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Wednesday, 15 July 2009

Islamic insurers work to build Saudi business

Islamic scholars in Saudi Arabia have long looked askance at the insurance industry. They fear it combines riba , or the collection of interest payments, with gharar , or gambling - both forbidden to the pious.

Saudi talk shows and websites abound with questions about insurance, particularly life assurance, which is still viewed with suspicion. But two recent changes have openednew possibilities in this conservative kingdom.

First, newly launched Islamic insurance products are beginning to catch on. Second, since joining the World Trade Organisation in 2006, Saudi Arabia has opened the industry to foreign investment in takaful , sharia -compliant cooperative insurance.

Now a board of Islamic scholars reviews each product and companies such as SABB Takaful, affiliated with HSBC, are coaxing consumers to buy insurance. Demand for Islamic insurance is brisk in the Arab Gulf, analysts say, particularly in Saudi Arabia, the largest economy.

Last year, the nascent insurance industry grew by 27 per cent to SR10.9bn in premiums last year from SR8.6bn in 2007, according to the Saudi Arabia Monetary Agency, the central bank that is also the insurance regulator. Health insurance premiums, which represent 44 per cent of the market, increased by 57 per cent to SR4.1bn. Automotive insurance, accounting for 46 per cent of the market, grew by 23 per cent.

"There is increasing awareness of insurance in the market," says David Hunt, managing director at SABB Takaful, which has 80,000 policyholders. "We see a long-term opportunity in bancassurance - selling insurance products along with bank products to provide customers with a one-stop shop."

Regulatory efforts are partially responsible for such growth. Last year, Sama expanded mandatory health insurance to cover all foreigners working in the kingdom and, now, Saudis working in the private sector. Vehicle insurance is mandatory for all drivers, Saudis included.

The government sees the insurance industry as part of a drive to create jobs for its young population while diversifying the highly energy-dependent economy.

Even so, the industry accounted for less than 1 per cent of Saudi Arabia's gross domestic product last year, partially due to unprecedented oil windfalls and partially to a reluctance to embrace insurance.

"Awareness and access to financial advisers remain one of the main obstacles," says Mr Hunt. "In the long term, people will become convinced of the importance of simple products like covering daily risks, travel insurance and home insurance."

Family ties and free education and healthcare provided by the state also hinder the development of the insurance markets, analysts say.

"There is serious debate to make health insurance compulsory for Saudi nationals," says David Anthony, a credit analyst at Standard & Poor's. "If this happens, Saudi Arabia will be one of the largest health markets in the world. But unless it is compulsory, people won't buy it."

Meanwhile, companies are working to comply with the new regime. Sama bars foreign companies from operating except through entities based in Saudi Arabia and majority-owned by a Saudi partner.

All insurers must adopt a co-operative insurance model, with separate shareholder and policyholder accounts, by which profits are shared with premium-payers. Basic insurers need a minimum capital of SR100m, while reinsurers need SR200m. Most of all, insurers must qualify for listing on the Tadawul, the Saudi stock exchange, which entails crossing substantial administrative hurdles, including complying with corporate governance regulations, market codes and employing a workforce that is 30 per cent Saudi.

Still, foreign companies are pouring into the kingdom, including Scottish Widows Investment Partnership, which is owned by Lloyd's Group and entered a partnership with Saudi Manar earlier this year. Their primary target is institutional investors, including banks, corporation and government funds and pension funds.

Many companies are eyeing energy sector insurance. However, Saudi Aramco and Sabic made arrangements with overseas companies long ago.

Some analysts suggest that bars on certain lucrative policies and the relative unpopularity of some lines, such as life assurance, constrict the market, creating risks that the increasing number of companies will saturate what is left over. Sama has pushed out several insurers, reducing the totalfrom 100 to 23 and analysts expect further consolidation.

John Sfakianakis, an economist in Riyadh, said: "Significant education will be needed, particularly since the home insurance market is barely tapped. But gradually the market will mature."

(By Abeer Allam/The Financial Times Limited 2009)

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