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Saudi Arabia - Cooperative Insurance Regulations
Global Arab Network - David Morgan
The insurance sector in Saudi Arabia was unregulated prior to the passing Control of Cooperative Insurance Companies Law, which came into force on 20 November 2003 along with its implementing regulations published on 23 April 2004 (together the “Cooperative Insurance Regulations”) .

Prior to the implementation of the Cooperative Insurance Regulations and the subsequent establishment of licensed insurance companies in Saudi Arabia, the only options for individuals or businesses operating in Saudi Arabia seeking insurance were between taking out conventional insurance either overseas or with an unlicensed provider in the Saudi Arabia (in the knowledge that such insurance was arguably unenforceable in Saudi Arabia on the basis that it contravened Islamic (Shari'ah) law and that the unlicensed insurer was not subject to any regulation) or taking out cooperative insurance with the Saudi Arabia’s former state monopoly provider, the National Company for Cooperative Insurance (“NCCI”), now known as “Tawuniya”.

The Cooperative Insurance Regulations are administered and enforced by the Saudi Arabian Monetary Agency ("SAMA").  Although the Cooperative Insurance Regulations were promulgated in 2004, their implementation has been delayed.  A moratorium was put in place on the enforcement of the Cooperative Insurance Regulations whilst the unlicensed entities operating in Saudi Arabia brought their operations into accordance with the requirements of the new law and were registered with SAMA.  The moratorium ended on 9 April 2008 and, according to Standard & Poor's, as at April 2009 there were 29 Saudi insurers, including 20 that had completed SAMA’s licensing process and were publicly listed, 5 that were publicly listed but awaiting a license and 4 that were neither publicly listed nor licensed. The rapid development of the sector is reflected in the fact that four insurers undertook IPOs in Saudi Arabia in April 2009 alone, including ACE Arabia and AXA Cooperative.

As a regulator, SAMA is recognised as having taken great strides in only a few years since the insurance sector became regulated and is keen to promote the growth of a properly regulated insurance market in Saudi Arabia as part of a wider policy of encouraging foreign investment into the country.  SAMA's mandate is to create an environment in which policy holders are protected and ensure the market is competitive, stable, fair and transparent. The insurance supervision team has developed from a small internal department of nine employees to an independent supervisory authority with a team of 44 employees.  SAMA is mandated as the regulator for all licensed insurance companies including insurance brokers, insurance agents, insurance consultants, surveyors, loss adjusters and actuaries, all of whom must now apply to SAMA for a licence to carry on business in Saudi Arabia.  SAMA now has responsibility for licensing and authorisation, supervision, rule-making, supervision of investment of assets and monitoring compliance with capital and reserve requirements.

The introduction of the Cooperative Insurance Regulations by SAMA has been a catalyst for a rapid growth in gross written premium income within the Kingdom. In this regard, the compounded annual growth rate of gross written premium is reported to have been 32% between 2002 and 2007.  Gross written premiums increased by 27% in 2008 rising to US$2.9bn (from US$2.3bn in 2007) and have been predicted to reach US$8bn by 2015.  This growth has been triggered in part by the introduction of compulsory insurance, particularly in the health sector.

