Young population and strong economy reinforces rise of reinsurance market

I would like to talk about the process of globalization and change, fluctuation. This has had an influence in the insurance sector worldwide. A recent survey stated that 92% of CEO’s main concern was volatility and uncertainty and how to manage that. It is important to remain consistent but be flexible to adapt, to change. How have you seen this have an impact on the sector and how have you adapted Saudi Re to this trend?

First of all, dealing with volatility and uncertainty is the core principle of the insurance and reinsurance industry. Having said that, adaptation and adjustment should be considered integral parts of business strategy for any successful provider.

Working in an emerging market makes this more important because the industry has not taken its final shape yet where many developments, especially regulatory, will continue to emerge. This is portrayed in the continuously changing circumstances in the region’s markets.

Saudi Re is aware of the ever-developing and continuously changing nature of the market, and the region in general. Therefore, it is built in our structure and we made special attention in the past couple of years to set up a dedicated risk management procedures using top of the line models and IT systems.

From our side, we make sure to follow up with such developments as we believe, as a company and a market, that compliance is the first step to achieve stability and we also embrace the self-regulation concept. To sum it up, Saudi Re is consistent in the sense that it always keep efficient risk management approach but flexible as it is capable of reacting suitably to the market changes and developments.

Reinsurance firms are traditionally looked up to as a point of stability within the insurance market. In recent years, Saudi Arabia has experienced some volatility in the insurance sector, which looks like it is coming away from this curve now, with regulatory changes in the market. To what extent do you consider Saudi Re as a point of stability within the market?

One of the main drivers for establishing Saudi Re was to provide stability to the market. This is embedded in the company’s strategy since inception. Therefore, Saudi Re as a local and national reinsurer is committed to deal with the market volatility in this regard and partake in building resilience.

Part of our role is to educate the market players and help them adopt best practices as a basic mean to alleviate market volatility and deal with uncertainty. The latest regulatory instructions are designed to help upgrade the market standards and help overcome operators’ financial challenges. Saudi Re is in the same boat with direct insurers. We have a common marketplace to safeguard.

To what extent do you perceive it to be an advantage being the only Saudi founded reinsurance company?

It could be a double-edged sword. From one side, it is a big advantage to be the sole national reinsurer in a very important market such as Saudi Arabia and be part of the tremendous growth from early stages. The strong economy and the huge untapped potential also provide sources of optimism. In addition, we enjoy a withholding tax exemption.

However, all this naturally comes with challenges. There are high expectations from all parties, including insurers and the regulator. Being a local reinsurer is sometimes misunderstood in the region. For instance, almost all of the local reinsurers in the Arab world enjoy compulsory cession from their markets. Saudi Re, on the contrast, is forced to compete with big brands without such a treat. The law in Saudi Arabia requires insuring 30% of operations within the Kingdom but doesn’t name us exclusively. We are not against this, Saudi Re welcomes competition and feels it is healthier for its well-being and the sector in the long-term to operate in a completely competitive environment.

Traditionally, the Saudi market has competed on price in the insurance world, but increasingly this is evolving towards a service proposition. How are you developing your service proposition to ensure big business and positive customer relationships?

To put things in perspective, price competition is dominant in the region as a whole, not limited to the Saudi market. As a reinsurer, we can see this in several markets in the region – probably the Saudi market is better priced compared to some neighboring markets.

Luckily, there has been a growing awareness towards the risks accompanied with this practice in the Saudi market where the regulator and providers as well moved towards improving the market financial standards.  Again, being in a big market and competing with large-scale reinsurers forces Saudi Re to put service as a top priority.

It is interesting that you mention focusing on profit because we have seen a global trend in the insurance market to focus on the bottom line as opposed to the top line. Saudi Re’s top line has grown about four times under your leadership but the bottom line has not followed in succession. How much of a concern is that for you and what steps are you trying to take to realign the top line with the bottom line?

