Saudi Insurance Sector Growth Amid Intense Competition

Interview with Gary M. Lewin, CEO of AXA Cooperative Insurance Company

Many analysts are saying that the insurance sector is the fastest growing sector in the Gulf yet that profitability is under pressure in many companies and there are almost 30 players on the market. What is your general assessment of the insurance sector in Saudi Arabia? How does it differ to other sectors?

The big differential here in Saudi Arabia is the demographics: it is a very young population and it is the largest population in the Middle East and among all the states in the Gulf. From an AXA Group perspective, this is where we see huge growth potential. In the European markets, growth is under a lot of pressure. On the other hand, here we have an emerging market where we can grow significantly. This is a very challenging market in Saudi Arabia but we believe we can make a difference here.

The average growth for the market in 2013 was 18%.

The big differential here in Saudi Arabia is the demographics: it is a very young population and it is the largest population in the Middle East and among all the states in the Gulf. From an AXA Group perspective, this is where we see huge growth potential.

Correct and I see that continuing, particularly due to changes such as actuarial pricing, which means pricing are now increasing. Furthermore, the health regulator CCHI is doubling the limit of cover from 250 thousand to 500 thousand and this means that rates will increase here. In terms of motor insurance, it is a challenging area because driving is rather poor here in Saudi Arabia, but at the same time the rates for this are also rising.

There is great potential here. I would say that there are possibly too many players here and too many trying to enter the market. However, I also see the possibility of some players disappearing in the next few years due to the strain on profitability.

Could you say that companies have grown at the expense of profit?

Partially yes. I think some companies grew for market share and some companies were not reserving adequately. This has had an impact on what is happening here. Out of the top ten companies, only three have made a profit last year. The strain will continue through this year although I think it will improve over the next twelve months. I think we will see more companies returning to profitability over the next year.

What do you think that the regulators should do in order to address the profitability issues?

The regulators are working with the insurers on things like actuarial pricing and compliance issues. This is the most regulated market in the Gulf from an insurance perspective. The regulator does a great job. We work very closely with the regulator and can see only benefits from AXA´s perspective from working with SAMA and CCHI. We have good relationships with both regulators and we hope to maintain them and do well in this market.

Which segment of insurance do you see as the future driver of growth and profitability?

From a growth perspective, motor insurance is not compulsory at present; people take insurance for one year when they buy a car but then do not renew it for the next two years because they do not have to renew their car registration until the third year. This means there is a large potential market out there if compulsory motor insurance is brought in and I know that the regulators are working on this.

The healthcare insurance segment also continues to grow. There is talk of housemaid insurance and there is the possibility of health insurance for all Saudi nationals although this has been delayed.  Therefore, I see huge potential in both medical and motor insurance.

The construction segment also continues at a good pace here. There are a lot of infrastructure projects going on, Riyadh Metro is a good example. There are three large consortiums building the Riyadh Metro and this kind of thing is being seen across the Kingdom; I believe there is going to be a metro built in Mecca, Medina and Jeddah. There are great plans for expansion in infrastructure. There are plans for new airports, for example Jeddah airport and the new terminal at Riyadh airport. Thus, we see a good future here in construction insurance as well as motor and medical insurance.

Another spin off area we are developing is marine insurance; bringing cargo into Saudi Arabia. This will be another profitable line of business for AXA.

How are accidents between uninsured drivers resolved? Is insurance something that traditionally has not been part of this society?

Many years ago, insurance was treated as haram from a religious perspective but that has slowly changed with the introduction of third party motor insurance by the government. The public are gradually becoming more and more aware of insurance. Awareness is the big issue. As more and more people become aware, they are taking up insurance.

We are moving into personal line insurance and retail insurance; we see that as the way forward for the future. We have opened up nine shops so far in the Kingdom and we are looking to open more in shopping malls to attract clients for motor, travel, home insurance etc. Home insurance is another area that may well grow because of the new mortgage law. This shall take some time to come through but we are already seeing some people take out home insurance. Life insurance is another area that will grow in the coming years.

You mentioned construction project insurance; supposedly that is probably one of the biggest drivers of profitability because companies, unlike individuals, understand insurance and know that they have to have it. AXA is the world´s largest insurance provider and perhaps the leading player in this segment. What is your strategy to attract clients?

People are attracted to AXA because we are a known brand. We are one of the few international players in this market, which is a big bonus for AXA. Many of the contractors know that we have good capacity in the Kingdom and we have good reinsurance arrangements. We are seen as a safe pair of hands for the larger construction companies. We do well on power projects for example and things like the Riyadh Metro that we are involved in as well as the Princess Noura University. For many of the major contracts across the Kingdom, AXA is involved in some way, whether it be a small share or a lead share.

