence of short-term challenges such as high costs, but the long-term benefits to the market and customers will be great, he added.