The KSA’s Underwriting Licensing Requirements: Key Implications for the Insurance Market

5 min 9 sec

Written by

Anand Singh

Legal Director

a.singh@tamimi.com View LinkedIn Profile

Melody Huang

Associate

d.huang@tamimi.com. View LinkedIn Profile

Saeed AlBarghouthi

S.AlBarghouthi@tamimi.com View LinkedIn Profile

The Saudi insurance industry is continuing to change rapidly, and this is evident in the new way that it is being organised and regulated. One important change in the regulatory framework is the requirement to obtain an underwriting licence from the Insurance Authority (IA). Underwriting is a major part of insurance activities, and the  licensing requirement demonstrates a regulatory focus on establishing more clearly defined roles in the industry.

Key requirements for an underwriting licence

This represents a regulatory development and a structural change, especially as an increasing number of firms are entering the Saudi insurance market.

The core requirements for an underwriting licence are:

• Entities intending to carry out underwriting activities must obtain a licence from the IA prior to commencing operations;
• Applicants must establish and maintain a registered office within the Kingdom of Saudi Arabia;
• A minimum capital requirement of SAR 1 million applies;
• Licensed entities must maintain professional liability insurance coverage of no less than SAR 3 million;
• Applicants are required to employ qualified professionals with relevant underwriting expertise;
• Entities must implement appropriate governance, compliance, and risk management frameworks; and
• A clear organisational structure and detailed business plan must be submitted as part of the licensing process.

The major lesson to draw from the framework is that underwriting is no longer seen as an internal practice for insurers, but as a task that might need to be regulated according to the nature of the process involved. Underwriting processes should not take place without appropriate authorisation, and the parties undertaking such processes must have specific qualifications. This is particularly critical when considering the role of third parties in the insurance supply chain. The framework offers some guidance on which parties can undertake underwriting tasks and the circumstances surrounding such undertakings.

While the requirements make no mention of the structure for managing general agents (MGAs), the applicability thereof cannot be disregarded. In fact, many MGA models depend on delegated underwriting powers, meaning that critical decisions pertaining to risk acceptance, pricing, and policy wording have to be taken by a person other than the insurer. The issue becomes more prominent under the new framework, since underwriting is viewed as a licensed activity and, therefore, an MGA cannot solely depend on contractual delegation. It follows that the MGA structure will have to be looked at in a regulatory context to ensure compliance with the IA’s expectations and avoid the licensing of activities as a result.

A key issue is when insurers need to use third-party services for reasons such as cost-efficiency or entry into the insurance lines which are currently outside the scope of expertise of the insurer. The difference between the two has become extremely relevant, because the latter could very well constitute a regulated activity. For that reason, a more sophisticated approach is now necessary whereby not only commercial considerations but also regulatory analysis will be considered in designing such relationships.

Another key element of the licensing process is the focus placed by the IA on corporate governance and controls. The IA would expect to see an organisation that clearly establishes its structure, duties, and responsibilities, and has control measures in place. In this context, it is essential for underwriting decisions to be reviewed in a way that allows for the assignment of accountability and the management of potential conflicts of interest. Another issue that emerges from the licensing process is that of personnel qualifications, particularly with regards to underwriting experience.

Related to the issue of governance is that of technical capability. The act of underwriting requires more than just being a process; it demands that risks are carefully analysed, judgements made, and knowledge of market dynamics taken into consideration. According to the IA, it is expected that underwriting entities be capable of handling underwriting tasks responsibly and consistently enough to guarantee that the results of such underwriting will actually help to stabilise the market, and not destabilise it through unnecessary risks and uncertainties.

The financial and operational capabilities of the underwriting entities are also considered by the IA. In some cases, the entity doing the underwriting is not necessarily taking any balance sheet risk, which means that it has to be capable of meeting the requirements to continue its operations without difficulty. This includes having enough capital, operational capabilities, and financial strength to continue operating for as long as necessary.

It is important to note that these obligations are part of the larger goal of increasing accountability in the insurance industry. By clarifying not only who should be accountable for making certain decisions but also what circumstances must be fulfilled in order for such decisions to be made, the IA eliminates confusion and increases transparency, thus contributing to oversight and helping to protect consumers. It also ensures that key responsibilities are assigned to organisations under regulatory control.

Although the implementation of the underwriting licensing requirement may seem to complicate the process at first glance, it actually brings clarity for everyone involved. It is clear not only what a company has to do, but also what requires approval from the authorities. This is especially relevant to emerging markets such as Saudi Arabia.

It would be advisable for any company looking at underwriting operations within the Kingdom to conduct a comprehensive evaluation of its business model to identify the roles it plans to play and determine whether such roles will be covered by the licensed activity. After this assessment, the company will be able to determine whether or not it will need a licence to operate and whether changes need to be made to its operations. Engagement with the IA during the early stages will prove beneficial in clarifying expectations and ensuring compatibility with regulatory guidelines.

Conclusion

The introduction of the underwriting licensing requirement within Saudi Arabia is an important step for the insurance market. While some reorganisation of companies’ operations may be required, the new regulation is expected to bring about improved organisation in the market and a more efficient way of conducting business. The IA will be able to exercise better supervision of the insurance industry, while market players will have clearer roles, duties, and responsibilities. It is therefore important for all concerned stakeholders to embrace the regulations for optimal performance.