It seems that consolidation is imminent in this market. Is AXA looking for any acquisitions?

We are always actively looking. AXA is a young organisation in many ways, grown by acquisition. The main issue is deciding which sort of company you want to target and I think that you have to look for the right distribution channel. This is something that might happen down the line, we are not sure yet. Some companies will be disappearing in the future, whether AXA will be interested in acquisitions depends on a variety of issues. We are keen to expand and grow in the Kingdom; we are here for the long term. We have invested in advertising and in Saudi nationals; our Saudization is a good percentage, and we are looking to reach 60% this year. We see this Kingdom as one of the best growth engines in the world for AXA.

You are currently the sixth player in the market but you are aiming to become one of the top three players. When do you think this might happen?

We would like to break into the top five in the next year or two and from there break into the top three. There is a bit of a gulf between the top three and the rest of the market, but we believe we can get there. We shall see how we go; the potential is definitely there for us to do it. Our brand is slowly being recognised more and more and I think that we can add a lot of value in the market. I would guess that it would take maybe 5 years before we can break into the top three.

What strategic pillars are you going to be building on?

We are already quite strong in terms of corporate insurance. We are a known player in the market especially among the main brokers like Willis, Aon and Marsh, which are all international brokers. Obviously, we want to accelerate growth in that area as well as in construction, marine and some other profitable lines of insurance such as liability insurance, which is slowly growing in the market. There is soon going to be compulsory public liability insurance coming in for places that hold large public gatherings such as shopping malls and football stadiums.

Currently only 1.5 to 2% of our business is retail insurance, thus we see a lot of potential for growth in that area because for AXA Worldwide, retail insurance represents a huge part of the business. For various reasons this has not been the case here in Saudi Arabia yet although we do see that now is the right time to move into this area. As I said, we have opened up AXA shops and are now looking at a multi-access strategy. People will be able to buy insurance from our shops, once we get regulatory approval they will be able to get insurance online and customers can also come into our branches. We want to be accessible everywhere. We have just started a new motor claims system, which is unique in the market. Thus, there are huge areas in which we can accelerate our growth. One area could be acquisition down the line, we´ll see. With the way that the market is moving, we see great potential to move forward.

How would you like to split your portfolio?

At the moment, just over 50% of our portfolio is medical insurance and we would like to maintain that level and grow the rest of our portfolio.

Group life is growing very quickly; we have something like 40% growth in that area this year already. Construction and marine insurance is also growing as I mentioned earlier. These are the more profitable areas that we believe offer good growth. We think that medical insurance will always be under strain, because of the results in the market, a lot of which have been due to under-pricing in medical policies. There are fraud issues in Saudi Arabia and issues with the medical providers.

CCHI are working with the insurers to solve this but this will take time to work out. Motor insurance is also a challenge but our loss ratios are good at the moment. The market in general for motor insurance is poor.
We are looking to grow in the more profitable areas, particular in retail, where we see good opportunities and in the smaller lines of business where we can make good profit.

How much growth do you need in order to reach the top three?

We have a long way to go. The market has grown last year by about 18 to 19%. Some analysts are saying that this is going to reduce slightly but we are aiming for about 20% growth and we aim to increase this growth over the next few years. In retail, we are anticipating huge growth over the coming years, following our brand advertising and our motor campaign that we hope to do again this year.

Would you say that you would have to grow by at least 30%?

Yes, I would think so. One of the main challenges is finding Saudi nationals at the right level. Obviously, we want to train Saudi nationals and we are doing so but we have problems getting visas for people coming into Saudi Arabia to be able to train the nationals. AXA Group is supporting us a lot in this and I am sure we will get there.

Is this still a growth market or is it a competition market?

It is both. There is a market share issue going on but I think there is definitely growth here. As I said, with the new mortgage law, household insurance will come in and with new rules on public liability there will be growth in that respect. There is also talk of making property insurance mandatory. There are many advancements occurring with the regulators and the government here. Construction is also booming with plenty of infrastructure projects. The growth is there, the only thing is that in my view there are too many players, too many small local players. Once that has settled over the next couple of years, I think the market will escalate further.

AXA is one of the foreign players on the market; the top three players are local Saudi companies. How does the public view you in comparison to the local players?

We have given our brand advertising a very Saudi flavour. We are an AXA cooperative and at the end of the day, we are a Saudi company with international backing. This is a good thing and is recognised by the major companies here; it is the added value of having a parent company. It means you can bring expertise to the market.
We provide a lot of risk management services, which is something that many insurers here do not do. We survey every property risk before we offer cover and we work with clients to give them risk improvements. There is a price to pay international backing but there is added value, which I think our clients are aware of.

