Danger-Based mostly Capital Regime within the Saudi Arabia Insurance coverage Market

The first purpose of an insurance coverage solvency regime is to guard policyholders and help the monetary stability of the market. Regulatory capital necessities throughout the globe, together with within the Saudi Arabia insurance market, are both risk-based capital or transitioning to grow to be risk-based.¹

The insurance coverage business across the globe historically used fixed-capital requirements, which require all insurance coverage corporations to carry the identical quantity of capital no matter their measurement or dangers. Nonetheless, after a number of insurance coverage corporations grew to become bancrupt, many regulators acknowledged the weaknesses of such an strategy to evaluate the required solvency ranges for insurance coverage corporations.² A few of these weaknesses embrace, however will not be restricted to:

• No hyperlink between the quantity of capital required and the businesses’ threat administration and threat mitigation methods
• Not dealing with the adjustments taking place available in the market
• Not permitting for the advantage of diversification
• Lack of transparency

Saudi Arabia Insurance coverage Market Overview

Saudi Arabia’s insurance coverage market has seen a latest premium development of 26.9% in 2022 in comparison with 2021, with complete gross written premiums reaching SAR 53.4 billion. The penetration of insurance coverage to nonoil gross home product (GDP) reached 2.09% in 2022 in comparison with 1.91% in 2021. The highest eight insurance coverage corporations contributed 77.5% of the entire gross written premium, and the remaining 19 insurance coverage corporations accounted for 22.5% of the market’s complete premiums.³

Medical health insurance was the biggest line of enterprise in 2022, contributing to the entire gross written premium of 59.7% and experiencing a 26.8% premium development. Motor insurance coverage stood second, contributing to the entire gross written premium of 19.4% and experiencing a 26.7% improve in premium in 2022. Saving and safety accounted for 3.5% of the entire gross written premium, and different normal insurance coverage merchandise (e.g., property, journey) accounted for 17.3% of the entire gross written premium.⁴

Furthermore, below normal and medical health insurance, the web incurred declare elevated by 22.8% to achieve SAR 32.7 billion with a internet loss ratio of 83.4%. As well as, the insurance coverage corporations held SAR 43.13 billion in technical reserves (consisting of incurred however not reported [IBNR], excellent, unearned premium and adjustment expense reserves). Insurance coverage corporations reported a internet earnings of SAR 689 million in 2022 in comparison with a internet lack of SAR 47 million in 2021.⁵

The market has witnessed mergers over the previous few years, which aligns with the central financial institution’s efforts to encourage mergers and acquisitions (M&As) to enhance customer support and effectivity, scale back prices and create extra financially solvent entities.⁶

In August 2023, the Saudi Cupboard accepted the institution of a brand new unified and impartial regulator for the insurance coverage sector, the Insurance coverage Authority (IA). The IA is designed to spice up the function of the insurance coverage sector within the kingdom, which can develop and improve the marketplace for Saudi, regional and world companies working within the kingdom.

Earlier than the institution of the IA, the Central Financial institution of Saudi Arabia and the Council of Well being Insurance coverage had been answerable for regulating and supervising the Saudi Arabia insurance coverage sector.

Saudi Arabia’s Danger-Based mostly Capital Regime

As defined earlier, risk-based capital is a technique to measure the minimal quantity of capital applicable for an insurer to help its general enterprise operations, considering the insurer’s mixture of merchandise, property and operations, in addition to the interactions amongst these dangers. Over time, risk-based approaches have changed or supplemented easier approaches akin to mounted quantity of capital.

Within the Saudi Arabia insurance coverage market, the mounted minimal capital requirement strategy has been used for a few years. In accordance with the insurance coverage legislation (Article 3.3), the minimal capital requirement is SAR 100 million for a corporation engaged within the insurance coverage enterprise and SAR 200 million for a corporation engaged in insurance coverage and reinsurance. These minimal necessities are predicted to rise to SAR 500 million and SAR 1 billion, respectively. The precise thresholds are but to be confirmed, however they’re anticipated to materially improve above present ranges.⁷

The Saudi Arabian Financial Authority (SAMA) has been transitioning towards risk-based capital necessities since 2020. It began this journey by requiring insurance coverage corporations to finish the “Solvency and Capital” train through which the required solvency margin of insurance coverage enterprise operations is calculated. SAMA identified that such an train will assist facilitate the transition towards a risk-based capital regime and supply insurance coverage corporations with an early view of the potential transition impression.

