Principles of Insurance in Saudi Arabia

Principles of Insurance: Overview of the Insurance Sector in Saudi Arabia


Saudi Arabia strategic plan for the vision 2030, is an inclusive one, that aims to promote the growth of all industries and improving productivity. The overall structure of this country seeks to speed the rate of economic growth, by tapping the skills and talents from different sectors, with one agenda of creating more opportunities for the citizens and reaching a self-sustaining level. One of the industry that has experienced tremendous changes is the insurance sector. This has been through the introduction of regulations, rules and the merging trends in the economy, that are contributed to by the improving technological developments.

One of the new changes is the introduction of merger and acquisition(M&A). Following the global destabilization of the economic and the meltdown of the oil prices, the Saudi stock market has been fluctuating (Shanmuganathan et al.,2011). The trend has laid uncertainties in the growth of the economy, and making the insurance companies to end up making loses, thus heightening the complaints from the customers. To solve the problem, the Saudi Arabia Monetary Agency formed stricter rules for the insurance companies to operate as a drive to address the challenge of financial insolvency. According to Alkhamis (2014), the insurance market in this country is fragmented, with small companies competing with each other.  He proposes that merging the small companies to form a large entity would improve the competing power in the economy, and mitigate the chances of making unprecedented loses. Operating an insurance company in Saudi Arabia is governed by the principles of Sharia, and the Saudi Monetary Agency is responsible for ensuring that all the players in this sector adhere to the set outlaws.

According to the Atlas magazine (2019), about thirty-three insurance companies operating in the Saudi Arabia market recorded loses. Tawuniya topped the list, making the loses of SAR 213.3 million. While the market is estimated to be suffering due to hard economic times, companies such as Walaa Coopertaive posted a profit of SAR 100.37 million (Atlas Magazine,2019). This data signified that the large businesses that have established bases in the state for quite some time, have understood the market operations and hence able to comprehend the working strategies so well. In the year 2018, there was a modification of the motor insurance that was amended, by changing the basis of calculations of the premiums. Before the changes were enacted, the complaints were carried out by the resolution committee of the insurance company. In the new improvements of the claim can be done on the website of the Saudi Monetary Agency, which is a huge milestone in the industry (Atlas Magazine,2019).

The financial website, Argaam (2019) publishes that Saudi Monetary Agency is with talk with foreign insurance companies, that are willing to penetrate into the Saudi market. The information indicates that entrance of the new players would nudge the local entities into seeing mergers. The move is taken by the regulatory agency, to increase financial solvency. It was also noted that 85% of the insurance services center on healthcare and motor, while there are other sectors such as credit and property that are not tapped.

History of AXA Cooperative

It is a multinational insurance company that is French-owned, and offers services such as insurance and other financial services. It was founded in the year 1816, and its global presence has placed it in the international maps, as a competitive insurance business. It operates as a conglomerate of individual entities, that are formed based on the precepts and laws of the countries where they have establishedpresences. Since inception, it has featured in the business news, competing among the giants such as Barclays, and its performance in the Saudi market is growing at a faster rate(Ali,2014).

Webb (2017) records that any company must have a structured procedure that helps it to achieve the goals in the market, and retain the competitive edge. The structure, according to him, should be flexible and subject to change, depending on the prevailing economic market. For AXA Cooperative, the defined organization structure is shown below.

The sub-branching of the department and roles are interlinked, which ensures that all activities happening at every stage can be accountedfor. This flow of processes is useful in the identification of flaws and thus improving the services of the AXA cooperative.

The financial position of a company determines how well it able to compete with others in the market, as also manage both internal and external mandates. For example, AXA cooperative is an enormous investment, that has a local and international presence, hence the cost of labor is perceived to be high. Argaam (2019) reports that the AXA fiscal year profit rose by 27% that was equivalent to SAR 76.4 million. The witnessed performance was due to reduced number of claims and higher investment income. To evaluate its performance in terms of assets bases, some considerations are taken into place. For example, one of its major source of capital is the premiums contributed to by the members. According to Webb (2017) premiums is the set amount that a person pays to an insurance company, tobe covered against a particular risk. It was noted that about 60% of the operational cost came from the contribution of the members, which has given AXA cooperative a considerable benefit to compete with other established companies. The other primary source is long-term deposits. This is a strategy adopted, to widen the base of the capital collection.

