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Insurance and reinsurance in Saudi Arabia: overview
A Q&A guide to insurance and reinsurance law in Saudi Arabia.
The Q&A gives a high level overview of the market trends and regulatory framework in the insurance and reinsurance market; the definitions for a contract of insurance and a contract of reinsurance; the regulation of insurance and reinsurance contracts; the forms of corporate organisation an insurer can take; and the regulation of insurers and reinsurers, including regulation of the transfer of risk. It also covers: operating restrictions for insurance and reinsurance entities; reinsurance monitoring and disclosure requirements; content requirements for policies and implied terms; insurance and reinsurance claims; remedies; insolvency of insurance and reinsurance providers; taxation; dispute resolution; and proposals for reform. Finally, it provides websites and brief details for the main insurance/reinsurance trade organisations in Saudi Arabia.
To compare answers across multiple jurisdictions visit the Insurance and reinsurance Country Q&A tool.
This Q&A is part of the global guide to insurance and reinsurance. .
Market trends and regulatory framework
1. What were the main trends in the insurance and reinsurance markets over the last 12 months?
Insurance
The insurance sector in the Kingdom of Saudi Arabia (KSA) has experienced a strong rate of growth in recent years, notably led by a set of structural and regulatory reforms implemented by the government in 2005. Subsequently, the industry’s gross written premium (GWP) grew from US$2.9 billion in 2008 to US$9.7 billion in 2015. Still, at 1.4% of GDP, insurance penetration in Saudi Arabia is among the lowest in the region as well as globally.
Mandatory health and motor insurance regulations launched by the government have resulted in a high demand for insurance products in the country, and are likely to remain the key driver for industry growth in the medium term. It is estimated that only 45% of the cars are covered by insurance, while only 57% of the private sector Saudi workforce has medical insurance.
The KSA currently has 35 licensed insurance and reinsurance companies. However in light of recent losses reported by some insurers in the KSA, experts anticipate consolidation in the insurance market in the next few years. Of the 35 insurance companies operating in the country, 17 reported losses in 2015 and as such a number of insurance companies have called for either a capital increase or a capital reduction in the last quarter of 2016 and the first quarter of 2017. While this may provide some breathing space, slowing GWP growth is likely to challenge a number of insurers who have been chasing growth. This could hasten consolidation in the sector, and at least two insurance companies are expected to wind up their business as of April 2017. We also understand that a number of insurance companies are exploring potential mergers or acquisitions.
The recent slowdown in the KSA insurance market appears to be driven by lower investment returns as a result of the decline in oil prices and fierce price competition between insurers.
Although profits of insurers in the KSA as a whole have increased, the gap between the larger and smaller insurers is increasing. For example, in 2014, the top three insurers in the KSA accounted for 53% of gross written premiums in the market, while the smallest ten insurers shared less than 5% of the market. Moody’s believes that the average premiums reported previously demonstrate overcapacity in the market. The insurance regulator, the Saudi Arabian Monetary Agency (SAMA) is reported to be working with the boards of insurers to develop plans for consolidation and increasing profitability.
Health insurance and motor insurance continue to dominate the direct insurance sector with premiums at 52% and 29% respectively in 2015 (motor insurance grew by 3% of total market premiums between 2014 and 2015).
Visitors to the KSA must now take out compulsory medical cover from one of the seven insurance companies licensed to provide healthcare insurance. The Council of Co-operative Health Insurance is also preparing a strategy to deal with the medium- and long-term goals of the health insurance industry.
Reinsurance
Although the overall retention of insurers in the KSA is increasing, the KSA insurance market remains heavily reliant on foreign reinsurance, with many leading insurance companies ceding large percentages of gross premiums. This is partly due to the lack of capacity and a lack of the requisite technical capabilities at domestic insurers (particularly for property and casualty). Latest reports indicate that the retention rate of insurance companies has increased to about 80%. This figure is skewed by health and motor insurance, which had retention rates of 96% and 92% respectively, while the retention rates in other lines of business are significantly lower (accidents and liabilities: 48%, marine: 34%, engineering: 18%, energy and aviation: 2%).
2. What is the regulatory framework for insurance/reinsurance activities?
Regulatory framework
Insurance and reinsurance in the Kingdom of Saudi Arabia (KSA) is governed by the Law On Supervision of Co-operative Insurance Companies, Royal Decree No M/32 of 2 Jumada Thani 1424 Hejra (31 July 2003) (Insurance Law). The Insurance Law applies to all registered companies undertaking insurance business in KSA including insurance brokers and insurance service providers.
The Insurance Law is supplemented by the Implementing Regulations 2003 published by the Saudi Arabian Monetary Agency (SAMA) on 23 April 2004 (Implementing Regulations) and other regulations issued by SAMA including:
- Insurance Market Code of Conduct Regulations 2008.
- Risk Management Regulation 2008.
- The Regulation of Reinsurance Activities 2010.
- Insurance Intermediaries Regulation 2011.
- Investment Regulations 2012.
- Outsourcing Regulation for Insurance and Reinsurance Companies and Insurance Service Providers 2012.
- Surplus Distribution Policy 2015.
- Insurance Corporate Governance Regulations 2015.
- Audit Committee Regulation in Insurance and/or Reinsurance Companies 2015.
- Actuarial Work Regulation for Insurance and/or Reinsurance Companies 2016.
Occasionally, SAMA also publishes circulars to clarify the operation of the Insurance Law and Regulations.
All insurance/reinsurance companies must be publicly listed joint stock companies (Article 3, Insurance Law) (see Question 6). As such, insurers are also subject to the laws and regulations of the Capital Market Authority (CMA) and its Listing Rules (issued in 2004, amended in 2012 and in 2016); as well as the laws and regulations of the Ministry of Commerce and Investment (MOCI) and notably the KSA Companies Law.
