Analysis and outlook for the Saudi insurance sector: the market lost SAR 200 mln

Interview with Gary M. Lewin, CEO of Axa Insurance

Could you give us an overview of the insurance sector in Saudi Arabia? A year ago, we spoke about this topic in depth: there being too many companies on the market; you had forecasted a consolidation, several companies going underwater. What has been happening since last we spoke? We haven’t seen many big bankruptcies.

No, not yet. No, the market pretty much has stayed the same in many respects other than the two companies suspended at the moment by SAMA and three were suspended for doing medical insurance as well, so things are moving in the marketplace, albeit slowly. Outside of the top 10, many companies are still unprofitable. The market lost something like 200 million Saudi riyals. The concern about there being too many players remains, although it is difficult to consolidate the way things are at the moment with the economy especially. The top 10 companies are still fairly profitable, and their profitability has increased, but the other companies– some 32 beyond the top 10– are not experiencing the same results.

Do you feel that the consolidation hasn’t happened because there is a lack of willpower on the part of the regulators?

One factor is the share price and the value of the company: what are you buying if you do merge or take over one of these companies? Obviously there are historical claims issues. There has been talk of putting a few of the poorly performing companies together, but in that scenario you would just have one large bad apple instead of three smaller ones. I do not not envy regulators in sorting this out, but it will get sorted out. The companies are burning their capital. Over 50% of their capital now have a red flag against them on the Dow stock market. Things are slowly moving, it is merely a matter of consolidation before this happens, but again, it is a slow moving process. As I said, some companies are suspended at the moment and I expect we will see more.

The market would do well with how many companies, in your opinion?

Really in my view, there should be the same number of insurance companies as banks, so I would suggest something like 13, 14. I think that is what the regulator is aiming for long-term actually. I think that maximum 15 would be more than enough for the Saudi market. At the moment there are just too many smaller players with a lack of expertise.

Many of the big conglomerates or families with large numbers of employees have launched their own companies without any prior knowledge of how business is done.

There were too many licenses issued at the outset and I think they understand now that this should be addressed. It’s a long, slow process. There is one company not trading at all at the moment. There are two suspended by SAMA and three suspended by CCHI for some medical malpractice they’d been doing, so things are changing and the regulators are toughening up. We are seeing a lot more regulator visits to examine our files, how we rate risk, that sort of thing. The regulators, I must say, are doing a good job for their part, so it will just take time to sort the market out.

What is the outlook for the premiums in 2015 and 2016?

It will continue to be positive despite the economy. I still expect growth. They are looking to insure all Saudi nationals now under medical insurance in the private sector so that will obviously be a boost to the medical side.

Motor insurance you still don’t need to renew every year. You license your vehicle for three years so people take the insurance for just one year and then two years don’t pay it, then the third year they buy it again, so that’s an issue which I think the government is addressing with SAMA. I think that will change as well. Something like 40% of Saudi vehicles are uninsured at the moment, so it’s substantial, and that will obviously be a huge win for the insurance companies if yearly insurance becomes mandatory, so again, we will see growth.

Some sectors such as marine insurance will reduce due to the economy, I’m sure, and the construction industry as we know is a problem as well, so we won’t see much in the construction area over the next 12 months, two years at all until the economy comes back, although existing projects– Riyadh Metro, the flagship projects– will continue, but a lot of other things will go on the back burner for sure.

We see a slowdown, then, in those areas but there is good growth potential in other areas so we expect some slowing over the next year, but next year, I would expect 10-15% growth.

That’s still a lot compared to the venture share markets.

Yes, assuming the motor situation gets sorted out, otherwise the growth will hover around that 10%, but well above 5%.

What do you feel are the major challenges in the market at the moment? What are you planning for: the slowdown in the economy?

It is a matter of people being able to pay their premiums. Large companies, the government– they need money to pay their contractors, to pay the insurance company for the premium. There will be certain issues around collecting premiums, certainly. We have to be careful of the type of clients we put onto our books.

Medical insurance is still problematic. It’s profitable for a couple of companies but not for the rest of the market because of the actuarial pricing and the economy of scale of certain companies. The top three can obviously derive bigger discounts from the providers so they are in a much more competitive position than the rest of the market and this is having a big impact. Some 37% of the medical market now are these very big players, which push the others out. The medical space is tough.

