Natural Disasters Risk Management in KSA: A Regulator's Perspective

1. Taipei, 14 July 2008 Saudi Arabian Monetary Agency Consumer Issues and Natural Disasters: KSA regulator’s perspective Presentation to the 44th Annual Seminar of the International Insurance Society

2. Overview of the Saudi EconomyZoom on the Insurance IndustryNatural Disasters Risk Management in KSA

3. The Kingdom of Saudi Arabia occupies 80% of the Arabian Peninsula and is flanked by the Arabian Gulf and the Red Sea Kingdom of Saudi Arabia Country Snapshot • 1,960,582 square kilometers • 13 provinces or mintaqat • Population of 24.2 million of which 50% is under the age of 20 • 2,640 km of coastline • Common boundaries with Kuwait, Iraq, Jordan, Yemen, Oman, the United Arab Emirates and Qatar • Life expectancy of 69 years • Literacy rate of 78% • National language is Arabic Syria Lebanon Iraq Jordan Kuwait UAE Egypt Qatar Saudi Arabia Oman Yemen Source: Saudi Arabian Monetary Agency, World Bank Country Database

4. The Saudi economy remains highly dependant on Oil and Gas although government initiatives are helping other sectors develop Snapshot of the Saudi Economy Economy Snapshot Gross Domestic Product by Economic Sectors at Producer’s Values in Current Prices (in Billion USD - 2006) Overall • GDP = USD 357 Billion • > 18,000 companies • > 695,000 individual establishments Banking Sector • 18 banks, 1,361 branches Insurance Sector • 22 insurance companies (1) 14% Government Services Non-Oil & Gas 9% Financial Services Oil & Gas 8% Manufacturing 174.9 (49%) 182.1 (51%) Wholesale &Retail 5% Construction 4% Communication 3% 3% Agriculture 4% Other (1) Number of insurance companies having obtained a Royal Decree, which constitutes one of the last steps of the licensing process Source: Ministry of Economy and Planning, World Bank Database, ISD team analysis

5. The financial sector is regulated by the Saudi Arabian Monetary Agency (SAMA) and the Capital Markets Authority (CMA) Roles of SAMA and the CMA Role of the Central Bank (SAMA) Role of the Capital Markets Authority Banking Supervision Insurance Supervision • Regulate and monitor the activities of banks, e.g.: • Conduct inspection of banks’ registers and records regularly • Conduct on-site examination and inspection programs • Evaluate banks’ policies and procedures • Verify banks’ compliance with laws and regulations • Protect the general public from unfair and fraudulent banking practices • Regulate and monitor full disclosure of information • Create an environment in which policyholders can buy insurance and have confidence that they will be treated fairly • Ensure the market is: • Competitive to ensure equitable prices • Stable to minimize unnecessary losses • Efficient and effective so that (1) insurers can invest and disinvest under any circumstance to maximize opportunities and (2) fair and transparent prices are available to buyers and sellers and that assets are priced as accurately as possible • Regulate and develop the capital market • Protect investors and the general public from unfair and fraudulent practices • Achieve fairness, security, efficiency and transparency in transactions • Develop, regulate and monitor the issuance and trading in securities • Regulate and monitor the activities of entities subject to the control of the CMA • Regulate and monitor full disclosure of information • Regulate proxy and purchase requests and public share offerings

6. 817 The Saudi insurance market grew significantly since 2002 and in particular after the introduction of the insurance Law Comments Market Evolution • The introduction of the Law on Supervision of Cooperative Insurance Companies late in 2003 served as a catalyst that facilitated the development of the market. • The overall insurance GWP reached USD 2.3 Billion in 2007, compared to USD 0.83 Billion in 2002. This translates into a growth rate of +177% and an overall Compounded Annual Growth Rate (CAGR) of 23%. • The CAGR grew from 10% between 2002 and 2004 to 32% between 2004 and 2007. • General and health insurance accounted for 60% and 36% of total GWP in 2007, respectively. • Protection and Savings insurance remained a small market reaching USD 87 Million in 2007. Gross Written Premiums (2002 – 2007) (USD Million) Overall CAGR = 23% +177% 2,289 +32% 87 1,850 58 +10% 1,374 51 996 977 Protection & Savings 827 1,384 Health 1,199 957 755 722 General 593 2002 2003 2004 2005 2006 2007 Source: The Annual Survey of the Saudi Insurance Market (2003), The Saudi Insurance Market Survey Report (2007), ISD Team analysis