Along with other Gulf States, the KSA has implemented a compulsory health insurance scheme, which was established by the Co-operative Health Insurance Law (No 71) in 1999 (and since amended). The health insurance sector is also regulated by the Council of Co-operative Health Insurance (CCHI), which has published additional regulations, including:
- Implementing Regulation of the Co-operative Health Insurance Law.
- Co-operative Health Insurance Policy.
CCHI has published further circulars and other guidance, to be read alongside the Health Insurance Law.
Regulatory bodies
The primary regulator of the insurance and reinsurance sector in KSA is SAMA while health insurers are also supervised by the CCHI. Locally registered insurers, which must be publicly listed joint stock companies, are also regulated by the CMA and must also comply with the laws and regulations of the MOCI, the regulator for commercial companies. Finally, in the event that an insurance/reinsurance company has foreign shareholders, they will be additionally required to obtain a foreign investment licence from the Saudi Arabia General Investment Authority (SAGIA), and to abide by the Foreign Investment Act.
Regulation of insurance and reinsurance contracts
3. What is a contract of insurance for the purposes of the law and regulation? How does it differ from a contract of reinsurance?
The Insurance Law requires insurers in the Kingdom of Saudi Arabia (KSA) to adopt a co-operative insurance model. The most notable feature of the co-operative insurance model is that 10% of the net surplus of an insurer must be distributed directly to policyholders or be applied towards a reduction in premiums for the next year (Article 70, Implementing Regulations).
The Saudi Arabian Monetary Agency (SAMA) published its Surplus Distribution Policy in 2015 which provides further guidance on how to calculate and apply the surplus.
A co-operative insurance model is distinct from the more commonly known takaful insurance model, which is a sharia compliant model for insuring losses. While takaful also includes the concept of a distribution of surplus to policyholders, the main distinction between the two models is that under the co-operative model:
- Policyholder funds and shareholder funds do not need to be segregated.
- A co-operative insurance company is not required to invest in accordance with sharia principles.
- A co-operative insurance company is not required to appoint a sharia board.
The Implementing Regulations set out the following definitions in relation to contracts of insurance and reinsurance:
- Insurance: a mechanism of contractually shifting burdens of pure risks by pooling them.
- Risk: a situation involving the chance of loss or no loss, but no chance of gain.
- Insurance policy: Legal document/contract issued to the insured by the insurer setting out the terms of the contract to indemnify the insured for loss and damages covered by the policy against a premium paid by the insured.
- Reinsurance: transfer of the insured’s risk from the insurer to the reinsurer and to indemnify the insurer by the reinsurer for any payments made to the insured against damages or loss.
The definition of risk provides that there must be the chance of loss or no loss, but no chance of gain. In referring to “chance”, KSA law therefore recognises the concept of a fortuity, although this term is not expressly used, nor further defined.
The insurable interest must be taken into account when completing the insurance application (Article 55, Implementing Regulations). No definition of insurable interest is provided in the legislation/regulations. However, the FAQs on SAMA’s website provide that an insurable interest is the legal right of a natural or juristic person to insure an object (for example, a car). To insure an object there must be a verifiable legal relationship between the person and the subject of insurance. An example of legal relationship is “ownership”. For example, if you own a house or a car, you have the right to insure it, whereas a person may not insure his neighbour’s house, due to the absence of an insurance interest.
4. Are all contracts of insurance/reinsurance regulated?
All contracts of insurance and reinsurance, when issued by a KSA-licensed insurer, are regulated under the Insurance Law and subject to the supervision of the Saudi Arabian Monetary Agency (SAMA). Insurance and reinsurance contracts in the health insurance sector must comply with requirements as set out by the Council of Co-operative Health Insurance (see also Question 2). Under the Insurance Law, the Implementing Regulations and the Regulation of Reinsurance Activities 2010, SAMA has a broad ability to determine what is and is not a contract of insurance or reinsurance.
Reinsurance treaties signed between a KSA-registered company and a foreign reinsurer can be made subject to non-KSA law. However, all such agreements must be first submitted to SAMA for pre-approval before execution.
Corporate structure
5. What form of corporate organisation can insurers take?
Under the Insurance Law, all insurance and reinsurance companies in the KSA must be established as a publicly listed joint stock company (PJSC). Although in theory there is scope for branches of foreign insurance companies to be established (as per KSA’s accession agreement to the World Trade Organization), in practice, no such branches have been established to date.
Insurance companies operating in the KSA must comply with the following minimum requirements:
- Have a paid up capital of SAR100 million (for insurance activities) or SAR200 million (for reinsurance activities).
- Set aside no less than 20% of their profits as a statutory reserve until the reserve amounts to 100% of paid capital.
- Provide a statutory deposit of 10% of the paid up capital (15% if the Saudi Arabian Monetary Agency (SAMA) decides that the risk profile of the company warrants it) into a bank designated by SAMA within three months of the date of SAMA issuing the licence in favour of the company.
Regulation of insurers and reinsurers
6. Are all insurers and reinsurers regulated? Are they all regulated in the same way?
All insurers and reinsurers registered in the KSA are regulated by the Saudi Arabian Monetary Agency (SAMA). Other than the varying capital requirements (see Question 5) there is no material difference in the way insurance and reinsurance companies are regulated.
