News Column

Saudi Arabian Insurers' Reserve Strengthening Indicates Weaker Results for 2013

January 26, 2014

Standard & Poor's Ratings Services said today that it expects to see disappointing 2013 results from almost all the 35 insurers and reinsurers in the Kingdom of Saudi Arabia. The companies' fourth-quarter interim and unaudited pro forma year-end figures already indicate that fire losses and, more particularly, unusually cautious reserving, will have dampened profits or led to outright losses. S&P believe that, in many cases, earnings are likely to be significantly worse than those reported at the end of September 2013 . Although the reasons for the deterioration in the fourth quarter vary by company, one common factor is a series of major fires that plagued the Kingdom during the year. Several insurers were hit by large claims after these events, with many others also affected, having acted as coinsurers of the affected risks. Other companies also suffered from the delayed effects of recent price competition in the group-health and motor liability segments. However, in S&Ps view, the weaker performance has in many cases been exacerbated by local actuaries' and auditors' particularly conservative interpretation of pre-existing regulatory guidance concerning provisioning and reserve adequacy. Late last year, the insurance regulator--the Saudi Arabian Monetary Agency (SAMA)--reminded actuaries and auditors to be cautious when assessing insurance companies' reserve adequacy. External actuarial reviews and audits are compulsory for all Saudi Arabia-based insurers and reinsurers. At the same time, the regulator also encouraged auditors to be stringent in ascertaining the quality of receivables and to set up provisions for any receivables that are less than certain. Auditors have also often opted to set aside premium deficiency reserves on unexpired risks they regard as underpriced. The authorities have encouraged similar conservatism in the assessment of reserve adequacy, particularly in respect of group-medical, motor third-party, and engineering liabilities. S&P consider that the increased reserving now being reported is extremely prudent in many instances. Early in 2013, in response to bouts of extreme price competition, SAMA introduced a requirement for insurers to use actuarial pricing for new business. However, some actuaries' calculations proved more lenient than others, leading SAMA to reinforce its guidance to actuaries and auditors to be prudent in their assumptions. In S&Ps opinion, the regulatory reiteration of the existing requirement for prudence has jolted the actuarial and audit establishments into a particularly conservative stance in respect of insurers' 2013 year-end accounts. In any event, most of the insurance written in Saudi Arabia is still short tail in nature, with nearly all claims reported, reserved, paid, and resolved within one or two years. This being the case, S&P expect that during 2014, it will become clear whether any significant over-reserving has occurred. One positive effect of insurers' adoption of prudent, actuarial pricing is a gradual increase in tariffs, which suggests the likelihood of improved performance across much of the sector in 2014. In addition, an improvement would likely occur if the frequency and severity of fire losses this year were to revert to the statistical average, rather than the high levels seen in 2013. On this basis, S&P expect to see a steady improvement in underwriting and overall performance at the many Saudi Arabia-based companies that have set aside particularly prudent reserves and provisions, and taken appropriate remedial action on pricing. In S&Ps view, the beneficiaries of higher tariffs from actuarial pricing are likely to be insurers that enjoy significant economies of scale, and those smaller companies with relatively low cost bases. However, S&Ps greatest concern is for those companies that have none of these advantages and which risk pricing themselves out of the market if they increase their tariffs. Adding to insurers' dilemma, the Capital Market Authority in Riyadh usually requires the suspension of trading in shares that have lost more than 75 per cent of their value. All insurers and reinsurers are compulsorily listed on the Riyadh Tadawul stock exchange and the poor results that insurance companies are now reporting have already depressed share prices across the sector. The shares in at least one insurer, which S&P don't rate, have been suspended due to their significant decline in value. The fall in share prices and the market stresses that this fall reflects may be more conducive to the consolidation of Saudi Arabia's insurance industry. On the basis of information currently available, S&P don't expect their ratings on Saudi-based insurers to be affected by the often-subpar results now being reported for 2013. This is mainly because of the improvement in performance that they anticipate during 2014 and 2015, which should in most cases offset the effects of the poor results for 2013. Nonetheless, S&P will continue to monitor the situation closely.

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Source: CPI Financial

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