Determinants of Insurance Business Activities in an Oil Dependent Economy: the Case Study of Saudi Arabia

Abstract

Similar to other businesses, deterioration in macroeconomic outlook subsequent to a dip in oil price could be a cause of concern for the insurance sector. We investigate the impact of macroeconomic variables on the insurance business of an oil dependent economy such as Saudi Arabia. Interestingly, and contrary to expectations, oil prices play no direct role in insurance written premiums as well as retention. We recorded the indirect effect of oil prices and conclude that rising inflation and government debt negatively impact net written premium, while population size and GDP per capita do the opposite. This is true of life, health and general insurance sub-businesses. Inflation also has a negative impact on retention rates for overall insurance activity as well as general and health insurance. Interestingly, health insurance retention rates are positively impacted by rising population levels. Subsequently, we looked at more disaggregated level insurance activities and concluded that GDP per capital had a positive impact on property related written premiums and a negative effect on motor retention rates. Inflation has a negative impact on net written premiums of energy, engineering, marine, accidents, motor and property/fire. Similarly, an increase in government spending positively impacts net written premiums of the above insurance sectors except marine. Inflation reduces retention rates of energy and property sector but helps motor sector. Government spending and debt also help retention rates in engineering sector insurance but reduces property/fire related retention rates.

Keywords: Insurance companies; Retention ratio; Net written premium; Saudi Arabia; Macroeconomic; Oil prices