7. Can insurers and reinsurers carry on non-insurance business? Are there any restrictions on their business activities?
The “main object” of an insurance or reinsurance company is to “engage in insurance and reinsurance activities and not to undertake any other activities unless they are complementary or necessary” (Article 3(2), Insurance Law). Accordingly, insurance and reinsurance companies must not carry out non-insurance business, unless the business is complementary or necessary for the insurance/reinsurance business. In the event that any non-insurance business is proposed to be undertaken, the appropriate approvals must be sought from the Saudi Arabian Monetary Agency.
8. Are there any statutory limits or other restrictions on, or requirements relating to, the transfer of risk by insurance or reinsurance companies?
Risk transfer by insurance and reinsurance companies in the Kingdom of Saudi Arabia (KSA) is regulated by the Implementing Regulations and the Regulation of Reinsurance Activities 2010. The key requirements in relation to retentions are:
- The Boards of Directors of a KSA insurer must prepare the insurer’s reinsurance strategy, which must be approved, documented and implemented within three months of the company’s authorisation. The reinsurance strategy must be updated at least annually and must be submitted to the Saudi Arabian Monetary Agency (SAMA) for approval by 30 April each year.
- Any insurance or reinsurance company registered in the KSA must both:
- retain at least 30% of its total insurance premium; and
- reinsure at least 30% of its total premium in the KSA (Article 40, Implementing Regulations).
- To depart from these percentages, the written approval of SAMA is required.
- If an insurance or reinsurance company obtains reinsurance from a reinsurer outside the KSA, it must comply with a number of requirements as set out in Article 42 of the Implementing Regulations, including:
- the insurance supervisor of the foreign reinsurer must authorise the exchange of relevant information with SAMA;
- the foreign reinsurer must retain separate records of all KSA-related business and be ready to provide these to SAMA on request.
- In addition, the foreign reinsurer must have, at a minimum, any of the following ratings:
- A.M. Best Company: B+;
- Fitch: BBB;
- Moody’s: Baa; or
- Standard & Poor’s: BBB.
- If the foreign reinsurer’s ratings fall below these levels, the cedant must immediately notify SAMA and take appropriate steps to protect its policyholders.
- If the foreign reinsurer is located in a country with a sovereign debt rating from Standard & Poor of less than BBB (or equivalent from the other ratings agencies), or the country is not rated, then written approval from SAMA is required (Article 16, Regulation of Reinsurance Activities 2010).
- Reinsurance treaties must be submitted to SAMA to obtain SAMA’s “no objection” within two months of the reinsurance treaty renewal date. SAMA must be notified within seven days of the cancellation or termination of any reinsurance treaty for any reason.
- Facultative reinsurance (that is, reinsurance covering a single risk) that can be placed if either:
- the size of the risk exceeds the capacity of the company’s treaty (that is, a reinsurance contract covering all risks of a certain class); or
- if no treaty is in place.
- SAMA’s approval is required where the insurance/reinsurance company wishes to place facultative reinsurance that exceeds the capacity of its treaty by more than three times.
Article 17 of the Regulation of Reinsurance Activities 2010 provides that insurance companies must demonstrate that their insurance policies are “no wider” than the relevant reinsurance policies behind them. Any exclusions in the reinsurance policy must be reflected in the direct insurance policy. The insurance company must report on any discrepancies between its insurance coverage provided and reinsurance protection obtained and take steps to reconcile the differences (Article 41, Implementing Regulations).
Operating restrictions
Authorisation or licensing
9. Does the entity or person have to be authorised or licensed?
Insurance/reinsurance providers
To conduct insurance business in the Kingdom of Saudi Arabia (KSA), insurance/reinsurance companies must be licensed by the Saudi Arabian Monetary Agency (SAMA), operate in the co-operative manner (see Question 3) and must operate in accordance with the principles of sharia. Any company/individual operating within the KSA insurance sector is prohibited from dealing with unlicensed insurers/insurance service providers (Article 19, Implementing Regulations).
If the insurance/reinsurance company is to be owned by a non-KSA national, a foreign investment licence from the Saudi Arabia General Investment Authority (SAGIA) is additionally required.
Insurance/reinsurance intermediaries
Insurance brokers, insurance agents or other intermediaries must be licensed by SAMA to operate in the KSA. As above, it is not permitted for any company to deal with an unlicensed insurance intermediary.
If the insurance intermediary is to be owned by a non-KSA national, a foreign investment licence from SAGIA is additionally required.
Other providers of insurance/reinsurance-related activities
Insurance/reinsurance-related service providers, such as loss adjusters or third party administrators, must be licensed by SAMA in order to operate in the KSA. The prohibition on dealing with unlicensed entities in Article 19 of the Implementing Regulations also prohibits insurers from dealing with unlicensed insurance/reinsurance related service providers.
Health insurance third party administrators are also governed by the Regulations of Qualification of Health Insurance Claims Managers issued by the Council of Co-operative Health Insurance (CCHI).
10. What are the main exemptions or exclusions from authorisation or licensing?
Insurance/reinsurance providers
In general, there are no exemptions or exclusions from authorisation or licensing for insurance/reinsurance providers in the Kingdom of Saudi Arabia (KSA). The provider must be licensed by the relevant regulator as detailed in Question 9. It is possible for risks in the KSA to be placed with insurers outside KSA only in limited circumstances where a risk cannot be placed with a KSA-licensed insurer. In order to do so, an insurance intermediary placing the risk must obtain written approval from the Saudi Arabian Monetary Agency (SAMA) (Article 34, Insurance Intermediaries Regulations (2011)). We understand that this route is rarely used in practice.
Insurance/reinsurance intermediaries
All insurance/reinsurance intermediaries must be licensed by SAMA.
Other providers of insurance/reinsurance-related activities
All insurance/reinsurance-related service providers must be licensed by SAMA.
