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Issue No: 18 -May – September 2005
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The Kingdom has taken significant steps to regulate its insurance industry since enacting the Cooperative Insurance Companies Control Law in 2003. The statute and its implementing regulations are designed to ensure that only well-capitalized and properly constituted insurance companies operate in Saudi Arabia. The Saudi Arabian Monetary Agency (SAMA) oversees all insurance activities so that Saudi citizens only deal with companies that have adequate capital to meet claim demands.
Before the law was enacted, many insurance companies operating within the country were undercapitalized and unregulated. This led to wide-spread abuses where premiums were paid but policyholders’ claims were not honored. Companies would discontinue operations without notice and leave policyholders without insurance.
Now, the new law requires that no insurance or reinsurance company can operate within the Kingdom without a license and must meet the following minimum criteria: |
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The company must be a public joint-stock company offering at least 25% of its shares to the public. |
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The company’s principal object must be to perform insurance and reinsurance activities and not engage in other business ventures. |
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Each insurance company must maintain paid-up capital of at least SR 100 million, and each reinsurance company must maintain no less than SR 200 million in paid-up capital. |
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Each company must allocate at least 20% of its annual profits into a legal reserve until the total reserve equals 100% of the capital paid. The company also must retain at least 30% of all premiums received, unless SAMA allows it to retain a smaller percentage. |
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Significantly, all Board directors and the company’s general manager are individually liable for any violation of the insurance law and its corresponding regulations. Violators are subject to a maximum fine of SR 1 million and imprisonment of up to four years.
Last February, thirty-two insurance companies met SAMA’s deadline to submit registration for licenses with the agency. At that time, only the National Company for Cooperative Insurance received a full license. Of the other 31 companies, 23 were those already doing business in the country and the remaining nine were newcomers to the industry. All other insurance businesses operating in Saudi Arabia must close down their offices and coordinate their exit strategy with SAMA. These companies have been ordered not to underwrite new business or seek policy renewals without obtaining the written approval of SAMA. No new insurance company will be licensed within the next five years to do business in the Kingdom.
In early March, it was reported that licenses had been issued to thirteen companies to provide insurance and reinsurance services in Saudi Arabia. Some of these companies are well-known companies from Britain, the United States, Europe, Bahrain, Jordan and Lebanon, demonstrating the high international interest in the Kingdom’s new insurance law. It is expected that the Saudi insurance market may be worth SR 15 billion within the next five years.
Coupled with the issuance of licenses, the Saudi Health Ministry is overseeing the implementation of a compulsory cooperative health insurance plan for expatriates working in both the public or private sectors, effective June 1, 2005. The plan will be phased in as follows: any company with a work force of 500 or more expatriates must immediately provide them with medical insurance coverage before the expatriates will be issued a residence permit. Later, the plan will apply to companies having a non-Saudi work force of 100 to 500, and finally to companies with an expatriate work force of less than 100.
Once the health insurance plan is fully implemented, approximately SR 5 billion will be generated in annual premiums, based upon 5,000,000 expatriates at SR 1,000 per employee. In the health insurance sector alone, the market is anticipated to grow from SR 8 billion to SR 18 billion over the next five years.
Additionally, all insurance professionals such as brokers, agents, loss adjusters, and loss assessors must work for a licensed company in the Kingdom. To do otherwise exposes the violator to a substantial fine, imprisonment, or both. Such professionals are required to deal honestly with customers, provide them with sound advice as to the risks involved, and not mislead them in any way.
Brokers are allowed to use insurance companies outside Saudi Arabia, but only after proving that they had been unable to place these risks with a licensed insurance or reinsurance firm in the Kingdom.