In my expertise, the outcomes of the train assist insurance coverage corporations perceive the important thing dangers the corporate is uncovered to and the way efficient its threat mitigation methods are. The train consists of a number of stress and state of affairs analyses which can be accomplished below completely different threat classes, and the impression of these dangers on the solvency ratio (precise firm capital vs. minimal required capital) is assessed. The chance classes within the train are the next:⁸

• Market threat
• Concentrated threat
• Counterparty default threat
• Nonlife underwriting threat
• Life underwriting threat
• Catastrophic threat
• Operational threat
• International recession

Market Danger

There are a number of completely different market dangers on this train, together with the next:

• Rate of interest threat. This displays threat as a consequence of a change in worth attributable to the deviation of the particular rate of interest from what is anticipated. This threat is materials if the corporate has long-term property and liabilities, akin to life insurance coverage. This evaluation reveals that the rate of interest is confused when rates of interest improve or lower by 2%.
• Fairness threat. This displays the danger of a change within the worth of equities attributable to the deviation of the particular market values from anticipated values. The stress take a look at is as follows: the worth of equities listed within the Saudi Inventory Change Tadawul and Group for Financial Co-operation and Improvement (OECD) international locations decreased by 50%, and the worth of different equities decreased by 60%.
• Property threat. An instance of this is able to be the worth of actual property investments reducing by 25%.
• Change charge threat. This displays the danger of a change within the trade charge from what is anticipated. On this train, the trade charge is confused by +/-25%.⁹

Concentrated Danger

Concentrated threat displays the danger of accelerating losses related to inadequately diversified portfolios of property and obligations. Various kinds of property have completely different focus thresholds; for instance, 20% for equities, 25% for bonds with an S&P ranking of BBB or above and 10% for bonds rated beneath BBB. The stress components are outlined as +10%, +10% and +50%, respectively. This evaluation excludes authorities bonds.¹⁰

Counterparty Default Danger

The sort of threat displays the danger as a result of counterparty’s default—for instance, a reinsurer not assembly its obligations. The stress issue utilized varies based mostly on the credit standing of the counterparty.¹¹

Nonlife Underwriting Danger

Nonlife underwriting dangers on this train embrace the next:

• Premium threat. This displays the danger of accelerating the web loss ratio greater than anticipated. The stress components range between strains of enterprise and forms of reinsurance contracts.
• Reserve threat. This displays the shortfall within the reserve set below the enterprise. The stress components range between strains of enterprise and forms of reinsurance contracts.¹²

Life Underwriting Danger

This train comprises life underwriting dangers, together with the next:

• Mortality threat. This threat displays the danger as a consequence of a change in worth attributable to the deviation of the particular mortality charge from what is anticipated. Thus, the mortality charge is confused by +15%, and its impression on the mathematical reserve could be evaluated.
• Lapse threat. This displays the danger as a consequence of a change in worth attributable to the deviation of the particular charge of coverage lapses from what is anticipated. So, the lapse charge is confused by +/-5%, and its impression on the mathematical reserve could be evaluated.
• Expense threat. An instance of this threat could be stressing the inflation charge by +1% and evaluating its impression on the mathematical reserve.¹³

Catastrophic Danger

There are just a few catastrophic dangers to think about on this train, together with the next:

• Well being pandemic. Below medical health insurance, the state of affairs thought of is 2% of insureds are contaminated, of which 10% are hospitalized and 30% are referred to a doctor for session. Below safety and financial savings insurance coverage, the state of affairs thought of is 0.06% of insureds die. The impression on the variety of insureds and price of care is evaluated.
• Pure disaster (flood). The instance state of affairs is cloudbursts over the town of Jeddah trigger flooding that impacts 25% of property and 5% of motor autos. Then, the impression on the sum insured is evaluated.
• Humanmade disaster. Examples of this threat kind embrace power, property, motor legal responsibility, marine and aviation.¹⁴

Operational Danger

Cyber threat is an operational threat to think about. The state of affairs utilized right here is that if worldwide hackers from outdoors the dominion assault insurance coverage corporations’ techniques, it might result in a halt in enterprise and policyholder information being accessed illegally.¹⁵

International Recession

Saudi Arabia’s financial system depends closely on oil, and financial actions have led to decrease oil costs. Thus, many authorities and personal initiatives could also be postponed or stopped, and this will result in a slowdown in financial exercise within the kingdom. The liquidity of insurers and the conduct of policyholders could also be affected adversely. As such, there may be an impression on the income and claims of insurance coverage corporations.¹⁶

Current Developments within the Framework

In 2022, this framework was considerably enhanced, permitting for correlation and diversification amongst dangers within the Saudi Arabia insurance coverage market. Figures 1 and a pair of present examples of the correlation matrices that SAMA has used.

Conclusion

Insurance coverage solvency regimes globally are present process vital adjustments, and there may be all the time room for enchancment.¹⁷ Whereas most of the solvency regimes have similarities, there are variations of their stage of sophistication.

A follow-up to this text might spotlight a number of the challenges which were noticed in Saudi Arabia’s insurance coverage market. It additionally might present comparisons of the risk-based capital threat classes and formulation throughout completely different techniques—specifically the USA, United Kingdom and Saudi Arabia—and classes discovered from evaluating these techniques.

Statements of reality and opinions expressed herein are these of the person authors and will not be essentially these of the Society of Actuaries or the respective authors’ employers.

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