As a principle, Saudi Re focus on achieving sustainable and profitable growth and at the same time maintain a balanced and diversified portfolio. It should be taking into account that Saudi Re is relatively a young company; therefore, it is expected to see the costs of establishment and acquisition burdening the balance sheets in the early years of operation. In addition, the company’s establishment has been shortly followed by several international and regional financial crises. Also, the regulatory financial reserves requirements have added strains on the company’s income statement, yet it further strengthened the overall financial position of the company.

We are in line with our business plans and have been acting prudently. In 2014, we have recorded a growth rate of 32% while our expense ratio stood at 8%, compared to 30% around four years ago, which is a major achievement. In general, the financial standing is stable as can be seen in the size of our assets which exceed USD 500 million by end of 2014 as well as the soundness of our rating of BBB+ with a stable outlook form S&P.

On the operational front, to further strengthen bottom-lines, we have set in place the necessary guidelines for underwriting strategies especially fire, which is a challenging line.

How important is a strong international network to be able to facilitate this diversification and growth?

Reinsurance business in international by nature. Therefore, international network is essential for doing business especially for expanding the exposure. We have been building an expanded network of relationships either through visiting markets and meeting operators or through building bonds with international brokers, which is very important in this case. We currently enjoy favorable ties with clients across 35 countries in the insurance markets in the Middle East, Asia and Africa.

Diversification is key to balance business and it leads to growth as well. Speaking of growth, it is important to keep in mind that Saudi Re’s ambitions are beyond the local market. Our strong capital (USD 276 Million), on the regional scale at least, gives us impetus to expand but of course without compromising the local market. This is another reason for seeking to build international network.  

Half of our portfolio comes from non-Saudi markets and we are proud the company made big strides in achieving its regional identity and a satisfactory international exposure.

You clearly take an interest in the regional insurance market through your business and through your position in the MENA CEO Club. There is a global trend, mature market insurance companies are increasingly trying to find exposure to emerging markets and the Gulf, the Middle East, is considered one of the really exciting areas. What are your perceptions on Saudi Arabia’s sitting in the Middle East?

As mentioned earlier, Saudi Re looks for a strong footprint in the regional scenery. My membership at MENA CEO Club and other regional initiatives comes as part of building the network and increasing Saudi Re’s presence in various forums.

There is an apparent interest in the region. This can be seen with many international entities, such as Lloyd’s of London, coming to set up in the region. Financial centers such as the DIFC in Dubai and QFC in Qatar are increasingly attracting international companies.

The MENA region presents great opportunities for international players. The low penetration rate indicates there is huge room for development as evident in the region’s double-digit growth rates over the past years. In terms of diversity, reinsurers look at MENA with great interest too. The low natural catastrophe occurrence rate encourages international providers to consider the region to balance their operations as they face high perils in other regions.

Saudi Arabia is part of this success and there are strong indicators that it is going to become the largest Arab market in a matter of few years. The Saudi insurance market has nearly doubled since 2010, exceeding USD 8 billion of premiums in 2014. Having massive energy resources in the Kingdom adds to the interest of international providers. Despite seeing rates and prices declining, the interest remains high in the market for insurers, reinsurers and investors.

A key ambition of the government in Saudi Arabia is the new development plan. The objective is diversification and modernization of the economy. Saudi Re has been involved with a number of events to talk about the impact that insurance can have on the national development of the economy. I would like to understand your personal perspectives on how insurance, as an industry, can help develop and modernize an economy such as Saudi Arabia’s.

Insurance in principle provides the necessary protection for businesses and thereby helps in creating an attractive and encouraging business environment. On the local community level, the industry also helps in upgrading the levels of services such as medical insurance which has become compulsory. The insurance sector has been responsive in offering various products addressing the investors’ needs besides responding to the social community demands. Saudi Re has been as well involved in designing many offerings.

