Restricted insurance regulations in Saudi Arabia: Capital starting from 5 million

A strategic step to develop the Saudi insurance sector

In a significant regulatory step aimed at deepening and maturing the insurance market in the Kingdom of Saudi Arabia, the Insurance Authority has released a draft regulation governing the operations of restricted insurance companies and restricted insurance management companies. This draft, published on the “Istilaa” platform to gather public and stakeholder feedback, is part of ongoing efforts to develop the legislative infrastructure of the financial sector, in line with the objectives of the Financial Sector Development Program and the Kingdom’s Vision 2030.

The project aims to establish an integrated regulatory and supervisory framework for this specialized type of insurance, and to define the requirements and conditions for licensing its operations, in order to ensure fairness, transparency, and the protection of the rights of all relevant parties, and to enhance the Kingdom’s position as a leading regional financial center.

What is restricted insurance and what is its importance?

Captive insurance is an advanced risk management tool where a large corporation or group of corporations establishes its own wholly-owned insurance company. The primary purpose of this "captive" company is to insure the risks of the parent company or its subsidiaries within the group. This mechanism allows large corporations to better control insurance costs, design insurance coverages precisely tailored to their risk profiles, and gain direct access to global reinsurance markets and profits from underwriting.

Key features of the proposed regulations

The new regulations establish a comprehensive framework covering all aspects of the operations of restricted insurance companies, from establishment and operation to oversight. The Authority has emphasized that no person may conduct these activities within the Kingdom without obtaining an official license from it, ensuring that all market players are subject to regulatory oversight.

Licensing and governance requirements

The regulations require applicants for a license to submit a comprehensive application that includes detailed information about the founders and major shareholders, declarations of integrity and honesty, incorporation documents, and a detailed three-year business plan. This plan must include the ownership structure, the proposed organizational structure, written premium projections, the reinsurance strategy, projected financial statements, and a governance and risk management framework, reflecting a move towards a thorough risk assessment before granting a license.

Risk-based capital

The regulations established the principle of “risk-based capital requirements,” obligating companies to maintain qualifying equity at least equal to the greater of three key criteria: minimum capital, premium risk requirements, and insurance risk requirements. Article 24 set the minimum capital at SAR 5 million for Category 1 companies and SAR 15 million for Category 2, a scale reflecting the different business scope and risk levels between the two categories.

Permitted and prohibited activities

The regulations allowed restricted insurance companies to conduct insurance or restricted reinsurance business, or both. However, they imposed clear restrictions to protect the market and consumers, prohibiting them from engaging in long-term activities, entering into mandatory insurance contracts (such as mandatory health or vehicle insurance), and insuring the liability of board members or executive officers to ensure there were no conflicts of interest.

Expected impact on the Saudi economy

These regulations are expected to have a multi-dimensional positive impact on the local and regional economy:

• Locally, it will provide major Saudi companies and family groups with an effective tool for managing risks and improving financial efficiency. It will also contribute to deepening the local insurance market and increasing the volume of premiums retained within the Kingdom, thus supporting financial stability.
• Regionally: This step enhances the Kingdom’s competitiveness as a destination for investments and regional company headquarters, as it provides a sophisticated regulatory environment comparable to global financial centers, which may attract multinational companies to establish restricted insurance companies to manage their risks in the region.
• Internationally: Adopting a risk-based regulatory framework that is in line with international best practices sends a strong message to global investors and reinsurers about the maturity and reliability of the Saudi insurance sector.

Regulation of restricted insurance business management companies

The regulations were not limited to insurance companies alone, but extended to regulate "registered insurance business management companies," which are specialized entities that provide administrative and technical services to registered insurance companies. The regulations stipulated that the capital of these companies must not be less than 350,000 riyals, and obligated them to obtain a professional liability insurance policy with a minimum coverage of 10 million riyals per claim, thus ensuring the quality of services provided and protecting customer rights.