The Cooperative Insurance Regulations
The Cooperative Insurance Regulations aim to provide a basis on which competitors to the now publicly listed Tawuniya can operate in a regulated environment within Saudi Arabia. Key issues to note are:
· Insurance (or reinsurance) in Saudi Arabia can only be placed through registered public joint stock insurance companies incorporated in Saudi Arabia with a minimum paid-up capital of SAR100 million (US$26.66 million) for direct insurers, and SAR200 million (US$53.33 million) for reinsurers.  Therefore, new branch offices of foreign insurers are not permitted.
· Insurance must be offered on a cooperative basis “in accordance with the Islamic Shari’ah”, the model for which is expressed as being the Articles of Association of Tawuniya.
· Insurers must be registered by SAMA to write specific classes of business, which are broadly grouped as general insurance (including accident, liability, motor, property, marine, aviation, energy and engineering), health insurance, and saving and life insurance, or for two or more of these, depending on the proposals put forward by the applicant in the feasibility study and business plan, which must be submitted with the licence application.
· SAMA has the right to determine minimum and maximum limits of cover and of premiums.  Prices charged should be “fair and reasonable” and SAMA can request that a Saudi insurance company justifies its prices by reference to the risks undertaken by the company.
· Insurance must be offered on standard form policies which are required to be pre-approved by SAMA.
· Unless SAMA’s consent is obtained, at least 30 per cent of cover must be retained by insurers and at least 30 per cent of cover must be reinsured within Saudi Arabia.  SAMA’s consent must be obtained before a Saudi insurer re-insures with non-Saudi insurance funds and Saudi insurers, brokers and agents who wish to place cover with Lloyd’s or non-Saudi insurance companies must obtain SAMA’s permission.  As noted further below, there is presently only one licensed Saudi reinsurance company (Saudi Re) and therefore waivers of these requirements are understood to be available in certain classes of business, including in respect of large construction risks. 
· The Cooperative Insurance Regulations contain detailed provisions governing investments, solvency margins, evaluation of assets and technical provisions.  A statutory deposit of at least 10% of the Insurance company's paid up capital must be deposited with a bank designated by SAMA.  An insurance company is required to have written investment and risk assessment guidelines approved by its board.  The Cooperative Insurance Regulations provide a detailed table outlining the permitted investments and the investment limits for each category.  Assets of companies with composite licences must be segregated according to each licence.  The Cooperative Insurance Regulations provide a table outlining the permitted limits for evaluation of assets for the purpose of determining the company’s solvency ratio.
· “Saudisation” (the obligation on companies to employ a certain percentage of Saudi nationals), applies to insurance companies setting up in the Kingdom.  Insurance companies are required to employ Saudi nationals as no less than 30% if it’s total workforce for its first year of operation.  This percentage must increase annually in accordance with a Saudisation plan that applicant are required to submit to SAMA as part of the authorisation and licensing process.  It is clear from the 2008 Saudi Insurance Market Report that many of the smaller insurers in Saudi Arabia do not yet comply with the 30% requirement, but SAMA will require any new entrants to the market to do so insofar as possible.
· Importantly, the Regulations imposes a requirement on Saudi insurance brokers to seek to place business with a Saudi licensed reinsurer before placing it with a foreign insurer not registered in the Kingdom, thereby giving a real competitive advantage to locally registered reinsurance companies.  At present, there is only one registered and licensed reinsurer in Saudi Arabia (Saudi Re).

Cooperative Insurance Model
Whilst there are some parallels with Takaful, the cooperative insurance model operates in a distinct manner.  The Cooperative Insurance Regulations do not provide certainty on some issues.  For instance, although the Cooperative Insurance Regulations provide that insurance must be offered on a Cooperative basis “in accordance with the Islamic Shari’ah”, there is no detailed guidance on what constitutes a cooperative basis.  The Cooperative Insurance Regulations point to the NCCI’s articles of association as guidance but the NCCI articles of association themselves do not set out a detailed framework as to how cooperative insurance is to be conducted.
Rather, the only requirement they would seem to provide for is that the company concerned must maintain separate profit and loss accounts for policyholders and for shareholders and that there must be a distribution of part of the net surplus from the insurance operations among the policyholders.  Therefore, it is open to insurers to write business essentially on a commercial basis, subject to the redistribution element on a semi-cooperative basis.

