Traffic on King Fahd Road in Riyadh. While the kingdom has in many ways been the pioneer in creating mandatory health insurance, it has lagged in creating opportunities for some of the other key insurance lines such as motor insurance. Image Credit: Reuters

Dubai: In terms of relative maturity and the depth of its internal processes, Saudi Arabia's insurance industry may not stand comparison with the systems in the UAE or Bahrain. But this is now being turned into an advantage by the Saudi authorities.

Even as new players are being created, the kingdom is putting in place a regulatory regime that sets the bar high and backing it with strict compliance norms.

When all the newly established processes are in sync, Saudi Arabia should be well on its way to establishing itself as the premier insurance market in the region, expected during the second half of the decade.

The latest regulatory reform relates to the setting up of an ‘audit committee' by all insurers and reinsurers operating in the kingdom.

Put out in late July, the draft regulation calls on all players to create internal systems to maintain records and thus be in compliance with the new regulations.

Furthermore, the findings of the annual audits and the effectiveness of internal control procedures should be included in the report of the company directors, said Clyde & Co, the law firm, in an overview of the regulations.

"Companies must establish suitable written controls and procedures to ensure and monitor compliance [including compliance of all contracted parties]," the report said.

"Companies must also maintain adequate records to demonstrate their compliance with the regulation [for example, minutes of meetings held and reports and recommendations issued]."

Insurers will not have wiggle room on implementation — the authorities are putting in sufficient muscle if they do not comply. Non-compliance will lead to enforcement action by the Saudi Arabian Monetary Agency, though at this point it has not been spelt out as to what this will entail.

Long way to go

According to industry sources in the Gulf, Saudi Arabia's insurance sector still has a long way to go before its full potential can be attained. While the kingdom has in many ways been the pioneer in creating mandatory health insurance, it has lagged in creating opportunities for some of the other key lines.

These gaps are now being filled gradually, and the entry of more and more players is part of that process. But the presence of more players requires more active scrutiny, both at the regulator level and internally. The new regulation is a step in the latter direction.

"Given the relative newness, ownership structure, prospects and the pace of the sector's growth, a strong audit regime as envisioned by the audit regulation will serve to foster a rigorous level of best practices and a sound and transparent sector," said Youil Homsi, MetLife Alico's associate vice-president and regional director for Saudi Arabia and new markets in the Middle East, Africa and South Asia territory. (With its new joint venture under formation in Saudi Arabia, MetLife Alico will be compliant with the regulation.)

"There are several differences between the Saudi Arabia and [the rest of the] GCC insurance markets, and where the regulation goes beyond what is in existence in other GCC markets, it is tailored to be appropriate for the sector in Saudi Arabia."

Committee members

So who gets to man the audit committee? Ideally involving three to five members, such a committee should seek not involve executive managers, employees or consultants from the company's own ranks. Moreover, a member should not reprise a similar role with any other insurance company and nor should he be the founder of such a company.

According to the regulations, an audit committee can be set up by an insurer's board and serve out a three-year term on receipt of Sama's written approval. It may also go in for a further three-year extension.

However, "Sama has the right to dismiss a member of the audit committee in case of any violation of the regulation or the law on Supervision of Cooperative Insurance Companies and its implementing regulation," the Clyde & Co report added.

"Should a vacant position arise in the audit committee, having gained Sama's written approval, the board may appoint a new member to complete any outgoing member's term of appointment."

According to Homai, "the regulation specifies several significant functions for the audit committee — recommendation on appointment of the external auditor, compliance officer, internal auditors and actuary, following important lawsuits of the company and reporting regularly to the board, reviewing and approving annual and quarterly financial statements, assessing the adequacy of technical provisions, among others.

"This is quite an extensive scope, and carried out well, should be satisfactory to the company's stakeholders. We expect the sector to maintain its strong growth and to experience enhanced quality and profitability, reflective of Saudi Arabia's overall economic plans and prospects."

Members to decide

The general assembly of shareholders will issue rules on the appointment of audit committee members, on the recommendation of the board, according to the draft regulation on the formation of audit committees for the insurance industry.

The chairman of the audit committee must provide the Saudi Arabian Monetary Agency (Sama) with copies of reports, recommendations and related decisions issued by the company within seven working days.

Some of the responsibilities coming under the audit committee's ambit include:

  • Submitting recommendations to the board to approve the appointment or reappointment of external auditors, the compliance control manager, the compliance officer, the manager of the internal audit department or the internal auditor and the actuary (on receipt of Sama's written approval).
  • Ensuring the independence of external auditors from the company, board and the senior management of the company, the internal audit department or the internal auditor in the performance their duties.
  • Ensuring the company's compliance with actuary recommendations.
  • Reviewing the audit plan of the internal and external auditors and the critical accounting policies and procedures.
  • Coordinating internal and external auditors.