Restrictions on ownership or control
11. Are there any restrictions on the ownership or control of insurance-related entities?
Insurance/reinsurance providers
The Saudi Arabian Monetary Agency (SAMA) has issued an “ownership structure and percentage” table, based on which non-KSA nationals may own between 25% and 49% of a KSA insurance or reinsurance company. The percentage of permitted foreign ownership depends on a number of factors, including the identity of the other shareholders. Insurance and reinsurance companies partially owned by non-KSA nationals must also obtain a foreign investment licence from the Saudi Arabia General Investment Authority (SAGIA).
Approval must be obtained from SAMA for any shareholding (that is, whether owned by a KSA-national or foreign national) over:
- 2% for individuals.
- 5% for companies.
Owners of insurance and reinsurance companies must be of good conduct and reputation with no convictions by a court affecting their honour or integrity (Article 10, Implementing Regulations).
As all KSA insurance companies must be public companies and listed, they are also subject to the Listing Rules, and, in particular, Article 45 which establishes a mandatory notification to the Capital Market Authority (CMA) if one shareholder in a listed company becomes the owner of, or interested in, 5% or more of any class of voting shares or convertible debt instrument (see Question 12).
Insurance/reinsurance intermediaries
Under KSA foreign ownership restrictions, non-KSA nationals may own up to 60% of a KSA insurance or reinsurance intermediary. The percentage of permitted foreign ownership depends on a number of factors, including the identity of the other shareholders. Non-KSA nationals must also obtain a foreign investment licence from SAGIA.
Owners of insurance and reinsurance intermediaries must be of good conduct and reputation with no convictions by a court affecting their honour or integrity (Article 10, Implementing Regulations).
Other providers of insurance/reinsurance-related activities
This is the same as for insurance/reinsurance intermediaries (see above, Insurance/reinsurance intermediaries).
12. Must owners or controllers be approved by or notified to the relevant authorities before taking, increasing or reducing their control or ownership of the entity?
Insurance/reinsurance providers
As a general rule, the Saudi Arabian Monetary Agency (SAMA) must be notified of any changes in the ownership of a KSA insurance/reinsurance company as follows (Article 38, Implementing Rules):
- The insurance/reinsurance company must notify SAMA of the percentage ownership of any person or entity that owns 5% or more of the company in a quarterly report.
- Any person or entity that owns 5% or more of the shares of an insurance/reinsurance company must notify SAMA in writing both of the ownership, and of any change, within five working days of the change.
As KSA insurance/reinsurance companies are public joint stock companies (PJSCs) and publicly listed, any change in their ownership must also be notified to the Capital Market Authority (CMA). In addition, if the ownership changes in a non-KSA owned company, the Saudi Arabia General Investment Authority’s (SAGIA’s) approval must be obtained. The CMA’s regulations also set out various duties on shareholders of listed companies, including:
- Disclosure of material changes in ownership above 5%.
- A requirement to seek the CMA’s approval where there is to be a disposal of shares by a shareholder who owns or has an interest in 10% or more of shares with voting rights or convertible bonds.
- Public disclosures in relation to changes in controllers must be made in accordance with the CMA’s listing rules.
Insurance/reinsurance intermediaries
As with insurance/reinsurance companies, any changes to the ownership of an insurance intermediary must be notified to SAMA and/or SAGIA as appropriate (the latter if there is a change in ownership in a non-KSA owned company).
Any insurance intermediary that is incorporated as a limited liability company will need to update its articles of association with the Ministry of Commerce and Industry.
Other providers of insurance/reinsurance-related activities
This is the same as for insurance/reinsurance intermediaries (see above, Insurance/reinsurance intermediaries).
Ongoing requirements for the authorised or licensed entity
13. What are the key ongoing requirements with which the authorised or licensed entity must comply?
Insurance/reinsurance providers
The Capital Market Authority (CMA) rules and regulations and the Insurance Law provide for a number of obligations with which insurance and reinsurance companies must comply. These can be divided into periodic and ad hoc obligations.
Periodic obligations. These include:
- Announcing annual financial results on the Saudi Arabian Stock Exchange (that is, Tadawul).
- Publishing summary financial statements on the Stock Exchange.
- Sending detailed financial statements, auditors’ report and board of directors’ report to the CMA.
- Providing the CMA with a report on compliance with the Corporate Governance Regulations issued by the CMA.
- Reporting to the Saudi Arabian Monetary Agency (SAMA) in relation to the KSA insurer’s reinsurance arrangements (seeQuestion 8).
- Annual reports to SAMA in relation to the board of directors, managing directors, general managers, senior managers of the company and the percentages of Saudi and non-Saudi employees.
- Quarterly reports to SAMA in relation to the company’s owners (see Question 12).
Ad hoc obligations. These include:
- Disclosing material developments (such as a debt or transaction which is equivalent to 10% or more of the company’s net assets).
- Promptly notifying the CMA of noticeable change in the ownership or the identity of shareholders owning more than 5%.
- Announcing on the Stock Exchange any change in the memorandum or articles of association.
- Announcing on the Stock Exchange any change of auditor.
- Obtaining SAMA’s approval for any mergers, acquisitions, transfer of ownership and opening of new branches by any insurance company or intermediary.
Insurance/reinsurance intermediaries
Insurance and reinsurance intermediaries are generally established in the KSA as limited liability companies. Therefore, their reporting requirements are less onerous and they are required simply to report quarterly to SAMA, as specified in Article 55 of SAMA’s Insurance Intermediaries Regulation, providing their financial information in the form provided by SAMA available on their website.
Other providers of insurance/reinsurance-related activities
This is the same as for insurance/reinsurance intermediaries (see above, Insurance/reinsurance intermediaries).
