Reinsurance cession to the local reinsurance market
Transport & Logistics Focus
SAMA's Circular promotes local content in the insurance sector under Vision 2030. Gradual reinsurance cession to local market boosts domestic reinsurers amid economic boom and global challenges. Positive impact on local reinsurers' GWP.
Law Update: Issue 360 - Africa and Transport & Logistics
Anand SinghSenior Counsel,Transport & Insurance
Di Melody Huang Associate,Transport & Insurance
As part of Vision 2030, the Kingdom of Saudi Arabia has accelerated its national infrastructure and development efforts in recent years and is undergoing unprecedented economic boom. The Kingdom was the fastest growing G20 economy in 2022, achieving 8.7% growth; and the International Monetary Fund puts the size of the Saudi economy in 2022 for the first time at more than $1 trillion, confirming its position as the 18th largest economy worldwide.
As the national transformation strategy continued to progress, the Kingdom has also expanded the focus areas into specific objectives and sub-sector initiatives, such as the Financial Sector Development Program and sub-sectors, including banking, insurance, investment, and stock and debt markets. The insurance sector is a particularly key pillar in the Kingdom’s economy. The Financial Sector Development Program confirms in its 2022 Program Charter that insurance sector is one of the most important financial services sectors that supports all other economic activities and maintains their stability. It also aspires to increase gross written premiums (“GWP”) as a percentage of non-oil sector GDP to 4.3% by 2030 from 1.9% in 2019. For this reason, we expect to see a significant growth of the insurance market in the Kingdom whilst it undertakes rapid infrastructure development.
According to the Saudi Insurance Market Reports, released by the Saudi Arabian Monetary Authority’s (“SAMA”), the insurance sector has already witnessed a year-on-year 8.4% of premium growth in 2021 with total GWP reaching SR 42.0 billion, and an exceptional 26.9% growth in 2022 with total GWP reaching SR 53.4 billion.
The insurance companies in the GCC region remain heavily dependent on reinsurance - they often decide to cede the bulk if not entire risk to reinsurance companies, leaving very little to no retention on their own books. Moreover, these reinsurance companies that decide to take on the risks are usually large global reinsurers with a well-established international footprint, rather than local reinsurers. For these reasons, the insurance and reinsurance regulator in the Kingdom, SAMA, aims to shift away from this and has therefore brought a number of changes in recent years.
Articles 40 to 42 of the Implementing Regulations 2003 and the Reinsurance Regulations 2010 stipulate that the insurance and reinsurance companies in the Kingdom must retain at least 30% of its total insurance premium, and that they must reinsure at least 30% of its total premium within the Kingdom before placing risks abroad. SAMA requires its written approval where a company is unable to comply with these percentages, in which case SAMA may consider exercising its discretion to not direct hard compliance in light of the insurance market and each company’s financial position.
The requirement to reinsure within the Kingdom is called local cession. Local cession is usually imposed by regulators as a way to protect the local market and to help local companies grow and build the same level of skills and talent to rival the global players. Despite SAMA’s clear expectations in these regulations, there was a lack of clarity in the manner in which the local cession under the existing regulations were to be achieved.
More recently, SAMA announced in a circular dated 26 October 2022 (“the Circular”) the implementation of a new mechanism for reinsurance cession to the local reinsurance market. This new mechanism requires insurance companies to gradually cede a share of all their reinsurance treaties (proportional and non-proportional), either directly or through reinsurance brokers, to the local reinsurance market with effect from 1 January 2023. It sets out a course for gradual cession of at least 20% in 2023, 25% in 2024 and 30% in 2025.
SAMA further outlines in the circular:
An obligation on insurance companies and reinsurance brokers to maintain records and documentation demonstrating compliance as well as those that show the reason of refusal by the local reinsurance market to participate;
In case of failure to comply with the Circular, insurance company must notify the SAMA within twenty (20) business days after the end of each calendar year, together with reasons;
A positive obligation on the insurance company to ensure reinsurance brokers’ compliance;
An obligation on the licensed reinsurance companies to maintain records and documentation showing the treaty shares offered to them, including:
An obligation on the insurance companies to update their reinsurance strategy to reflect the Circular and submit to SAMA to obtain no objection on it.
reasons for not participating, or participating at lower shares; and
details of the size of the reinsurance premium that has been retroceded.
This new mechanism builds on the existing regulations by reinforcing minimum cession rates of the reinsurance premiums to the domestic reinsurance market (so it could gradually reach 30% by 2025), provides more guidance and expands SAMA supervisory authority in:
Records keeping and documentation requirements on insurance companies, reinsurance brokers as well as reinsurance companies to demonstrate compliance.
The creation of a positive obligation on the part of the insurance company, in cases the reinsurance treaties are procured through reinsurance brokers, to ensure the reinsurance brokers’ compliance.
In case of failure to comply with the Circular, insurance company must notify the SAMA within twenty (20) business days after the end of each calendar year, together with reasons.
Whilst the Circular imposes an array of duties and obligations, it’s silent on what the consequences are in case of non-compliance or repeated non-compliance without reasonable or sound basis. It is also not clear how SAMA will treat and manage reinsurance retrocession in cases where the local reinsurers cede risks under retrocession agreements to another reinsurer who could be an international player. This is a concern as significant retrocession will render the Circular ineffective or completely futile.
As highlighted by the Circular preamble, the purpose of the Circular is to create better alignment with Vision 2030 which aims at reducing the Kingdom’s dependence on oil and to diversify its economy. One of the crucial drivers of growth in Vision 2030 is through the promotion of local content development which focuses on the development of research, capabilities and activities in the Kingdom.
The Circular is an example of the effort in promoting local content development. It helps by developing the local reinsurance market, creating job opportunities in the insurance sector, building local talent, enhancing competitiveness, improving the local retention of reinsurance premiums within the Kingdom which could then be reinvested locally, and reducing dependence on foreign markets.
The Circular is expected to strengthen the domestic reinsurance ecosystem.
According to SAMA’s website, there are six (6) licensed companies under the category of “Insurance and Reinsurance Companies”, including The Company for Cooperative Insurance (Tawuniya), The Mediterranean and Gulf Cooperative Insurance and Reinsurance Company (MEDGULF), Walaa Cooperative Insurance Company, Saudi Reinsurance Company (Saudi Re), Al Alamiya for Cooperative Insurance Company, and Gulf Insurance Group Company. Saudi Re, being the only homegrown specialized reinsurance company in the Kingdom which operates in more than 40+ countries.
These local Saudi reinsurers stand to financially benefit from favorable regulatory developments such as the Circular, especially when demand for insurance and reinsurance is expected to continue given the current economic boom in the Kingdom.
The Circular also enables the national reinsurance market to play an active role not only within the Kingdom but also on the international reinsurance stage against hardening trend in the global reinsurance market. The global reinsurance market has shown considerable tightening of reinsurance terms on account of the increasing threat of inflation, rising interest rates, reducing retro/reinsurance capacities, and the ongoing Russia-Ukraine conflict.
Overall, we expect to see a positive impact on the local reinsurers’ GWP from the Saudi market as well as the world stage, despite the uncertain global economic outlook.
For further information,please contact Anand Singh or Melody Huang
Published in August 2023
