Risk-Based Capital Regime in the Saudi Arabia Insurance Market

Considerations when transitioning from a fixed approach Ashwag Alzahrani

The primary goal of an insurance solvency regime is to protect policyholders and support the financial stability of the market. Regulatory capital requirements across the globe, including in the Saudi Arabia insurance market, are either risk-based capital or transitioning to become risk-based.1

The insurance industry around the globe traditionally used fixed-capital standards, which require all insurance companies to hold the same amount of capital regardless of their size or risks. However, after several insurance companies became insolvent, many regulators recognized the weaknesses of such an approach to assess the required solvency levels for insurance companies.2 Some of these weaknesses include, but are not limited to:

  • No link between the amount of capital required and the companies’ risk management and risk mitigation strategies
  • Not coping with the changes happening in the market
  • Not allowing for the benefit of diversification
  • Lack of transparency

Saudi Arabia Insurance Market Overview

Saudi Arabia’s insurance market has seen a recent premium growth of 26.9% in 2022 compared to 2021, with total gross written premiums reaching SAR 53.4 billion. The penetration of insurance to nonoil gross domestic product (GDP) reached 2.09% in 2022 compared to 1.91% in 2021. The top eight insurance companies contributed 77.5% of the total gross written premium, and the remaining 19 insurance companies accounted for 22.5% of the market’s total premiums.3

Health insurance was the largest line of business in 2022, contributing to the total gross written premium of 59.7% and experiencing a 26.8% premium growth. Motor insurance stood second, contributing to the total gross written premium of 19.4% and experiencing a 26.7% increase in premium in 2022. Saving and protection accounted for 3.5% of the total gross written premium, and other general insurance products (e.g., property, travel) accounted for 17.3% of the total gross written premium.4

Moreover, under general and health insurance, the net incurred claim increased by 22.8% to reach SAR 32.7 billion with a net loss ratio of 83.4%. In addition, the insurance companies held SAR 43.13 billion in technical reserves (consisting of incurred but not reported [IBNR], outstanding, unearned premium and adjustment expense reserves). Insurance companies reported a net income of SAR 689 million in 2022 compared to a net loss of SAR 47 million in 2021.5

The market has witnessed mergers over the past few years, which aligns with the central bank’s efforts to encourage mergers and acquisitions (M&As) to improve customer service and efficiency, reduce costs and create more financially solvent entities.6

In August 2023, the Saudi Cabinet approved the establishment of a new unified and independent regulator for the insurance sector, the Insurance Authority (IA). The IA is designed to boost the role of the insurance sector in the kingdom, which will grow and enhance the market for Saudi, regional and global businesses operating in the kingdom.

Before the establishment of the IA, the Central Bank of Saudi Arabia and the Council of Health Insurance were responsible for regulating and supervising the Saudi Arabia insurance sector.

Saudi Arabia’s Risk-Based Capital Regime

As explained earlier, risk-based capital is a method to measure the minimum amount of capital appropriate for an insurer to support its overall business operations, taking into account the insurer’s mix of products, assets and operations, as well as the interactions among those risks. Over time, risk-based approaches have replaced or supplemented simpler approaches such as fixed amount of capital.

In the Saudi Arabia insurance market, the fixed minimum capital requirement approach has been used for many years. According to the insurance law (Article 3.3), the minimum capital requirement is SAR 100 million for a company engaged in the insurance business and SAR 200 million for a company engaged in insurance and reinsurance. These minimum requirements are predicted to rise to SAR 500 million and SAR 1 billion, respectively. The exact thresholds are yet to be confirmed, but they are expected to materially increase above current levels.7

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The Saudi Arabian Monetary Authority (SAMA) has been transitioning toward risk-based capital requirements since 2020. It started this journey by requiring insurance companies to complete the “Solvency and Capital” exercise in which the required solvency margin of insurance business operations is calculated. SAMA pointed out that such an exercise will help facilitate the transition toward a risk-based capital regime and provide insurance companies with an early view of the potential transition impact.

In my experience, the results of the exercise help insurance companies understand the key risks the company is exposed to and how effective its risk mitigation strategies are. The exercise consists of multiple stress and scenario analyses that are done under different risk categories, and the impact of those risks on the solvency ratio (actual company capital vs. minimum required capital) is assessed. The risk categories in the exercise are the following:8

  • Market risk
  • Concentrated risk
  • Counterparty default risk
  • Nonlife underwriting risk
  • Life underwriting risk
  • Catastrophic risk
  • Operational risk
  • Global recession

Market Risk

There are several different market risks in this exercise, including the following:

  • Interest rate risk. This reflects risk due to a change in value caused by the deviation of the actual interest rate from what is expected. This risk is material if the company has long-term assets and liabilities, such as life insurance. This analysis shows that the interest rate is stressed when interest rates increase or decrease by 2%.
  • Equity risk. This reflects the risk of a change in the value of equities caused by the deviation of the actual market values from expected values. The stress test is as follows: the value of equities listed in the Saudi Stock Exchange Tadawul and Organization for Economic Co-operation and Development (OECD) countries decreased by 50%, and the value of other equities decreased by 60%.
  • Property risk. An example of this would be the value of real estate investments decreasing by 25%.
  • Exchange rate risk. This reflects the risk of a change in the exchange rate from what is expected. In this exercise, the exchange rate is stressed by +/-25%.9

Concentrated Risk

Concentrated risk reflects the risk of increasing losses associated with inadequately diversified portfolios of assets and obligations. Different types of assets have different concentration thresholds; for example, 20% for equities, 25% for bonds with an S&P rating of BBB or above and 10% for bonds rated below BBB. The stress factors are defined as +10%, +10% and +50%, respectively. This analysis excludes government bonds.10

Counterparty Default Risk

This type of risk reflects the risk due to the counterparty’s default—for example, a reinsurer not meeting its obligations. The stress factor applied varies based on the credit rating of the counterparty.11

Nonlife Underwriting Risk

Nonlife underwriting risks in this exercise include the following:

  • Premium risk. This reflects the risk of increasing the net loss ratio more than expected. The stress factors vary between lines of business and types of reinsurance contracts.
  • Reserve risk. This reflects the shortfall in the reserve set under the business. The stress factors vary between lines of business and types of reinsurance contracts.12

Life Underwriting Risk

This exercise contains life underwriting risks, including the following:

  • Mortality risk. This risk reflects the risk due to a change in value caused by the deviation of the actual mortality rate from what is expected. Thus, the mortality rate is stressed by +15%, and its impact on the mathematical reserve would be evaluated.
  • Lapse risk. This reflects the risk due to a change in value caused by the deviation of the actual rate of policy lapses from what is expected. So, the lapse rate is stressed by +/-5%, and its impact on the mathematical reserve would be evaluated.
  • Expense risk. An example of this risk would be stressing the inflation rate by +1% and evaluating its impact on the mathematical reserve.13

Catastrophic Risk

There are a few catastrophic risks to consider in this exercise, including the following:

  • Health pandemic. Under health insurance, the scenario considered is 2% of insureds are infected, of which 10% are hospitalized and 30% are referred to a physician for consultation. Under protection and savings insurance, the scenario considered is 0.06% of insureds die. The impact on the number of insureds and cost of care is evaluated.
  • Natural catastrophe (flood). The example scenario is cloudbursts over the city of Jeddah cause flooding that affects 25% of property and 5% of motor vehicles. Then, the impact on the sum insured is evaluated.
  • Humanmade catastrophe. Examples of this risk type include energy, property, motor liability, marine and aviation.14

Operational Risk

Cyber risk is an operational risk to consider. The scenario applied here is if international hackers from outside the kingdom attack insurance companies’ systems, it could lead to a halt in business and policyholder data being accessed illegally.15

Global Recession

Saudi Arabia’s economy relies heavily on oil, and economic activities have led to lower oil prices. Thus, many government and private projects may be postponed or stopped, and this may lead to a slowdown in economic activity in the kingdom. The liquidity of insurers and the behavior of policyholders may be affected adversely. As such, there is an impact on the revenue and claims of insurance companies.16

Recent Developments in the Framework

In 2022, this framework was significantly enhanced, allowing for correlation and diversification among risks in the Saudi Arabia insurance market. Figures 1 and 2 show examples of the correlation matrices that SAMA has used.

Figure 1: Correlation Matrix (1)

Market Risk Interest Rate Equity Concentration Property Currency
Interest Rate 100% 50% 0% 50% 25%
Equity 50% 100% 0% 75% 25%
Concentration 0% 0% 100% 0% 0%
Property 50% 75% 0% 100% 25%
Currency 25% 25% 0% 25% 100%

Source: Solvency and Capital Template. 2022. Insurance Authority.

Figure 2: Correlation Matrix (2)

Nonlife Underwriting Risk Premium Risk Reserve Risk Catastrophic Risk
Premium Risk 100% 75% 25%
Reserve Risk 75% 100% 25%
Catastrophic Risk 25% 25% 100%

Source: Solvency and Capital Template. 2022. Insurance Authority.


Insurance solvency regimes globally are undergoing significant changes, and there is always room for improvement.17 While many of the solvency regimes have similarities, there are differences in their level of sophistication.

A follow-up to this article could highlight some of the challenges that have been observed in Saudi Arabia’s insurance market. It also could provide comparisons of the risk-based capital risk categories and formulas across different systems—namely the United States, United Kingdom and Saudi Arabia—and lessons learned from comparing those systems.

Ashwag Alzahrani, FSA, CERA, is health actuary and an independent actuarial contractor based in Riyadh, Saudi Arabia. She is committed to transforming the actuarial landscape in the kingdom, and she is the first female in the kingdom with an FSA.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

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