Penalties for non-compliance with legal and regulatory requirements
14. What are the possible consequences of an entity failing to comply with applicable legal and regulatory requirements? What recourse do policyholders have if they have done business with a non-approved entity?
Insurance/reinsurance providers
The Saudi Arabian Monetary Agency (SAMA) has very broad powers to enforce the Insurance Law and its regulations. Its powers include the ability to:
- Appoint a consultant to run the business activities of the company.
- Suspend or dismiss any board member or employee responsible for a violation.
- Prevent the company from admitting new subscribers, investors or participants.
- Demand that the company be wound up.
- Impose fines of up to SAR1 million or impose a prison sentence of up to four years or a combination of the two.
- Call on the statutory deposit.
- Compel the company to take any steps that SAMA deems necessary.
In relation to non-admitted insurance by a foreign insurer, SAMA may also apply to the Insurance Disputes Committee to have the policy declared void and for damages to be paid to the insured for losses. SAMA may also complain to the foreign insurer’s domestic regulator.
As all insurance and reinsurance companies are publicly listed, they must also comply with the requirements of the Listing Rules, as published by the Capital Market Authority (CMA). Failure to do so could lead to CMA imposing sanctions, for example, CMA has the power to suspend the trading of shares in the company.
Insurance/reinsurance intermediaries
This is the same as for insurance/reinsurance providers in relation to SAMA’s powers (see above, Insurance/reinsurance providers).
Other providers of insurance/reinsurance-related activities
This is the same as for insurance/reinsurance providers in relation to SAMA’s powers (see above, Insurance/reinsurance providers).
Restrictions on persons to whom services can be marketed or sold
15. Are there any restrictions on the persons to whom insurance/reinsurance services and contracts can be marketed or sold?
There are generally no restrictions on the marketing or sale of insurance/reinsurance services to policyholders, provided the policyholder has legal capacity, subject to the restrictions in the Implementing Regulations, which provide that insurance policies may not be issued or renewed to any of the insurance company’s directors, senior and executive managers and any related parties, except where full premium has been paid. The Insurance Market Code of Conduct Regulations 2008 defines related parties as “close family members, wives, husbands, children, parents, brothers, sisters and any establishment in which any member of the board of directors has more than 5% interest”.
Reinsurance monitoring and disclosure requirements
16. To what extent can/must a reinsurance company monitor the claims, settlements and underwriting of the cedant company?
This is not provided for in the current legislation in the Kingdom of Saudi Arabia (KSA). Therefore, these issues must be addressed in the reinsurance contract.
17. What disclosure/notification obligations does the cedant company have to the reinsurance company?
The law does not substantively deal with the disclosure/notification obligations of a cedant company to its reinsurer. Therefore, these issues must be addressed in the reinsurance contract. In addition, the general principles of good faith (which are implied under sharia law) and the obligations to disclose material facts applicable between insured and insurer are generally held to be applicable (as appropriate) to insurer and reinsurer. For example:
- Article 55 of the Implementing Regulations contains a duty on the insured to provide all material facts related to the insurance policy.
- Article 42 of the Insurance Market Code of Conduct Regulations 2008 provides that (under the guise of an obligation of the insurer), those insured have an obligation to provide “full and honest disclosure of all relevant information needed to determine the insurance needs and underwrite the risk”. The customer must only be expected to “advise the companies of information that a reasonable person would regard to be relevant”.
Insurance and reinsurance policies
Content requirements and commonly found clauses
18. What are the main general form and content requirements for insurance policies? What are the most commonly found clauses?
Form and content requirements
The Implementing Regulations require that the Saudi Arabian Monetary Agency’s (SAMA’s) written approval is obtained before any insurance product can be marketed. Further, an insurance policy must meet the following general requirements:
- Be written in Arabic (and made available in English upon the customer request), use simple language and sentence structure and be printed in clear, readable text, with no fine print.
- Specify all coverage benefits, general terms, conditions and exclusions.
- Contain a schedule that specifies certain minimum information, including policy number, policyholder name and address, coverage period, coverage descriptions and limits, deductibles and retentions, conditions and exclusions.
- Include within the endorsements and riders any additional covers, conditions and exclusions.
- Bear the insurance company’s signature and seal.
- Contain a disclosure statement indicating that the policy wording is the whole contract.
- Contain a description of the insured’s duties after a loss.
- Contain a description of the claims handling and dispute resolution processes.
SAMA and the Council of Co-operative Health Insurance (CCHI) publish standard form wordings in relation to certain other products, for example motor insurance and health insurance respectively (see Question 22).
Commonly found clauses
Policy wordings issued in the Kingdom of Saudi Arabia (KSA) are generally based on London market wordings. For example, LM7 wording is commonly used for property policies.
19. Is facultative or treaty reinsurance more common? What are the most commonly found clauses in reinsurance policies?
Facultative/treaty reinsurance
Although both facultative and treaty reinsurance policies are used in the Kingdom of Saudi Arabia (KSA), Article 23 of the Regulation of Reinsurance Activities 2010 states that “it is anticipated that most reinsurance will be placed into treaties in line with best international practice”.
Commonly found clauses
Reinsurance policies are generally based on international wording, particularly those of the London market. Claims control/claims co-operation clauses and clauses specifying that the reinsurance is “back-to-back” with the underlying insurance are commonly used in the KSA.
Implied terms
20. Are there any terms that are implied by law or regulation (even if not included in the insurance or reinsurance contract)?
As noted above (see Questions 17 and 18):
- Under the principles of sharia, a duty of good faith will be implied into every insurance and reinsurance contract.