As to motor insurance, we see good growth in that area and we are focusing there, certainly on commercial fleets and private motor, despite the driving standards. Outside, the pricing has risen quite substantially because of the actuarial pricing again. This is something we have always been aware of, and now some of the companies are seeing poor results, having to increase their prices. Two years ago, you could buy a third party motor insurance for 350 riyals. Now you are looking at 1200 for the same product, and comprehensive insurance likewise. The scope there for good growth and profitability, and we are well-positioned because of our historical data. Our loss ratio on motor insurance has always been very good. It’s an interesting time for the market, but there is growth there.

One of the statistics I was reading is that Saudi Arabia is one of the only countries in the region where the number one cause of death is traffic accidents. That’s unbelievable.

The driving here is erratic to say the least. This is having an impact on the rating actually.

And yet people do not even care about the insurance. How do you reconcile this?

No, that 40% of the vehicles goes uninsured. The government needs to do something because the effect on the economy is huge. It will be addressed. I have been to the regulators fairly recently. It cannot continue like this. It is not feasible.

Why do people not care about this car insurance at all?

It’s not compulsory and then it becomes a cultural issue as well, or a religious issue really because insurance is Haram in a many people’s minds. The government needs to make it compulsory, as they have done with health care and other areas. This will happen. Compulsory liability insurance is coming about as well. In public areas, it will be compulsory. Shopping malls have liability insurance. The government and SMA need to work together to make this happen, which is the way it’s going. It’s heading in this direction which is good for the insurance market and for the whole economy long-term as well.

I also read in recent news that travel insurance is now compulsory in the Kingdom. Is that an area of growth?

Yes, again this is a big company for us. We were the first company that was approved to be selling online visitor insurance. I was at a meeting recently with CCHI. This should be launched next month. At the moment, I think there are six companies licensed to do the visitor insurance, and eventually the long-term is for it to include Hajj and Umrah, which would be a huge bonus for the insurance industry. In emergency situations in hospitals, people go in, who picks up the tab? It would only be for those emergency situations, but again, it will help the economy and improve the situation of the insurers as well; there are small premiums but again, the volume is large when it captures all of the visitors coming into Saudi. We project a lot of growth, and even more so once this goes into Hajj and Umrah, but there needs to be some movement on the part of the government which I would imagine would take several years.

Your strategy was to be among the top five. How are you progressing toward that goal?

We are progressing slowly, I would say. The top two are still dominating the market. One insure is going backwards. Other insurers have grown exponentially but now are suspended. We are growing relatively slowly: eight percent last year, eight and a half percent. Axa expects around the same amount next year. Then again, Axa has been growing consistently for several years whereas other companies swing up and down between huge profits and huge losses, so I, for one, am pleased that we are growing in the right manner, even if the numbers are conservative. We are here for the long-term. This is the way we need to go.

And headquarters are not pushing for larger numbers?

No, they are quite comfortable because the profitability is good and at the end of the day, that’s the bottom line. In the longer term, we are in good stead as well. You could easily double Axa’s size here in the market tomorrow, but I would lose millions, so it’s better to be on a safer, upward curve. I am happy with how it is proceeding.

Well, if that continued, you would remain profitable while eventually capturing the market.

That’s the way we want to go, yes. We are semi-focusing on motor insurance as we see the opportunity there. Other companies are somewhat stronger on the medical side. We still want to grow in medical, but it will be slower. We are moving into a more digital age and we are investing heavily in this area, which will help us a lot going forward, but as of today, we are in a much more comfortable position, ready to capture more growth. Hopefully in a year we will be in an even better position.

How do you structure your competitive strategy vis a vis your competitors, your strategy for capturing the market share? How difficult is it to stand out on the market?

We stand out especially because we are an international player. There are very few of those on the market. We are also the leading international player here in the Kingdom so that helps us a lot. We have a good brand and we are working on promoting that further. We’ve got advertising on TV now, on the radio; we are starting to see Axa billboards. We need to do more. We’ve opened up more Axa shops as well to be more visible. We have 14 now. There were maybe six last time I saw you. We believe that our Axa shops have a good, fresh look about them, which creates a good image for the insurance industry.