7. 57 The market continues to demonstrate growth potential due to favorable economic conditions and compulsory motor and health Market Penetration and Density Growth Observations • The market growth was driven by the demand growth for general insurance and health insurance which reflects, in large part, the enforcement of compulsory health insurance regulations. • The Kingdom continues to enjoy solid underlying growth drivers for the insurance market: • Strong macroeconomic growth • Young population • Overall growth of the financial sector • Compulsory insurance classes • Insurance penetration remains low compared to other countries. Insurance penetration is defined as Gross Written Premium as a percentage of Gross Domestic Product (GDP). The level of insurance penetration in Saudi Arabia was 0.44% in 2005 and increased to 0.61% in 2007. • Insurance density is defined as Gross Written Premium per Capita. The insurance density increased from USD 60 in 2005 to USD 94 in 2007, an increase of 59%. Insurance Penetration (2005 – 06 – 07) (% of GDP) 0.61% Protection & Savings 0.53% 0.02% 0.02% 0.44% Health 0.02% 39% 0.37% General 0.34% 0.30% 2005 2006 2007 Insurance Density (2005 – 06 – 07) (USD per Capita) 94 Protection & Savings 4 78 2 Health 60 2 59% General 2005 2006 2007 Source: The Saudi Insurance Market Survey Report (2007)

8. Epidemics • Risk of a widespread occurrence of disease that takes place in certain regions of the country causing numerous deaths Stampedes • Risk of sudden panic followed by a rush of large crowds in confined spaces causing numerous fatalities Floods • Risk of water overflow, which in Saudi can take place in the valleys surrounding Medina and Makah Sandstorms • Risk of windstorm that lifts up clouds of dust or sand, reducing visibility and causing a wide array of accidents and damage Earthquakes • Risk of earthquake that is common toSaudi Arabia given its position in the Arabian Plate Oil Fires • Risk of major fire at oil excavation or refinement sites Saudi Arabia is exposed to several natural disaster risks Description of Natural Disaster Risks in KSA Risk Description Droughts • Risk of an extended period of water deficiency due to limited precipitation and severe hot weather

9. The largest natural disasters to hit Saudi Arabia in the last 20 years amounted to thousands of fatalities Natural Disasters in KSA in the Last 20 Years Event Date Fatalities Stampede - Stampedes taking place at the annual Hajj pilgrimage in Mecca • 1990, 2004, 2006 2,030 Epidemic - Rift Valley fever • September 2000 85 Epidemic - Meningococcal disease outbreak occurs coinciding with international travel during the Hajj • March 2000 57 Fire - Fire caused by a gas leak near the Hawiyah natural gas liquids plant • November 2007 40 Flood - Flood water gushing through the deep valleys around Medina, resulting from a powerful storm during the final days of the Hajj • January 2005 29 Earthquake - A 6.3 magnitude earthquake and 7,000 aftershocks caused significant damage in the town of Haql • 1995 Not Available Total Last 20 years ~ 3000 Source: The Office of U.S. Foreign Disaster Assistance/ Centre for Research on the Epidemiology of DisastersInternational Disaster Database

10. At the moment, SAMA requires insurance companies to address natural disasters in 3 different ways Arrangements for Insurers to Address Natural Disasters in KSA Natural Disasters Arrangements Description 1 Preparing a Natural Disaster Risk Management Plan • Insurance companies are required to set up a natural disaster risk management plan prior to obtaining their license from SAMA • This plan includes developing a risk map to identify the exposure to natural disasters by region, and setting policy prices in that region accordingly 2 Transferring Natural Disaster Risks • Insurance companies are required to include natural disaster coverage in their reinsurance arrangements prior to obtaining their license 3 Reserving for Natural Disasters • Insurance companies are required to include natural disaster reserves as part of their technical provision as per the insurance Implementing Regulations

11. To ensure effective natural disaster risk management, SAMA aims to play a cornerstone role at three different levels Role of SAMA with Regard to Natural Disaster Risk Management Description of the Role of SAMA At the National Level • Help establish government programs and contingency plans • In association with all relevant government authorities and services At the Insurance Market Level • Ensure solvency of market players • Ensure availability of natural disaster related coverage • Ensure the availability of natural disaster re-insurance • With insurers, intermediaries, and other service providers At the Policyholder Level • Educate/ build public awareness • Ensure affordability of natural disaster insurance products • With insurance policyholders and the general public as a whole

12. In the long run, SAMA is considering implementing one or several additional natural disaster risk management approaches Natural Disaster Risk Management Approaches Approach Description Modeling • Assess the potential risks of a large-scale natural disaster across multiple locations, allowing to gain valuable insight into risk exposure in complex scenarios 1 Pooling • Split the risks of natural disaster between several members of a pool 2 Funding • Compensate natural disaster victims by taping into a pool funded by policyholders’ premium surcharges 3 Investment • Investing in natural disaster risk mitigation techniques (e.g., earthquake resistant buildings) 4 Capital Adequacy • Maintain a high enough capital adequacy ratio to provide protection against natural disaster risks 5

13. Thank you for your attention…