The wild world of insurance companies

When dealing with insurance companies in Saudi Arabia, you get an impression that they still maintain the same posture as when they operated before insurance was legalized in 2003. It should not be surprising, however; as many staff working today in legalized insurance companies are veterans from the days of prohibition. Reliance on verbal agreements, lack of documentation and signatures on blank papers are still main tools of the trade. When you receive the “proper” written insurance policies, you frequently find them different from those verbal agreements. Sending the policies is typically delayed for weeks or months, so that the grace period is passed and the cost of cancelation becomes prohibitive.

Insurance was made openly lawful with the adoption of the Cooperative Insurance Companies Supervision Law in 2003. Up until that time, only one company was permitted to sell insurance legally: The National Company for Cooperative Insurance (NCCI), which was established in 1984. Nevertheless, many foreign insurance companies were operating illegally in the Kingdom during those years, either through shell companies established in neighboring countries or through individual agents and brokers working illegally in the Kingdom.

Introduction of the 2003 insurance law and the subsequent adoption of its executive bylaws in 2004 made it possible for insurance companies to work legally. Almost overnight, the insurance regulator licensed dozens of insurance companies. In addition, over 60 insurance “brokers” have also been licensed and 70 insurance “agents.” Regardless of the legal designation, most of these entities sell “re-insurance,” i.e. insurance issued and underwritten by foreign companies. You can easily discover that when you ask your insurance salesmen a question of a technical nature; they would admit that very few people here could answer the questions, because they rely on pre-packaged software that only the original insurance company could understand. A few local companies maintain a limited number of staff well-versed in those technical details, but most do not.

Ten years after legalization, most insurance companies have yet to succeed financially. Today, there are 35 insurance companies listed in the Saudi stock exchange (Tadawul), but most of them are failing or struggling financially. One report issued at the end of the third quarter of 2013 listed 30 publicly traded companies whose book values were below their original (Initial Public Offering, or IPO) price of SR10. Nearly two-thirds of them were insurance companies. Book values below IPO prices are of course indicators of high risk, including the risk of suspension, loss of license or liquidation altogether. One insurance company’s book value was put at 34 percent of its IPO value. Book values of six others were less than 50 percent of IPO values. Book values for another 13 companies were between 51 percent and 86 percent of their IPO values.

The financial risks that insurance companies face could have been caused in part by overvaluation of the initial IPOs. Most likely, however, financial difficulties of licensed companies can be attributed to failure to generate business, reduce costs, manage risks and satisfy customers. As I indicated, local insurance companies rely heavily on veteran salesmen trained during prohibition days. Their main skills were focused on making a quick sell and staying below the regulators’ radar to avoid prosecution for selling insurance without a license. Consequently, insurance companies suffer from a dearth of qualified staff, trained in insurance as well as customer satisfaction.

In addition, with lack of transparency and clear written rules comes endless potential for corruption. Premiums could be reduced or raised at a whim and claims could be rejected or satisfactorily settled at a whim. Another potential for corruption is that customers are rarely notified of claims settled in their names, leaving the possibility that their identities or insurance policies were used fraudulently.

Most damaging is lack of customers’ trust; there is no other activity that suffers an image problem as insurance companies do. Some of the negative image is unjustified, a carryover from the days when they operated illegally. Some of it, however, is self–inflicted, as I pointed out earlier.

The image of insurance companies has been further tarnished by their experience on the stock market. With over half of all licensed and publicly traded insurance companies struggling financially and could be suspended on the stock exchange, lose their licenses or both, and with book values of two thirds of them ranging between 34 percent and 87 percent of their IPOs, you would expect them to be valued accordingly on the stock exchange. You would also expect them to be shunned by traders and allowed to wither away and fade while their managements ponder their future.

Not so. Most insurance companies, including clear failures, have become convenient tools for speculative traders on the stock exchange at hugely inflated prices. They are among the most vigorously traded and favored because of their small capitalization and limited numbers of shares. Through a few transactions, price shares could be jacked up or pummeled, earning speculators huge profits. Most of the profits are kept by the speculators; the company could benefit only indirectly through the inflated value of its shares. The companies’ founders, who typically own large tranches of shares, stand to profit handsomely from the inflated prices.

A comparison between book values and share prices of insurance prices on the stock exchange clearly point out the dangerously speculative nature of their valuation. For example, one company’s book value was put at SR3.37 (34 percent of its IPO price), but its share value last Thursday (April 10) was SR96, or 28 times as much. Many other insurance companies exhibited the same dangerous discrepancy.

Ten years after the legalization of insurance companies, it is high time for a reassessment to weed out the bad and encourage the good among them. Self-policing has clearly failed. Another main goal of the required interagency review should be to let insurance customers and stock traders beware of the realities behind the scenes.


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