The report further noted that the insurance operations also raised by 2.6 %, which complements the observed profit. The lower the operations cost, the higher the profit. Operations cost is inclusive of any charge the company incurs when dealing with the internal services such as payments of the employees, but excludes the issues like paying the claims forwarded by the complainants. Among the sectors that have resulted to the improvement of the performance are vehicle insurance (51.18%), health (30.05%), general insurance (11.57%) and property (29.22%). More than before, individuals are embracing the aspect of insurance, and the performance of the AXA cooperative is estimated to increase its occupancy in different international spaces.

Provide in depth analysis of lines of insurance business the company is operating in

The collective mission for all insurance companies is not only to make a profit, but also to help cushion the negative impacts that are caused by the unexpected events in life. For example, in the wake of proliferated negative repercussion of climate change, a lot of phenomenos arehappening, which leaves people losing their properties and even their health left at stake (Stephens & Thompson,2014).  AXA Cooperative is entirely revolutionizing the market in Saudi Arabia, by offering covers in some lines. One is life and saving, which covers against the perils that happen while in the normal of duty. For example, if someone is injured while in a construction site. The other one is property cover, that is chiefly concerned with protecting the person from the destruction of a building and other tangible objects, caused by either fire or any other cause fueled by human activity. In this case, natural calamities are excluded. Similarly, it covers casualty and health. The three lines of insurance have seen the company gain attraction from the corporations and individuals, hence its growth over the years in the Saudi Arabia market.

The products of the company that arespelt out by the three lines of policies itoffershas made the company a unique one in the Saudi market.According to Webb (2017), the population of Saudi is growing at a rapid rate, and the focus has been directed to young people, who form the highest percentage of the country. Also, the fact that people are entering the private sector is a massive plus for the insurance companies, that aim to operate in this state. The review of the insurance market indicated that it is dominated by health care and motor, that forms around 75-80%(Brophy,2013). The two have continued to grow since more vehicles can be seen on the roads and of course the increased campaigns on the need for people to remain healthy. However, more new policies such as in the field of real estate have not grown significantly, which provides AXA cooperative with an opportunity to grow and differentiate itself from the others. Nevertheless, the market share in healthcare and motor are prominent, and they also show linearity in their popularity.

Webb (2017) noted that for the economy of Saudi Arabia to grow, there needs to be a holistic change to the traditional form of doing business in the insurance industry. This implies in theway of the policies are currently offered, and grow other emerging areas such as real estate and technological fields. Such, it would be easier to increase the retention of the companies and enhance fair competitions. AXA has been transforming the industry through an approach of training the employees, which has enabled it to grow to a tune to $100 million to $300(Alkhamis,2017).

AXA cooperative financial performance

Price to earnings ratio is an important measure since it compares the price of the share to the company’s earnings per share. It helps to know whether the company is overvalued or devalued. In AXA Cooperative, the P/E is 17.69(Argaam,2019). The average P/E earnings ratios in the market ranges between 20 to 25, which demonstrates the company’s ratio is below the standard. The figure indicates that, what the business receives per share is small compared to the dividends it pays to its shareholders. Also, price to book ratio(P/B) stands at 1.83. The ratio designates that market price of the share, is almost similar to that of book value. In such a case, the company does not make significant return. Likewise, the report published by Argaam (2019) noted that the Return on Equity(ROE) stands at 10.77. This ratio is important in identifying the performance against a set standard of 10.0 ROE. AXA has slightly bypassed the reccomdemed figure by 0.77, and the company can consider on lowering the average shareholder’s equity to boots the ROE.

