Market Review

7.1 The Global Context

Global economic activity, which was previously affected by the COVID-19 pandemic, was further hampered by geopolitical tensions, climate change, inflation, interest rates hikes, energy shortage were among the issues that are dominated the global agenda. These issues have created uncertainty and affected the global growth prospects.

The conflict between Russia and Ukraine has escalated into a wider geopolitical crisis. Throughout 2022, the ongoing conflict in Ukraine had a significant impact on prices of key commodities such as oil, gas, steel, and grain. The disruption to global energy markets accelerated the already fragmented supply chains. The conflict in Europe swept the global economy back into crisis mode, affecting global growth prospects, which were estimated to be 3.4% in 2022i. However, reopening of economies, particularly in China towards the end of the year, led to a faster-than-anticipated recovery.

Global equities decreased by $14 trillion USD and are on track for their second-worst year ever, with nearly 20% in losses. In addition to the decline driven by the war in Ukraine, combined with rampant inflation: several interest rate hikes, and rallies of 10% or more during this time, have contributed to high volatility in the markets.

Inflation, which remains higher than seen in several decades, is a significant concern in many countries, impacting household budgets and eroding purchasing power. The causes of inflation are complex, including supply chain disruptions, rising energy prices, and government stimulus spending.

Central banks reacted and increased interest rates in response to inflationary pressures, in an attempt to curb curb inflation but also slow economic growth and increase the cost of borrowing for consumers and businesses, which are also grappling with higher transportation and labor costs. The challenge for policymakers is to strike the right balance between controlling inflation and supporting economic growth.

The performance of capital markets reflected the broader economic environment. The pandemic created significant volatility in markets, and uncertainty around inflation and interest rates is likely to continue to impact investor sentiment.

The transition to renewable energy is crucial for tackling climate change, but it presents challenges in terms of energy security. The disruption of global supply chains, geopolitical tensions, and extreme weather events have the potential to impact energy supply and push up global energy prices.

The economic outlook is heavily dependent on the calibration of monetary and fiscal policies, the course of the war in Ukraine, and growth prospects in China. Governments, businesses, and individuals must prioritize resilience as a key element of their strategies for the future. This means investing in infrastructure, diversifying supply chains, and building more robust social safety nets. (Re)insurance companies can play an active role in supporting resilience and offering solutions to help navigate these challenges and build a more sustainable and prosperous future.

7.2 Prospects for the future

The global economy is expected to experience a deceleration in growth from 3.4% in 2022 to 2.9% in 2023, with potential turnaround in 2024, to 3.1%i. The continued response of central banks to inflationary pressures, especially in advanced economies, and persistence of the conflict in Ukraine are among factors that continue to affect economic activity across the globe.

Despite a projected decline in global inflation from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024i, inflation is expected to remain above pre-pandemic levels.

After a surge of approximately 60% in 2022, energy prices are expected to decline by 11% in 2023, although they will remain 75% higher than the average of the past five years. The price of Brent crude is predicted to climb to $92 USD per barrel in 2023, well above the five-year average of $ 60 per barrel. Both natural gas and coal prices are projected to ease in 2023 from record highs in 2022. Although demand concerns were the more significant driver at year-end, supply risks continue to present challenges for commodity markets.

Despite commodity markets experiencing a year of difficulty and high volatility, mainly driven by supply risks, the year ended with demand concerns having taken the driver’s seat. These challenges continue to persist, creating an uncertain outlook for 2023.

The MENA region is anticipating a substantial slowdown in economic activity in 2023, following a period of robust growth in 2022. Real GDP growth is forecasted to decrease from a record-high of 6.1% in 2022 to roughly 3.5% in the period of 2023-24ii, which will still be ahead of the general global economic performance in the same timeframe.

7.3 Impact on the Insurance and Reinsurance sector

The January 2023 reinsurance market renewal was a challenging one, marking a turning point for buyers. After six years of disappointing returns and high catastrophe losses, the market began to firm in 2022, with exogenous factors such as inflation, interest rates, and climate change affecting investor sentiment. As a result, pricing for US property catastrophe and global property retrocessional business hit multi-decade highs, with reinsurers seeking narrower coverage definitions and excluding more perils. This caused difficulties for insurers navigating these changes, especially those not in peak zones.

Reinsurers saw positive returns, but insurers had to restructure their reinsurance programs and underwriting strategies. The hardening of the reinsurance market is expected to affect the entire supply chain, with retrocession prices increasing and direct providers forced to increase their retentions due to the hike in prices. Excess of Loss (XoL) agreements saw a 5% - 20% increase in prices, while underperforming accounts saw an increase of up to 50%. CAT property covers also saw a notable increase in prices in Asia, forcing direct players to increase their retention levels.

