• Insurers in Saudi Arabia are showing improved performance, but are not all doing quite as well as might be expected. 
• The principal regulator SAMA has fueled industry growth by helping to expand compulsory coverage. At the same, its imposition of conservative reserving practices has weighed on insurers' near-term earnings and solvency.
• Insurers are awaiting clarification following the Ministry of Health's recent announcement that insurers of 'at fault' motorists should pay the medical costs of accident victims.

Dubai, UAE, September 27, 2016:  In many respects, conditions are favorable for the 32 currently active insurers in Saudi Arabia. Tariffs have risen significantly on the sector's main lines, compulsory medical and motor. The market is large, business is growing, regulation is generally supportive, new controls are helping reduce the number of large fires, and reinsurance protection is cheap. Plus, yields on the sector's principal investment asset class--cash--are rising sharply. 

Yet, a surprising number of insurers are still reporting disappointing or even outright negative results in their 2016 half-year accounts. In a report published on RatingsDirect, titled 'Saudi Insurers Are On The Right Road But It's A Surprisingly Rough Ride,' S&P Global Ratings comments on the challenges that persist in the Saudi insurance sector and the changes that lie ahead.

'Across the sector as a whole, only some 20 companies appear to be achieving a reasonably satisfactory performance,' said S&P Global Ratings analyst David Anthony. 'Several companies can claim to be still-maturing start-ups not yet generating sufficient business volumes relative to high fixed costs. But overall, insurance in Saudi Arabia is clearly not without its problems.' 

Many of the issues appear to be company-specific: failure of internal operations and controls, excessive costs, inadequate distribution, undifferentiated products and services, or insufficient margins on highly competitive commodity lines of business, particularly the large medical insurance requirements of Saudi Arabia's more prestigious corporations.

Regulation, too, has played a part. 'As well as helping to reinforce the sector and fuel its growth with the introduction of a lengthening list of compulsory covers for motor, medical, and liability lines, prudential regulation has also obliged many insurers to reinforce their reserving practices,' said Mr. Anthony. 'Inevitably, this has been to the short-term detriment of published earnings and solvency. Although we would not say that current reserving practices are excessive, they are in most cases now conservative, in our view.'

There may be more change to come for the sector, including the proposal that the insurer of an 'at fault' motorist assume the expenses related to any accident victim's medical costs. 'Although there is nothing inherently problematic with this proposal, which increases the role and value of insurance, the additional burden of loss and loss adjustment expenses could push up motor insurance premiums by around a third,' said Mr. Anthony. 'This may require substantial additional reserving if the new measure is applied retrospectively, to the further possible detriment of current earnings.'

Only a rating committee may determine a rating action and this report does not constitute a rating action. The report is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com.  If you are not a Ratings Direct subscriber, you may purchase a copy of the report by calling (1) 
212-438-7280 or sending an e-mail to research_request@spglobal.com. Ratings information can also be found on the S&P Global Ratings' public website by 
using the Ratings search box located in the left column at www.standardandpoors.com.  Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4009.