The company has managed to cut the cost, by training the employees to improve productivity, and expanded the scoop of its operations to cover more risks. The consequence has been increased revenue and hence lowering the cost efficiency. In light of the solvencyratio, the standard measures and policies require an insurance company, to take manageable risks, and that wouldn’t impact it severely. For example, covering high valued projects, which in the incident of the risk occurrence, can destabilize the company in terms of the top claim. For AXA Cooperative, the solvency ratio lowered by twelve points from the value of the last year. The results were afforded due to favorable performance of IPO and increased operational returns.

The number indicatedan increase in demand for the insurances for vehicles, health,and marine. Furthermore, the populace is more aware of how the insurance companies can help them cover for the unseen perils.  The company’s liquidity ratio is at stake, due to adverse capital and unfavorable credit market. Brophy (2013) defined liquidity ratio as the ability of the company to use liquid assets to make payments. AXA need high liquidity to pay the dividend to the shareholders and also pay the debts arising from the daily operations.

Generally, the financial performance of AXA Cooperative has continued to improve, and due to new strategies and policies in the insurance market, it is expected that the company will continue to grow and cover different geographic regions(Abdalelah,2012). In Saudi Arabia, as people become more assertive to risk they are exposed to, more enrollment would be witnessed in the coming years. One of the areas that areseeingtremendous growth is in the motor vehicle insurances, as the young population in this country are embracing the ownership of cars(Ali,2014). The precepts of the land require the people owning cars to have cover for the drivers and passengers, hence becoming a fertile ground for the AXA Cooperative and other insurance entities.

General evaluation of AXA Cooperative

The company is doing well in the area of innovating new ways of operating, different from what the competitors in the Saudi market are performing (Taher & Hajjar,2013). For example, they have invested in a high number of customer care support, who receive calls in case of complaint from the customers. Also, the team is heavily engaged in researching the company’s products, to determine what the customers want in the market. For example, there is an improvement in the motor vehicle insurance policy, whereby some time back, individuals had to personally report the case(Stephens & Thompson,2014). AXA has simplified this process, where a person can call and get the forms via a short code message. The company later sends a surveyor to asses the claim, hence saving time on the side of the client. This move has significantly improved the quality of the services, therefore attracting diverse clients. Likewise, the company’s products are affordable compared to other large companies operating in the same space, thus improving their competitive edge.

Moreover, the company has afforded penetration in different parts of the world, other than the Kingdom of Saudi Arabia. Therefore, this makes it gain trusts from many clients since the pool of fund is enormous(Alkhamis,2017). The decision to open different outlets to represent the mother company is a way that has permitted reaching of the people deep in their central cities, and the consequence is improved returns. What’s more, AXA lacks the working structures specificallydesigned for the individual countries they operate in. Instead of having to be tied to the original operation strategy, every outlet should be allowed to developa specialized format, that fits the culture of the native citizens.

The opportunities for AXA cooperative are extensive and promising. Recently, Saudi Arabia made it compulsory for all motor vehicles to be insured. This is a tremendous opportunity to tap into, that the company can leverage on. Similarly, the healthcare sector is widely grown, and demand has been rising of people to cover their health. The two forms the basis of operations of all insurance companies in Saudi, but the market is vast. Another area that is emerging in property policy, due to the advance of the real estate business.

The major challenge that is posing to affect the AXA Cooperative is the continued changes of regulations by the government and regulatory bodies. Due to this, the company has recurrentlychanged its mode of operation, and sometimes adjust their product offering to meet the varying demands. Also, convincing the people to join AXA Cooperative requires substantial investment in terms of capital. The company needs to come up with a way of cutting operating cost, such as the use of modern technology to reduce human labor.

Recommendations and Conclusion

Since the healthcare sector is widening and the populace in the Kingdom of Saudi continues to seek medical services, the AXA Cooperative should extend its cover by probably reducing the premiums for youth who form the highest percentage of the Saudi population. Similarly, it should focus on real estate, which is an upcoming business. More investors would want their building covered among other assets, that would see this sector attracts other insurance companies. Being among the early initiators of offering policy in this line would increase its revenue base in the future.