- The Kingdom of Saudi Arabia (KSA) law requires certain minimum requirements to be met in insurance policy wordings.
- Insurers have a duty to notify customers that they must disclose all material facts. The Insurance Consumer Protection Principles (July 2014) also provides that consumers should always present full and accurate information and not give any misleading information, nor conceal important and material information.
It is likely that the Insurance Disputes Committee would imply the above terms into an insurance contract. Aside from the above, the Insurance Law and accompanying regulations do not generally imply terms into insurance/reinsurance contracts.
Customer protections
21. How do customer protections in the general law affect insurance contracts? What customer protections are generally included in insurance policies to supplement this?
General law
The Insurance Law and accompanying regulations contain a number of provisions to protect customers/policyholders, including (but not limited to) the following:
- General requirements. Insurance companies must:
- act in an honest, transparent and fair manner, and fulfil their obligations to customers in accordance with applicable laws, regulations, and the Saudi Arabian Monetary Agency (SAMA) guidelines;
- not unfairly discriminate between customers. Treatment must not differ based on customer (exiting or potential) race or gender;
- communicate all relevant information to customers in a timely manner to enable them to make informed decisions;
- take reasonable measures to identify and address conflicts of interest to ensure fair treatment and must disclose such conflicts to customers.
- Pre-sale. Insurance companies must provide the insured with access to the policy terms and conditions in advance of issuing the policy. Further, every protections and savings insurance policy must provide a “free look” period of 21 days to allow the policyholder to assess suitability.
- Underwriting. Insurance companies must price policies:
- fairly, reasonably and accurately;
- in accordance with the insurance company’s underwriting guidelines, with adequacy and appropriateness to the risk;
- in accordance with justifications and bases that have been provided to and approved by SAMA.
- Renewals. Insurance companies must inform customers of the policy renewal or expiry date in a timely fashion to allow them to arrange continuing coverage.
- Claims handling. Insurance companies must settle:
- individual policyholder claims within 15 days of receiving all requested and necessary documents (this may be extended by 15 days with notification to the regulatory compliance officer);
- commercial entity claims within 45 days of receipt of all requested and necessary documents, including a loss adjuster’s report.
- Complaints. Insurance companies must respond to complaints within 15 days.
- Cancellations. Cancellation terms must be clearly stated in the policy and be fair, reasonable and appropriate. Insurance companies cannot cancel a valid policy except for reasons stated in the cancellation clause and must refund the premium on a pro rata basis, with a 30 day minimum period of cover. The insurance company must provide credible reasons for denying, cancelling and not-renewing policies without discrimination and unfair treatment.
- Brokers and agents. Insurance brokers and agents must provide sound advice to the insured and disclose all facts and risks associated with the policy. Insurance brokers and agents must disclose their commission and fees to the insured, not combine insurance and reinsurance broking activities, strive to obtain the most appropriate coverage and price, and disclose the benefits under the policy in comparison with other policies. Brokers and agents must provide the insured with adequate information regarding the policy, including:
- coverage limits;
- exclusions;
- premium amount;
- inception and expiration dates;
- conditions;
- identity of the insurance company.
Many of these duties and obligations have also been codified in the Insurance Consumer Protection Principles (July 2014) published by SAMA. As well as going into more detail regarding the specific protections, the document sets out a number of key principles guiding consumer protection.
Insurance policies
See above, General law.
Standard policies or terms
22. What are the main standard policies or terms produced by trade associations or relevant authorities?
There are no trade associations in the Kingdom of Saudi Arabia (KSA). The regulators, the Saudi Arabian Monetary Agency and the Council of Co-operative Health Insurance respectively have published a Unified Compulsory Motor Insurance Policy and Co-operative Health Insurance Policy (both available on their websites).
Insurance and reinsurance policy claims
Establishing an insurance claim
23. What must be established to trigger coverage under an insurance policy?
Under Kingdom of Saudi Arabia (KSA) law, a claimant must establish that it is insured under the policy (and therefore may bring the claim) and that it has suffered an insured loss that falls within the terms of the policy.
KSA law (based essentially on Islamic sharia) recognises to a large extent the freedom of the parties to contract and, therefore, late notification provisions have previously been upheld. However, interpretation of KSA law is always subject to the principles of fairness contained within sharia law and the KSA courts may not uphold late notification clauses if they are seen to be unduly onerous. The principle of fairness cuts both ways and the Insurance Disputes Committee will equally uphold late notification provisions if they are not unduly onerous and if the party giving late notice has no reasonable excuse.
Third party insurance claims
24. What are the circumstances in which third parties can claim under an insurance policy?
Unless the rights of third parties are specifically provided for in the contract of insurance (for example, if the third party is named as a beneficiary under the policy), third parties do not have a right to claim under an insurance policy.
Time limits
25. Is there a time limit outside of which the insured/reinsured is barred from making a claim?
Under Kingdom of Saudi Arabia (KSA) law, the default position is that, subject to certain limited circumstances, there is no concept of time-bar, as sharia does not recognise statutory limitations due to a strict interpretation of the concept of a right not lapsing by passage of time. However, in the context of insurance, there are exceptions to the general position:
- The Saudi Arabian Monetary Agency’s (SAMA’s) Unified Compulsory Motor Insurance Policy provides that any action must be brought within three years of the incident.
- The procedural rules of the Insurance Disputes Committee provide that claims in respect of insurance disputes must be brought within five years of the due date of the claimed amount.
The above time limits may not apply if there is a reasonable excuse for not bringing the claim within that time period.