Clearly, SAMA is serious about shutting down unlicensed insurance firms operating within the country. After notifying unlicensed companies to settle all claims and withdraw from the Saudi market, violators are now having their bank accounts frozen by SAMA to protect policyholders. About 17 companies are affected, and they are expected to eventually sell their portfolios and liquidate or merge with other companies. |
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Since the enactment of the Capital Market Law in June 2003, the Capital Market Authority (CMA) has been overseeing reform of the Saudi stock market to protect investors, attract foreign investment, achieve transparency in securities transactions, regulate securities disclosures, and monitor the issuance and trading in securities. CMA’s mission is to regulate investments and securities in the Kingdom, review and decide on mergers and acquisitions, promote investor awareness, and prevent unfair trading practices. The Authority reports directly to the President of the Council of Ministers.
The law contains 67 articles and establishes six specific oversight areas. In addition to the nine-member Board of the Saudi Stock Exchange, which is the sole entity having the authority to carry out securities transactions in the Kingdom, the Capital Market Law also provides for the establishment of: |
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A Securities Depository Center solely entrusted with all stock exchange transactions and securities registration; |
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An Authorization and Inspection Department which reviews all license applications and ensures that authorized firms comply with CMA rules by making regular inspections; |
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A Corporate Finance Department which reviews applications from those wishing to offer securities and regulates mergers and acquisitions; |
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An Enforcement Department to investigate and resolve complaints from the public and resolve disputes that may arise among market participants; and |
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A Market Supervision Department responsible for monitoring the securities market and the financial soundness of its participants. |
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Recent high oil prices have contributed to an influx of capital to the Saudi Stock Exchange. All stock trading is settled electronically, and the share index is at record levels. As of the end of last year, 74 companies were listed on the Saudi Stock Exchange with a market capitalization of over $306 billion -- a 95% increase from 2003.
Over the past few months, the CMA Board, composed of five, full-time Saudi nationals, has issued certain Implementing Regulations to further the objectives of the Capital Market Law. These regulations include the following: |
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Market Conduct Regulations which prohibit insider trading, market manipulation, untrue statements and rumors, and the churning of investment portfolios to generate unnecessary trading commissions. |
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Offers of Securities Regulations which define all types of securities such as public offerings, private placements, and exempt offers and which set forth the disclosures required in placement memoranda to be distributed to prospective investors. |
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Listing Rules which specify all requirements for having a company’s stock listed on the stock exchange, including minimum aggregate market value of shares, a minimum operational history, audited financial statements supporting the existence of adequate working capital, and a detailed listing of the contents of prospectuses for the issuance of stocks and bonds. |
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The Capital Market Authority has wide-ranging powers to regulate all aspects of the Saudi capital market, such as suspending trading on the Exchange for no more than one day (or even longer with the approval of the Finance Minister), suspending the listing and trading in any security, regulating the maximum and minimum commissions to be paid to brokers by their clients, and providing advice to governmental authorities in order to contribute to the development of the Exchange and to protect the interests of investors.
Article 55 of the Capital Market Law gives an investor a legal claim for damages if he relied upon a material misstatement or a material fact that was not disclosed to him. Virtually everybody identified in the prospectus is liable to the affected investor for any losses caused by the omission or misinformation. The investor must bring his claim within one year of the time when he should have become aware of his loss, but no later than five years from the occurrence giving rise to the claim.
One who engages in insider trading in violation of Article 50 of the law may reach an agreement with the Authority to pay no more than three times the profit he realized from the illegal activity or no more than three times the loss he avoided by engaging in the prohibited trading activity.
As the law evolves, the CMA intends to propose additional Implementing Regulations to achieve the worthwhile goals of the Capital Market Law which will be reported in future issues of Legal Update. |
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| Disclaimer |
| Material contained in this newsletter is for general information only and should not be interpreted as legal advice on any particular matter. Readers are advised to consult their legal advisor directly on any issues discussed herein. Transmission of this document does not create any attorney-client relationship. Although considerable care has been taken to ensure the accuracy of the material in Legal Update, the Law Firm of Dr. Khalid Alnowaiser is not responsible for any errors contained herein. |
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