In recent years, the severity and frequency of Natural Catastrophe (Nat CAT) losses have led to significant changes in reinsurance programs in Asia. These changes include increased prices, more stringent terms, and changes in commissions, which have left insurers with no choice but to increase their retentions. However, small to medium-sized players have encountered greater difficulties in placing business due to their unbalanced capacity, and some have been forced to restructure their reinsurance programs. Additionally, international and large reinsurers have been withdrawing capacity from Asia and other emerging markets in favor of regions with higher returns. As a result, there has been a wave of restructuring in reinsurance programs in the Gulf Cooperation Council (GCC) region, resulting in a decrease in surplus business.

To achieve higher returns, reinsurers have been using sliding scales for commissions, tied to the profitability of the insurer, which has led to changes in the scale and maximum level of commissions offered. Furthermore, due to the ongoing conflict between Russia and Ukraine, new terms and clauses related to war have been introduced. Coinsurance business has also seen substantial reforms, with some reinsurance programs excluding or reducing the capacity available for conducting coinsurance operations or writing inward facultative business.

The reinsurance market is currently experiencing a period of hardening, which is anticipated to persist throughout the year. Given the current investment norms and projections of no decrease in interest rates, the cost of capital for reinsurance firms is likely to increase. As a result, further hardening is expected, although the degree of its impact cannot be accurately predicted at this time.

The industry is currently facing a pivotal moment. The January 2023 renewal season was marked by a convergence of macroeconomic and geopolitical events that extend beyond the regular loss experience that typically drives shifts in reinsurance market terms and conditions. Many of these variables persist and will remain fixtures in our industry's landscape for the foreseeable future. Tumultuous market conditions have arisen from the aftermath of the global pandemic combined with the war in Europe. Adjusting for the uncertainty, risk premiums have surged across asset classes worldwide.

7.4 The Local Context

Saudi Arabia's economy grew by 8.7% in 2022iii, mainly due to a sharp increase in oil prices and rising production. Buoyed by investment, the public sector posted growth of 1.5%, while non-oil activities showed growth of 6.0%iii. Non-oil private sector activity is forecast to continue to grow around 6% annually over the next three to five years. Growth in non-oil areas is consistent with the Saudi Vision 2030. The Kingdom expects to post a second consecutive budget surplus in 2023, despite the uncertain global economic outlook and lower crude prices, which look set to weigh on oil export revenues. Projections envisage a more conservative growth rate of 3.7% in 2023iv. In the medium to long-term, economic recovery could be supported by the government’s capital spending.

The GDP of the Kingdom expanded by 5.4% in the fourth quarter of 2022, compared to the corresponding quarter in 2021. The Saudi economy ranked highest among the G20 countries, with the Kingdom ranking first in terms of ease of starting a business. Saudi Arabia’s GDP growth, the fastest in almost a decade, exceeded expectations and posted one of the strongest performances among G20 nations. Contribution to GDP growth of the oil sector, which averaged 2.76% from 2011 until 2022, reached an all-time high of 22.88% in the second quarter of 2022.

The promotion of local content development has emerged as a crucial driver of growth in the Vision 2030, with many sectors such as the insurance industry actively pursuing this strategy. The goal of local content development is to enhance competitiveness and bolster socio-economic value by shifting production of goods and services towards local entities. This has been demonstrated in the insurance sector through new regulations issued by the Saudi Central Bank (SAMA) setting a new mechanism for reinforcing the minimum cession rates of the reinsurance premiums to the domestic reinsurance market to gradually reach 30% by 2025.

The adverse results experienced by the automotive market in Saudi Arabia played a pivotal role in reshaping reinsurance programs. As a result, quota share programs became very rigid and expensive for direct players, leading them to increase their retention rates and rely on XoL agreements. This transformation in the local insurance market has led to insurers needing to revisit their business strategies, due to the large portion of risk being retained, which carries the potential to cause serious profitability issues and other complications. Therefore, it has become crucial for insurers to ensure adequate pricing and increase motor insurance rates.

Despite the reshuffling that led to a reduction in the size of quota share operations, from a reinsurer's perspective, this is considered a positive development. A number of quota share treaties were discontinued, and XoL agreements are likely to encourage adequate pricing of risk. Similar principles have become applicable to medical insurance, as for some providers, even the price of XoL agreements was prohibitively high, leading them to retain 100% of the business. The inflation in medical costs, coupled with the additional benefits introduced by the Council of Health Insurance (CHI), has raised the cost of medical insurance. Providers therefore opted to retain a larger share of their medical portfolio.