Enforcement
26. Can the original policyholder or other third party enforce the reinsurance contract against a reinsurer?
Generally, unless provided for in the reinsurance contract or if a right to claim is assigned by the insurer, an insured/third party cannot claim directly against a reinsurer. However, in circumstances where a cut-through clause exists it is possible that a Kingdom of Saudi Arabia (KSA) Court will allow a reinsurer to be added to proceedings. In practice the identity of the reinsurer is unlikely to be known to a third party.
Remedies
27. What remedies are available for breach of an insurance policy?
Insurer
The Insurance Law and regulations do not set out the remedies that are available to an insurer for breach of any policy conditions. Moreover, judicial decisions in Kingdom of Saudi Arabia (KSA) are not binding, nor published. Disputes in relation to an insurance claim must be brought before the Insurance Disputes Committee. In practice, the Insurance Disputes Committee is likely to recognise the following remedies available to an insurer:
- The insurer will be entitled to avoid the policy if the insured breaches its duty of disclosure or makes a misrepresentation.
- The insurer can refuse to pay a claim if the insured has breached a warranty and the breach of warranty caused the loss.
- Breach of a condition precedent will result in the insurer being able to argue that the policy is not in force.
- The insurer will also be able to cancel a policy for non-payment of a premium.
Insured
KSA law does not recognise bad faith, other than the general duty to perform obligations under the contract in accordance with the principles of good faith espoused by sharia. Therefore, an insured is generally not entitled to a remedy in respect of a violation of the law or regulations by an insurer. However, if the insurer’s conduct is particularly egregious, the Saudi Arabian Monetary Agency (SAMA) may become involved and can penalise the insurer by way of sanctions.
Punitive damage claims
28. Are punitive damages insurable? Can punitive damages be reinsured if they are covered by an underlying policy?
There is no doctrine of punitive damages under KSA law and these would most likely be prohibited under the principles of sharia.
Insolvency of insurance and reinsurance providers
29. What is the regulatory framework for dealing with distressed or insolvent insurance or reinsurance companies, or other persons or entities providing insurance or reinsurance related services? What regulatory and/or other protections exist for policyholders if the insurance company is insolvent?
Historically, KSA insolvency law has been fairly undeveloped. In relation to the insolvency of insurance companies, the Implementing Regulations permits the Saudi Arabian Monetary Agency (SAMA) to request the withdrawal of the licence of the insurance company in the event of insolvency. If the licence is withdrawn, Article 76 further provides that the business will be transferred to another licensed entity chosen by the policyholders and approved by SAMA. SAMA will directly supervise any settlements relating to existing policies in the event of insolvency.
To protect policyholders from the risk of insurer insolvency, the Implementing Regulations provide certain solvency requirements for insurance companies as follows:
- If an insurer’s solvency margin falls to between 75% and 100% of the requirement, then the insurance company must restore its margin by the end of the next financial quarter.
- If an insurer’s solvency margin falls between 50% and 75% of the required margin, the insurance company must restore its margin within two financial quarters. If it cannot do so then the insurance company must formulate and submit a corrective action plan to SAMA.
- If an insurer’s solvency margin falls between 25% and 50% of the required margin, the insurance company must restore its margin within two financial quarters. If it cannot do so then SAMA can require the insurance company to take a number of actions, including:
- increasing capital;
- adjusting premiums;
- stopping underwriting;
- liquidating assets.
- If an insurer’s solvency margin falls below 25% of the required margin, then SAMA will appoint an adviser to provide consultation to the insurance company. SAMA may also request withdrawal of the company’s licence.
At the time of writing, the KSA is in the process of enacting reforms of insolvency law, which are due to come into effect during the course of 2016. Key features of the insolvency law reforms include:
- A conciliation phase where a moratorium is declared, classes of creditors are identified and binding proposals can be set out by the debtor (albeit subject to challenge in court).
- A rehabilitation procedure where certain companies will be assisted to return to health, by allowing cancellation of debt, debt for equity swaps, disposal of assets and restructuring.
- A new approach to the liquidation procedure, including stays against creditor claims.
30. Can excess insurance policies “drop down” to provide coverage if the primary insurer goes into insolvency?
Kingdom of Saudi Arabia (KSA) law does not expressly provide for drop down coverage. Therefore, this will depend on the specific wording in the excess insurance policies.
31. Is a right to set-off mutual debts and credits recognised in an insolvency proceeding involving an insurer or reinsurer?
Kingdom of Saudi Arabia (KSA) law does not expressly provide for a right of set off in an insolvency proceeding involving an insurer or reinsurer.
Taxation of insurance and reinsurance providers
32. What is the tax treatment for insurers, reinsurers, and other persons or entities providing insurance and reinsurance-related services?
All insurance and reinsurance companies must submit a tax and zakat (zakat is a form of Islamic religious levy imposed on the wealth of Kingdom of Saudi Arabia (KSA) nationals and Gulf Co-operation Council nationals operating in the KSA) declaration, audited financial statements and any other statements required to assess zakat and tax to the KSA General Authority of Zakat and Tax (GAZT), in accordance with the Income Tax Law and its implementing regulations (published by the Saudi Arabia General Investment Authority (SAGIA)) (Article 13, Insurance Law).
Non-KSA resident individuals and entities conducting business in KSA under the Foreign Investment Act must declare annual dividends and pay 20% income tax on realised profits.
In the case of a mixed-ownership entity, 20% income tax must be paid on the foreign investor’s share in the profits. The share owned by the KSA investor will only be subject to 2.5% zakat.
There is a 5% withholding tax applicable on the repatriation of dividends by a foreign shareholder in a mixed foreign/KSA entity.
There is also a withholding tax of 5% levied against any premium paid to non-KSA based insurance and reinsurance companies or commission paid to non-KSA based brokers.