We’ve developed a multi-access strategy, actually. We’ve developed a call center now which is active. We have our shops and branches. We’ve gone online. You can buy travel insurance online now. For motor insurance, you can get a quote online. You still have to ring up the call center to activate the quotes now but eventually with SAMA approval, we’ll be selling motor insurance online, and then other products as well. We see digitalization as the way to move forward, but with our multi-access strategy, we believe we can access good growth. Our retail division grew 45% last year. This is one area in which we are pushing forward as well.

Is it more of an advantage or disadvantage to be an international player in the Saudi market?

Longer-term, it will be an advantage, I believe. A few years ago, it was more of a disadvantage but slowly things are doing an about-face on that front. Everything hinges on trust, and to be a strong international player as well as a strong local one is a good thing, I think. You have to think back to Boober in the UK. They are a large international company with Axa and Alion, so there are big players here, but reputation-wise, from a service delivery aspect, we are doing well. We could invest more as an international player, but it is an advantage longer-term.

The biggest growth, then, would be motor insurance for the upcoming year?

I believe so, for Axa. Other companies may grow more in medical insurance, but Axa’s will go more down the motor route and other lines of business in which we grew fairly strongly last year. In some segments, Axa outperformed the market: marine, accident, liability insurance classes. There sorts of things are more profitable so we focus on those areas. There is a lot of good money to be made in medical insurance, but with the way we are structured right now, we believe that motor is the better way for us to go at the moment.

How does this Saudi market compare to that of the UK, with the UK being the most developed insurance market?

We have a long way to go, that’s for sure, but we’ll get there because we can leverage off our international experience in the UK and elsewhere in the world, which we are doing. It’s still a very immature market.

Do you have any key statistical highlights, perhaps, to compare it with the UK?

it is not compulsory here to have motor insurance and only 60% of the vehicles remain uninsured. The sophistication of the market, the way rating is done… until very recently, motor insurance was just flat-rated at two or two and a half percent. It didn’t take into account the driver, the vehicle, claims history… nothing. Now Axa is working in a very segmented way as in the UK, which helps us a lot. Having segmented the market, we have adapted a lot of the practices from the UK or good practices from around the world in general, hence we are doing quite well in motor insurance. Some companies here are still flat-rated, but we find that drivers over the age of 25 in higher-value cars with a good claims history, good driver history– we can check these things now. We consider those things. It is slowly getting more sophisticated. We can derive more profitability if we understand the risk. This is why we are leading in this segment.

But still the penetration rate is the lowest that we see.

Correct. There is still a long way to go with huge potential. You can grow very quickly but get it wrong very easily, so we are happy to be doing things the right way. I believe we are doing just that.

You already mentioned that some segments may suffer from the economic slowdown. You mentioned construction. Do you feel that something similar may apply to health or motor insurance, or anything else?

What we do see is the big expense for companies in terms of health insurance. We see many clients trying to downgrade their networks or benefits to save money. Other companies have the money and have no issues, but with onset of insuring Saudi nationals, we had a slow down and expect and increase, so we are just biding our time until that surfaces.

It seems, then, that the main growth comes from regulation and not from the market.

Correct, regulators help drive the growth. There is some growth in the market but it is mainly inspired there, as you said, especially with visitor insurance becoming mandatory, and medical and motor insurance following suit. That is being driven by the regulators.

If we take motor insurance, for example, which is your specialty. How much better are you than the other players on the market?

We believe we are a lot better. From our loss history, where we stand against other insurers, our actuarial pricing in the right segments is very good because of our historical position and the way we have rated risk so I believe we are doing things the right way. Other players are doing similarly, but I believe we are best-placed to move forward in motor insurance. We are still not the largest player in that set at the moment, but that growth is extraordinarily strong and this looks to only continue.

Is there anything else you would like to add?

Just to thank the regulators. They are in many ways the best in the GCC (Gulf Cooperation Council). They still have a way to go in a few things, consolidating the market, but with the property market, they have insured that market for insurers because of the actions being taken at present. Obviously that also goes for the medical side and motor insurance. It’s all for the good of the economy.