Insurers must adopt an adequate pricing strategy for both motor and medical insurance, as they are retaining more risk. Underwriting criteria must also be improved, while financial and human capabilities must be enhanced to cope with the new market conditions.

Over the past three years, SAMA has directed players to strengthen their capitalization to improve retention rates. SAMA worked on enhancing the capacities of insurers to increase the market retention and take the industry to the next level. The ultimate goal is to create professional risk carriers instead of maintaining transacting business similar to intermediaries. With the new market conditions and SAMA’s endeavors, companies are likely to become more cautious in fronting business and will give more weight to quality.

Furthermore, implementation is underway of the new International Financial Reporting Standard (IFRS) 17, which will be applicable in the Kingdom from the beginning of 2023. Currently, insurance companies are in the implementation and audit phase of the dry-runs for SAMA submission, and some of the common challenges for insurance companies include extracting data from the current systems for input into IFRS 17 models.

In order to capture current opportunities in the Saudi insurance market, given the economic boom the Kingdom is experiencing, businesses must improve their performance and strengthen their capabilities.

7.5 Saudi Re’s Response

The Company has maintained focus on strengthening its presence in the home market and leverage its unique position to seize growth opportunities its home market while maintaining a healthy balanced portfolio with healthy composition of local and international business. This has resulted in a growing the book of business by 26% driven by growth in the Saudi and Middle East segments. The Company is also eying opportunities to benefit from the increase of the reinsurance prices as a result of the hardening market and rigid terms, while optimizing its retrocession programs. Additionally, Saudi Re’s “A-” rating by S&P Global Ratings has enabled us to access quality markets and unique treaties, giving us the confidence to tap into different segments of the market.

With the increase of natural catastrophe risks, Saudi Re takes actions to closely monitor its exposure to these risks and continue to invest in actuarial and analytical tools to help develop comprehensive insights into risk exposure and accumulation modelling including the acquisition of RMS catastrophe modelling services and tools.

Being the only specialized reinsurer in the local market, Saudi Re has been actively engaged with the regulators and market participants to provide support to the new local retention mechanism. Furthermore, the Company continued to effectively lead the Insurance Defects Insurance (IDI) program and avail significant capacity directly and through partnerships with international reinsurers, which resulted in writing a considerable increase of the premiums written under IDI class which represented 28% of the overall portfolio in 2022.

Saudi Re remains committed to its ambitious growth strategies. and we are in the process of increasing our capital to strengthen our financial capabilities through a capital increase in 2023.

To adapt to the financial markets developments, Saudi Re has proactively taken decisions to reallocate its investments by increasing its holdings in money markets and fixed income assets while maintain healthy solvency and liquidity levels.

Probitas Holdings (Bermuda), in which Saudi Re acquired a 49.9% share in 2017, is registering strong performance and opening doors to write business from international markets through its Lloyd’s syndicate. This acquisition is one of our strategic tools to expand international business and tap into the Lloyd’s market. Saudi Re is also eying other acquisition opportunities that can help us grow in a prudent manner. Our goal is to become one of the top 50 global reinsurers by 2026, and we believe this is achievable, with a solid plan and our unwavering commitment to reaching our objectives.

Saudi Re tailors its sustainability approach to emphasize the importance of ESG principles; demonstrating its commitment to responsible business practices. As an organization that is guided by Sharia principles, sustainability is ingrained in Saudi Re's investment practices. We avoid investments that negatively impact society, while actively promoting equality, inclusion and economic prosperity.

Saudi Re actively monitors changes in regulations and accounting standards. To ensure the Company is well-prepared to handle emerging risks and evolving market trends, we regularly perform assessments using an enterprise risk management framework and a strategic planning framework.

In terms of governance, Saudi Re has a strong structure in place to protect the rights of its shareholders and other stakeholders, while also ensuring compliance with applicable laws, regulations, and directives issued by regulatory bodies.

i International Monetary Fund. 2023. World Economic Outlook Update, January 2023.

ii S&P Global Market Intelligence. 2022. MENA region’s economic growth to slow after strong 2022, December 2022.

iii General Authority for Statistics (GASTAT). 2022. GDP and National Accounts Q3/2022. Riyadh, KSA.

iv World Bank. 2023. Global Economic Prospects, January 2023. Washington, DC: World Bank.