By Bernardo Vizcaino
DUBAI, Oct 1 (Reuters) - Growth of premiums in Saudi Arabia's Islamic insurance industry has been slowing, but changes in the regulatory environment could reverse that trend in coming years.
Insurers in the country practice a cooperative form of insurance which gives policyholders a share of operating profits so that it complies with sharia law. It is different from the "takaful" model used in other Muslim countries, where insurers often charge an agent fee for managing money on behalf of policyholders.
Gross premiums in Saudi Arabia, the Gulf's largest insurance market after the United Arab Emirates, grew 9.8 percent to an estimated 18 billion riyals ($4.8 billion) in 2011, according to credit rating agency Standard & Poor's. That was a slowdown from 13.8 percent in 2010.
Also, profitability in the sector is concentrated in a handful of large players: Tawuniya , BUPA and Medgulf held a combined 52 percent of all gross premiums in 2011 and 79 percent of profits, according to S&P.
This has left some smaller firms struggling for financial viability, with 17 of them posting losses in 2011, in a market that comprises 30 locally incorporated insurers.
Price competition, most acute in medical cover, has added to the industry's woes.
"In medical and motor there is cut-throat competition. Some companies are bleeding," said Farid Khimani, chief financial officer at Alinma Tokio Marine , an affiliate of Japanese insurance giant Tokio Marine & Nichido Fire Insurance Co . He stressed that he was speaking in a personal capacity, not on behalf of his company.
But some industry executives and analysts think the sector could rebound on the back of regulatory changes which have happened or are expected.
An actuarial review of medical underwriting, requested by the Saudi Arabian Monetary Agency last month and due by the end of October, could improve margins. The review will be conducted by external auditors; industry particpants assume that if it finds insurers are not charging enough for their products, authorities will encourage them to raise their prices.
"The implication...is that where overall deficits on medical accounts are found, insurers will feel compelled to take remedial action, either by increasing prices or by being much more selective," said David Anthony, director of debt capital markets at S&P.
"If medical rates gradually start to improve, we would expect to see the improvement starting to show up in the reported results of Saudi Arabian insurers by the second half of 2013."
Premiums could grow 10 to 12 percent in 2012, reaching 12 to 15 percent growth in 2013, and that rate could be sustained into 2014 if life insurance business starts to grow, Anthony added.
A law covering home mortgages, approved in July after years of study by the government, is expected in the long term to stimulate home loans in the kingdom, though details of the law have not yet been announced and banks are likely to be cautious in the initial stage.
The law could stimulate both fire insurance and life insurance because mortgage lenders are expected to require their clients to have such cover as a condition for granting loans.
A shift towards life insurance, which is widely regarded as more profitable than medical insurance, could improve profits, aided by growth of Saudi Arabia's young population. Traditionally, older Saudis have not bought life insurance but younger generations are believed to be more receptive.
At present, the industry is dominated by medical cover, which accounts for an estimated 57 percent of all non-life premiums because it is mandatory for foreign workers and their dependants, in a country with roughly 9 million foreigners.
Life insurance premiums represented only 6 percent of total premiums in 2011 but this could increase several-fold in the next four to five years, Khimani said.
One key factor for the industry is the prospect of new entrants. Four new insurance firms are awaiting regulatory approval to start operations after navigating lengthy registration and listing requirements.
Because of the risk of overcrowding, authorities may be reluctant to allow more entrants after the current batch. New insurers would probably need to show authorities they could add value to the market - for example by bringing in new types of products and services, Anthony said.
"If they have little to offer other than further capacity, the authorities may well prefer to see these new entrants use their capital to invest in an existing, already operational insurer rather than simply aim to add a further start-up insurer to the already somewhat overcrowded sector."
Some analysts even think smaller companies could leave the industry in response to weak profits.
"If margins continue to deteriorate and insurers do not take action, exits from the regional insurance market can be expected. However, this reduction in the number of players is not expected to restore margins alone," consultancy AT Kearney said in a July report.
Another possibility is that regulators, seeking to strengthen the industry, could encourage it to streamline itself by combining small companies.
"Authorities may consider a total of 15 or 20 larger, stronger companies more appropriate than 30 to 40 smaller, more diverse entities where half the players struggle," Anthony said.
Such consolidation, however, would require a legal environment that facilitated mergers. Industry executives said this may not exist until 2013 or 2014, as details of how to apply Saudi Arabia's merger regulations still need to be ironed out in practice.
"The new law to address that sort of effort is yet unknown. We are in uncharted territory," said the chief investment officer of a Saudi-based insurer, who declined to be named.
(Editing by Andrew Torchia)
Keywords: SAUDI ARABIA/INSURANCE