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Saudi mortgage law to boost takaful industry

No mortgage finance provider would fund a house without the requisite insurance

Last updated: Tuesday, July 24, 2012 2:34 AM

Mushtak Parker
Saudi Gazette

LONDON – The Saudi insurance market is projected to grow by 15 percent per annum in total volume of gross premiums written (GPW) across the sector, driven primarily by demand from the Kingdom’s young population, especially for motor and medical insurance, Standard & Poor’s Rating Services said in its recent report titled "Cooperative & Takaful Insurance in Saudi Arabia in 2012".

Author of the report David Anthony said "the sector constitutes an already large and still expanding market in a country, which in many ways dominates the region. Basic drivers of insurable activity in the Kingdom are state-funded infrastructure spending which fuels the commercial and industrial sectors and, on the retail side, the insurance requirement of Saudi baby-boomers from the 1980s and 1990s who are now acquiring possessions - most notably cars - and setting up their own households as they come of age."

However, perhaps the most important key driver of insurance in the Kingdom, as in many countries, is compulsion through government policy and legislation such as compulsory health insurance for expatriate workers and motor third party liability insurance (ruksha) for all drivers.

Medical insurance in fact accounts for 60 percent of the Saudi insurance market, followed by motor insurance, which accounts for 20 percent of the market.

Besides, the adoption earlier this month of the Saudi Arabian Mortgage Law by the Council of Ministers will inevitably result in a massive new boost for the Saudi insurance market, especially for mortgage takaful.

No mortgage finance provider would finance a house without the requisite insurance - building and contents, for instance. It is not clear whether mortgage law allows this or whether this comes under the Cooperative Insurance Companies Control Law of the Kingdom.

The Kingdom a few years ago did introduce a the Cooperative Insurance Law which is based on the concept of Ta’awuni (mutuality or cooperativeness). Not surprisingly Islamic banks such as Bank Al Jazira established dedicated Takaful Ta’awuni operations for general (motor and fire) and family (life) takaful
This is different to Takaful per se, which is largely based on a combination of wakala (agency), wa’ad (pledge) and in some cases on mudarabah (trust financing) contracts as well.

Major international insurance companies that are in the Kingdom are gearing up to take advantage of the recent developments. Japan’s Tokio Marine Middle East Limited, for instance, is in the process of establishing a Takaful (Islamic insurance) joint venture in Saudi Arabia with local Islamic bank, Alinma Bank, the Alinma Tokio Marine KSA.

According to Ajmal Bhatty, President and CEO, Tokio Marine Middle East Limited, the adoption of a mortgage law could boost the mortgage takaful industry in a major way, which could lead to further developments in mortgage securitization down the line as the market matures.

"I think the introduction of the Saudi mortgage law is a major development for the housing market. I understand that more than 60 percent of the households may need new units because of the young demography of the Kingdom. So there is a huge housing market for mortgage finance. And of course that opens up opportunities on the mortgage takaful side as well. But it has to be handled properly with the right products and processes," Bhatty told the Saudi Gazette.

According to the S&P report, there are currently 30 locally-incorporated licensed insurance companies and one reinsurance company in the Kingdom, with a further four insurance companies in the process of being licensed, serving a population of some 25 million of which some 20 million are Saudi nationals of which a large percentage is between 16 and 24, and 9 million are foreign residents in the Kingdom.

In addition, the Saudi Arabia General Investment Authority (SAGIA), which is developing six economic cities, estimates that the Kingdom would have a population of 45 million by 2020, which would generate huge additional demand for housing and other services such as insurance.

The business case for insurance is there. Currently the Kingdom is the second largest insurance market in the GCC but the sector is growing at a much faster rate. It is only a matter of time when it overtakes the UAE.

According to the World Bank/IMF, in the housing sector, the annual needs are estimated at around 250,000 units over the medium term. Housing demand will only increase further, reflecting the young and growing population and declining household size. Similarly, the real estate development and investment entity of the Islamic Corporation for the Development of the Private sector (ICD), Anfaal Capital, which is regulated by the Saudi Capital Markets Authority (CMA) estimates the current demand for almost 1 million housing units in Saudi Arabia alone. This is projected to increase on a yearly basis by 150,000 units.

S&P report further said gross premiums written (GPW) across the Saudi insurance sector grew from SR5.2 billion in 2005 to SR16.2 billion in 2010 and to an estimated SR18 billion in 2011. GWP comprised 94 percent general insurance (of which group medical insurance accounted for 57 percent and motor insurance for 21 percent) and family (life) insurance accounted for 6 percent.

According to Sygma/Swiss Re data, GWP in the Kingdom increased from $4.37 billion in 2010 to $4.971 billion in 2011 - an increase of 13.8 percent on the year. Saudi Arabia trailed behind the UAE whose GWP increased from $5.97 billion in 2010 to $6.641 billion in 2011 - an annual increase of 11.2 percent.

However, the Saudi (and indeed the GCC) insurance sector must be viewed in perspective. Its size is very modest compared to other regions such as North America, the European Union, South East Asia and East Asia.

The latest World Bank/International Monetary Fund Financial Sector Assessment Report (FSAP) on the Kingdom titled "Saudi Arabia: Financial System Stability Assessment -Update" published in April this year, said that the insurance sector in Saudi Arabia "is small and poses no obvious financial stability risks." The regulatory and supervisory framework has improved significantly in recent years.

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