The presumption has to be that an insurance company regulated under the Cooperative Insurance Regulations and fulfilling the requirement to maintain separate profit and loss accounts meets the requirements of cooperative insurance and is therefore valid and enforceable in Saudi Arabia.  However, there is always the risk that a court or tribunal in Saudi Arabia may find that a particular insurance policy, particularly a bespoke policy for a large financing project, does not meet the requirements to be considered Shari’ah compliant.  Saudi Arabian law is based on Islamic law (Shari’ah), considered as the supreme divine guidance to all Muslims.  The Shari’ah is the source of all law; albeit, the Saudi Arabian government frequently issues rules and regulations with the objective of supplementing the Islamic law when the need arises.  But, in the event that any conflict occurs between the Islamic law and the enacted rules and regulations, the Islamic law prevails and when the government rules and regulations are silent on a particular issue, reference is made to the relevant provisions under the Islamic law.  This environment makes it conceptually complex for ‘conventional’ insurance companies to operate, for under the Shari’ah ‘conventional insurance’ has historically been seen as impermissible.

Foreign Ownership
There is no restriction on foreign participation, but current Saudi rules restrict the transfer of shares so that only Saudi nationals can own them. Depending on the partner selected to participate in the Saudi insurance company, a range of between 25 – 49% of shares will need to be floated.
Foreign interests could, however, increase their participation in a Saudi insurance company in one of the following ways:
· A Saudi insurance company may enter into third party agreements with a local or international consulting firm for the transfer of skills and expertise, provided that: (a) all records are maintained in Saudi Arabia, (b) fees are not excessive (c) the consulting firm is not commercially affiliated with the insurance company (subsidiary, sister company, etc.).
· A foreign partner in a Saudi insurance company who owns less than 49% may enter into a technical management agreement to manage effectively the company provided such agreement may be subject to SAMA’s review.  Roles and responsibilities of the CEO and Senior managers and executives cannot, however, be outsourced.
Care needs to be taken in drafting such agreements in order to ensure that they do not infringe the so-called "Anti Cover-Up Law" which, in essence, prohibits a non-Saudi entity from using a Saudi entity's licence for the purposes of undertaking business in Saudi Arabia.

The Cooperative Insurance Regulations are also silent as to whether the re-insurance must be on a cooperative basis or not.  Given the lack of reinsurance capacity in the Saudi market and that re-takaful or Islamic cooperative reinsurance is a developing area (there now being dedicated re-takaful companies) this is likely to be one issue to keep an eye on in future.
The difficulties created by the prohibition of the insurance of Saudi assets overseas are likely to continue until the Saudi insurance market has further matured and developed sufficient reinsurance capacity.  This is something which SAMA has recognised and, particularly in the context of large scale projects, it may be possible, until the Saudi insurance market further develops either to obtain SAMA consent with respect to exceeding the reinsurance limit; or to obtain a no objection letter from SAMA to the placing of insurance directly offshore.

Recent developments
SAMA is currently busy overhauling the regulation of insurance companies in the Kingdom and in 2008 released new regulations covering the following areas:
· Reinsurance Regulations
· Code of Corporate Governance
· Investment Guidelines
· Broker Regulations
· Risk Management Regulations
· Anti-Money Laundering Regulations
· Anti-Fraud Regulations

There are also rumours in the industry that suggest that SAMA is presently declining to license any new insurance companies for the time-being. Representatives of SAMA are on record stating that such rumours are incorrect and that any insurer that satisfies the requirements of the Cooperative Insurance Regulations will be granted a license.  It does, however, appear to be the case that new entrants are being encouraged to consider merging with existing licensed Saudi insurance companies as a way of entering into the market.

The existence of the regulated insurance market in Saudi Arabia, along with the development in takaful in the region, offers attractive opportunities to overseas insurance companies, but the undefined and developing nature of the “cooperative insurance” regime in the Kingdom presents some unique challenges. In addition, it is believed that SAMA is keen to promote consolidation in the local marketplace (particularly amount the existing weaker players) rather than new entrants, which may lead to increased merger activity in the future.

Global Arab Network

Peter Hodgins and Mark Beswetherick, Clyde & Co, First published in Re: Insurance, Clyde & Co’s Middle Eastern Insurance Newsletter, August 2009.

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