Do you think that risk management is a major issue that many companies on the market underestimate?
Yes, I have had various reinsurers come into my office telling me that AXA is one of the few insurers that surveys the major risks and truly understands risks. We actually retain more risk than most insurance companies here do. Many companies use facultative insurance and send the premiums outside of the Kingdom. We are on an excess of loss treaty so we actually retain more risk here in Saudi and so the premium stays in Saudi, giving added value for the Kingdom. Unfortunately, the premiums for the Riyadh Metro are all being farmed out to the London market, which is a shame for the Saudi insurance market.

Many companies here retain 1 or 2% of risk and everything else is placed outside of the Kingdom.

For example, for argument´s sake, say you have a property risk of 100 million, the insurance company may only carry the risk for a very small part of that and the rest is reinsured outside of the country with a panel of insurers. Therefore, they only retain a very small amount of the premium to cover the very small part of the risk that they are carrying and a large proportion goes out of the Kingdom.

Do you mean that in reality the profits do not remain here? Are you referring to the local insurers?

Correct. Most of these companies are local. That is an issue for property insurance and construction. For motor and medical insurance, the companies do retain the risk here. Property business is very problematic here. In the last few years a lot of big claims have occurred. Many companies are under pressure from their treaty reinsurers to increase pricing. This should help the market and bring some sensible pricing into the market.

Can you explain the cooperative model of insurance companies here? The banking law must be compliant with Islamic traditions, so how is insurance different here?

It is not Sharia compliant but it is a cooperative. A percentage of the insurance companies´ profits is returned to the policyholders. Unfortunately, many companies are not making any profit so that is not actually happening and this is an issue for the market. There does not seem to be any move towards a fully Sharia compliant system. The regulators seem comfortable with the cooperative model that is set up here, which is a slightly different model to elsewhere.

The regulators analyse the insurance companies´ results. All companies are audited, we are all now subject to actuarial reporting, hence the issue regarding the under-reserving that was going on. There were announcements made just prior to the end of last year saying that many companies had increased their reserves, which in the minds of the actuaries had been under-reserved. We have a very conservative approach to reserving as do some other companies and so we had no issues with that.

What would you like to achieve in the coming years? What kind of brand recognition would you like to see?

In the Gulf, we are recognised as one of the leading brands and worldwide I think we are the leading insurance brand. One day I expect that to be the same here in Saudi Arabia. We are investing a lot in our brand. Now is the right time for us to invest a lot here. We think that the market here is going to grow and is becoming more sensible in terms of pricing and operations. The regulators are doing a good job. We see that things are on a level playing field now and so AXA is keen to take part and do well in this market. We also believe that we can bring some added value to the market here.

You mentioned earlier that AXA wants to grow 30% per year and wants to be one of the top three players…

We are hoping for 20% growth this year, but yes, we will need that kind of growth in the future.

How do you plan to balance profitability and growth?

By focusing on the profitable areas. Let´s take our motor product for example, we segment that into the areas that we know offer profit, we do not just sell motor insurance to every type of driver or vehicle. Some companies have a flat rate for motor but we segment the market. For argument´s sake, if we see 4x4s with certain age groups being profitable we will do that but we won´t do 18-year-old drivers in sports cars if we do not see it as being profitable. That is how we go for profit.

Even though it is a crowded market, do you see some foreign players entering the market?

For sure. I know that there are a couple of big players that want to come into this market. Whether they will take some of the smaller companies that are struggling and use them as a tool to get into the market I am not sure, it could happen. I can think of a couple of major worldwide players that want to come here. I think that this is a good growth engine here. You can make profit in this market even though it is quite challenging. It is difficult for any new company coming here to get the right people; it is not easy to get the traction needed to get a company up and running quickly. You need a good understanding of the market here.

As a private sector company what has been your experience in dealing with the public sector? Many people state that this is the major challenge regarding doing business in Saud Arabia. Each public institution is insulated from the others and so there is no horizontal communication. What has been your experience?

We were Norwich Union originally, and then AXA bought up Norwich Union a few years ago. Thus, we have been in this market for about 20 years as an entity. As AXA, we have not had many issues but I do know that it is difficult for people coming into this market. For us, to get visas we need the regulator´s approval and we need the Ministry of Labour´s approval, and occasionally you find yourself caught between the two. Sometimes there are two bits of legislation that are in conflict with each other. Each government entity tends to work in silos, although I think that seems to be changing to make business a bit easier. The Kingdom does still have a way to go but the situation is slowly changing and getting better. It is not an easy place to do business but it does offer great opportunities if companies can handle things in the right way and work with the Ministries. It takes time and patience.

To conclude this interview, are you optimistic about this market?

Yes, that is the main thing; I am hugely optimistic about this market. It is a challenge but we believe we can get there. We see great opportunities here and hopefully the right level of profits to be able to offer returns to the policyholders at the end of the day.

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