Positioned for growth

Formed in 2008, Saudi Re was the first reinsurance company to be formed in Saudi Arabia and the first to be licensed by the Saudi Monetary Agency. With capital of SR1 billion ($267 million) and a rating of BBB+ from rating agency Standard & Poor’s, Saudi Re writes a mixture of facultative and treaty business on a proportional and non-proportional basis. Business lines it is involved in include property, engineering, marine, casualty, motor, life, medical and retrocessional business.

As the company celebrates its five years in business, Fahad Al-Hesni, the chief executive of Saudi Re, says he is now looking to move the business beyond its roots in the Middle East and North Africa (MENA) region and into new lines of business and new markets.

“So far, we have focused on building the necessary capacity and strength to grow as a regional reinsurer. We have worked to fortify our position in the MENA region but at the same time we are looking to expand and diversify our base in other promising emerging markets,” Al-Hesni says.

He says the capital strength of Saudi Re has helped its development so far. It is one of the best capitalised reinsurers in MENA allowing it, within a short period of time, to expand into other new countries across the region. It now writes business in more than 30 countries in MENA, Africa and Asia. “Product diversification is a key strategic pillar of ours and we were able to develop a balanced portfolio across different life and non-life classes,” he says.

The firm’s strategy of growth in these regions has been assisted by the fact that they are growing fast in their own right. A combination of a low starting point in terms of insurance penetration rates and massive investments in infrastructure projects means that the markets included in MENA and the region known as the Gulf Cooperation Council (GCC) are among the fastest-growing in the world.

“This provides the reinsurance industry with tremendous opportunities,” Al-Hesni says. “Despite the political turbulence, the MENA reinsurance market has been for a long time a very interesting and attractive area for international reinsurers to diversify their businesses. This has been boosted by the low natural catastrophes risks, relatively low mega accidents/losses, and the region’s development and infrastructure projects.”

Greater competition

As with any fast-growing and attractive market, there has been increased competition in recent years. This has, in turn, had a knock-on effect on prices and terms and conditions. “Supply has increased and price has often been the main differentiator between reinsurers,” Al-Hesni says.

This has forced some reinsurers to change the way they view the region. Some have started limiting their operations while some others have considered withdrawing altogether. But he hopes that wider market conditions and a trend towards a slight hardening of rates after the severe catastrophe losses of 2011 could also help this market move back towards a more underwriting-based approach.

“As in other emerging markets, the MENA region insurance industry faces challenges in areas such as developing and retaining talents, expanding distribution, and identifying accurate risk profiles.”

Another challenge he identifies in the market is that a healthy relationship between insurers and reinsurers is sometimes missing. Many primary insurers are heavily reliant on proportional reinsurance treaties and retain low shares, he says, but this means an unhealthy lack of focus on pricing business correctly.

“Relatively high reinsurance commissions have been a source of income for a long time in our markets and resulted in creating a dependence culture where insurers no longer carry risks as much, as they are passing them to reinsurers,” he says.

“In addition, tough competition on the direct side has been reflected in their relationship with reinsurers. Price plays a key role in deciding the shape of reinsurance operations; hence, most of the relationships are not built on a long-term basis. The level of development has been hindered too, where little investment is being done in areas of training, product development, and other aspects reinsurers are supposed to be active in—besides accepting risks.”

Al-Hesni admits that this dynamic is a concern for the business and will present a challenge for reinsurers trying to ensure their business remains profitable going forward.

“Competition is a big concern as markets are crowded with an abundance of capacity which in many cases makes players overlook quality for the sake of lower price,” he says. “Where risks are associated with expansion in new territories we are mindful of the fact we need to maintain our high underwriting standards all along.

“Direct players in MENA face serious challenges mainly in achieving profitability as margins continue to diminish, driven by the severe competition and deteriorating investment income. This is putting more pressure on increasing technical results but it is not an easy task at the moment.

“As in other emerging markets, the MENA region insurance industry faces challenges in areas such as developing and retaining talents, expanding distribution, and identifying accurate risk profiles. Some other challenges include fragmented markets and meeting regulatory requirements.”

Setting itself apart

Against a backdrop of such challenges, Al-Hesni is also clear that he believes Saudi Re has many reasons that mean it can compete effectively and maintain and grow its market position. As well as having paid-up capital of SR1 billion ($267 million), it has total assets of SR1.3 billion ($346.6 million), and technical reserves of SR203 million ($54 million).

This means it stands out from the crowd in terms of its size and ability to compete. But he also stresses the importance Saudi Re places on having good people and quality expertise in place.

“Financial capacity is a strong promoter but needs to be supported by technical capabilities,” he says. “Therefore, Saudi Re made great efforts in building this area by all means including strengthening the team of underwriters. We are proud to have a group of professionals who are experienced in various fields, enabling Saudi Re to offer facultative and treaty solutions on proportional and non-proportional bases for general and life businesses.

“Our business model is based on involving our underwriters and risk experts in interfacing and collaborating with clients and business partners directly. We aim to grow with our clients and we devote our capabilities and expertise to serve the growth ambitions of our valued clients.”

Going forward, Al-Hesni says Saudi Re is already building on its strengths by expanding on all fronts in line with the diversification strategy it wants to achieve. Besides the intended geographical expansion and raising the exposure in selected markets, it has started growing the life reinsurance side of its business.

“This is just one of the healthy developments we plan to give more attention in the coming period,” he says. “In addition, our eyes are open to keep up with market changes and preserve healthy performance. For instance, last year we conducted various reforms including updating our pricing tools in the life and non-life business.

“We will continue to build our in-house capabilities by strengthening the human capital and applying top of the line technology. Saudi Re was able to put in place advanced control systems and embrace sound enterprise risk management policy.”

The MENA region remains a growing and very promising market for all reinsurers that operate there, as seen in the growth it has achieved over the previous couple of years. Markets such as Egypt and Tunisia have grown by 5 percent despite unrest and political instability, which shows that the industry is coping with change, according to Al-Hesni.

“More importantly, in all MENA markets, gross written premiums have been growing faster than the region’s countries’ GDPs—something missed in the advanced part of the world,” he adds.

“The market dynamics are also showing outstanding development where life insurance continues to be the fastest growing line. Compulsory lines, especially medical, are also giving momentum for direct and reinsurance players in the region.

“Such factors, coupled with the encouraging demographics in MENA, give strong grounds for the industry to grow and find opportunities. The best is yet to come but it is up to players to work on leveraging their standards and embrace the best practice approach to doing business.”