In addition, Article 3 of the Regulation for Supervision and Inspection Costs (2009) requires payment of costs of inspection and supervision to SAMA as follows:
- Insurance and reinsurance companies: 0.5% of total underwritten premiums in a financial year, excluding local market share of the reinsurance business.
- Insurance and reinsurance brokers: 1% of total commissions and fees earned within an accounting year.
Insurance and reinsurance dispute resolution
33. Are there special procedures or venues for dealing with insurance or reinsurance complaints or disputes?
Article 20 of the Insurance Law provides for the formation of committees in order to hear disputes involving insurance companies, including specific provision for consideration of subrogated claims. Under this provision, the Insurance Disputes Committee was formed for this purpose and hears all disputes relating to insurance contracts. The Insurance Disputes Committee operates as part of the Saudi Arabian Monetary Agency (SAMA), although is intended to be independent from SAMA’s regulatory functions.
The procedural rules of the Insurance Disputes Committee (the Rules and Regulations for the Operation of the Committees for the Resolution of Insurance Disputes and Violations (IDC Procedural Rules)) came into force in April 2004 (and were amended in 2014) and set out a number of features differentiating the rules from normal procedure under the KSA courts system, including:
- Hearings at which oral advocacy is carried out.
- A greater use of witness testimony as a form of evidence.
- The prospect of recovery of (more than nominal) legal fees.
- A limitation period of five years (with exceptions) for insurance claims.
- The ability for the Insurance Disputes Committee to look to foreign jurisprudence (for example the law of England and Wales) in the event that KSA law is silent on a particular point. Any interpretation of the foreign jurisprudence will be carried out in accordance with sharia principles.
34. Are arbitration clauses in insurance and reinsurance agreements enforceable?
In principle, Kingdom of Saudi Arabia (KSA) law recognises and enforces arbitration clauses. The relevant rules are contained within the Arbitration Law, which came into force in 2012 and is modelled on the UNCITRAL Model Law on International Commercial Arbitration 1985 (UNCITRAL Model Arbitration Law). An attractive feature of the arbitration procedure for any foreign interests is that the arbitration may be conducted in a language other than Arabic.
An arbitration agreement may be a condition mentioned in a contract or may be contained in an independent agreement (Articles 1 and 9, Arbitration Law). The arbitration agreement must be written (so incorporation into an insurance policy would be valid).
An arbitration clause in a contract may survive the invalidity, revocation or termination of the contract (Article 21, Arbitration Law).
With respect to insurance policies, as above (see Question 18), approval from the Saudi Arabian Monetary Agency (SAMA) is required for insurance products. SAMA’s policy is that policies should primarily refer any disputes to the Insurance Disputes Committee. However, SAMA has permitted insurance policies with arbitration clauses in some instances, particularly in marine policies where English law will be the governing law of the policy.
Enforceability of foreign arbitration awards is beyond the scope of this question; however, it is worthwhile noting that although the KSA is a signatory to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention), it limited its recognition of awards made in foreign jurisdictions through a “reciprocity reservation”. Any foreign arbitral awards can only be enforced if they were made in compliance with sharia, which involved the KSA courts essentially conducting a full retrial; practically this made enforcement of foreign awards difficult. The enactment of a new Enforcement Law has narrowed the scope of what a KSA judge may look at when assessing compliance of a foreign arbitration award and is intended to prevent judges from revisiting the merits of the dispute.
35. Are choice of forum, venue and applicable law clauses in an insurance or reinsurance contract recognised and enforced?
The Saudi Arabian Monetary Agency’s (SAMA’s) approval is required for insurance products and SAMA’s position is that disputes should be referred to the Insurance Disputes Committee, with Kingdom of Saudi Arabia (KSA) law as the governing law of the contract (see Questions 18 and 34).
In certain circumstances, SAMA will approve foreign law and jurisdiction clauses. However, it can also be difficult to enforce foreign judgments in the KSA as the KSA courts do not recognise the concepts of private international law or the conflict of laws depriving the KSA courts of jurisdiction and may not uphold either the choice of foreign law or the choice of foreign jurisdiction. Even if the KSA courts do accept the choice of foreign law/jurisdiction, they will not enforce judgments that are inconsistent with the principles of sharia (for example, certain claims seeking interest payments on outstanding debts). The KSA courts will also require evidence that the courts of the foreign jurisdiction would likewise enforce a judgment from the KSA courts; in practice, it can be difficult to produce evidence that the KSA courts will accept.
Reform
36. What proposals are there for reform of the law, regulation or rules relating to the provision of insurance or reinsurance services?
The Council of Co-operative Health Insurance (CCHI) have implemented a study to prepare a strategy for healthcare in the KSA by 2020.
Although not directly related to insurance, the new Insolvency Law (see Question 29) will be implemented over the course of 2016, which will affect insolvency proceedings involving insurance and reinsurance companies.
Main insurance/reinsurance trade organisations
There are no insurance/reinsurance trade organisations in Saudi Arabia.
Online resources
Saudi Arabian Monetary Agency (SAMA)
Description. SAMA’s official website, containing English language translations of the Insurance Law and accompanying regulations and circulars. Arabic is the official language of KSA and the English translations are for guidance only.
Saudi Arabian General Investment Authority (SAGIA)
Description. SAGIA’s official website, contains links to company legislation. As above, English language translations are for guidance only.
Council of Co-operative Health Insurance (CCHI)
Description. An English language translation of the Health Insurance Law.
Capital Market Authority (CMA)
W http://cma.org.sa/En/Pages/Implementing_Regulations.aspx
Description. English language translations of useful company and business legislation.