As for the diversification element, expanding the financial sectors to increase their contribution in the GDP is part of the government’s strategy. The other advantage is the job opportunities and career developments the financial institutions offer for Saudi locals. This is another goal for the government to help diversify the economy.  In this sense, insurance is an integral pillar in any development plan.

If you look at places like London or New York or Japan, any financial market in the world, there is a well developed insurance and reinsurance sector. It is clear that there is an ongoing ambition to develop a financial center regionally and perhaps even globally. What contribution do you think the insurance sector here can make towards that?

Saudi Arabia has well earned its place among the world largest 20 economies. Contributing to this, Saudi Arabia has been taking steps of openness and has already become a major financial center. Opening the insurance sector around 12 years ago comes as part of the endeavors to strengthen the financial and capital market sectors in the kingdom, as insurance and reinsurance companies have to be publicly listed. There are serious initiatives to educate the public and increase their involvement. I believe that creating a culture is pivotal and it seems that having the insurance companies IPOs few years ago and then enforcing the compulsory insurance lines such as medical, all have played role in spreading awareness.

The potential in Saudi Arabia’s insurance sector is huge. We have sensed interest and excitement regarding the opening of the stock exchange and the high potential of companies to work with well experienced strategic investors. What are your perspectives on the opportunities for the insurance sector in Saudi Arabia, now that this year we are expecting them to be able to work hand in hand with well-experienced international investors in the insurance sector?

Our main interest is to develop the sector and we always welcome initiatives from within and abroad which aim to achieve this goal on basis of mutual benefits. The Saudi market is lucrative and attractive especially the financial sectors as they are in the early stages of development and have much to offer yet. We are willing to work on synergistic plans with others for the overall benefit of the Kingdom and investors as well.

What are your thoughts on partnerships between the UK and Saudi Arabia, or at least collaboration between the UK and Saudi Arabia, in the insurance sector?

There is a very strong relationship and the collaboration is already established with UK brokers actively involved in doing business in the region. In addition, the Lloyd’s market has shares in the businesses but of course facing some competition from other European markets.  However, I expect for it (Lloyd’s) to further increase its activity in the region as a whole especially after opening their Dubai office. I believe there are broad cooperation opportunities particularly in areas of specialty lines where Lloyd’s market has a strong record.

London is presenting itself as the Western capital of Sharia-compliant financial products and is clearly very far ahead of any other competitor. There are long-held traditional relationships between Saudi Arabia and the UK in trade, politically and otherwise. To what extent do you think that presents a benefit for the UK to work in the Saudi Arabian insurance market compared with other competitors?

Saudi Arabia financial markets are Sharia-compliant where Zakat is applied and the Islamic ethical standards are preserved by all means in the financial and other aspects of economy and life. At the same time, the Kingdom has been keen on embracing the developed financial standards and this is clear in adopting the cooperative model formula for insurance. In my opinion, this direction gives flexibility towards ensuring Sharia-compliance while developing an attractive business environment. Having the UK’s longstanding insurance experience coupled with the Islamic finance background, probably can open wider windows of cooperation in the sector.

As this report is going to reach many readers in different countries, what would you like to tell this audience about how different cultures can meet and how Saudi is open for business and is ready to take away all those misconceptions people still have nowadays?

Reinsurance business is largely based on relationships and building connections. I can see this translated in the variety of players and shareholders composing the insurance companies in Saudi. I can go to say all major international players, insurers and reinsurers, have transaction in the Saudi market. I can also give an example of the structure of the board of directors of Saudi Re, who comprise of Saudi, European, Asian, and African members. Our employees as well are of various parts of the world enjoying vast experiences.

Doing business truly revolves around making profits and meeting stakeholders’ interests but it as well leads to creating exchange of experiences, cultures and knowledge. Personally, I am proud to have developed very strong relationships on the personal and business levels with professionals in various parts of the world. My message is we welcome relationships and openness; the world is big but relationships make it easy to know.