Reasons for Issues Experienced with Corporate Governance in Arabia's Insurance Market

Corporate governance in listed Saudi insurance has been an issue of concern and has been analysed by scholars over the years. There are some measures that have been introduced and implemented by the government administrators to ensure that the losses in the financial sector have been solved. A financial crash was experienced in Saudi in 2006, and it has created an adverse impact on activities aimed at increasing the growth and development of industries in the nation, which has also affected the economic stability. The recent challenges that have been faced illustrate the notion that the introduction of Capital Market Authority has led to immense changes being experienced in the society. Despite strategies being developed, the issues have made it difficult for the government administrators to attain the objective of attaining requirements of persons in various communities, as well as guaranteeing that there is an attainment of a competitive advantage in the international market. There are various reasons that have been developed by scholars relative to the issues being experienced with corporate governance in Saudi Arabia, and the study is aimed at discussing the problems and also explaining the solutions that have been developed to assist in improving the situation in the nation. The study is based on scholarly materials that have been published over the years, based on issues related to corporate governance, problems being faced in the insurance companies as well as solutions that have been implemented to help in making sure that there is improvement in operations undertaken by employees and communities carrying out diverse tasks in the companies. The topics that will be discussed in the study include Saudi Arabia’s insurance market, issues experienced with corporate governance in Arabia’s insurance market, solutions to remedy the issues in Arabia’s insurance market that are based on scholarly information and statistics.

Research Questions

1. What are the issues experienced with corporate governance in Arabia’s insurance market?

2. How does poor corporate governance contribute to poor performance of insurance firms in Saudi Arabia

3. What is the best solution to the current issue of poor corporate governance and performance of insurance industries in Saudi Arabia

CHAPTER TWO: SAUDI ARABIA’S INSURANCE MARKET

The insurance companies in Saudi Arabia have been explained by scholars to have faced increased levels of competition based on the number of service providers that are continually being introduced in the nation. The insurance company managers have developed strategies aimed at ensuring that the client requirements have been attained and that there are reduced issues faced in the business environment (Al-Ghamdi and Rhodes 2015, p. 78). Some of the factors that have created an immense impact on the performance of insurance companies and corporate governance in Arabia include poor governance, where the employees carrying out various tasks have been dissatisfied with what they are receiving from the managers and heads of departments. In most instances, leaders have been found to demonstrate a high level of self-interest without considering the stakeholder’s health, promotion and stability issues in the organization. The factors have led to decreased effectiveness and efficiency in attaining client requirements, which has also affected the general performance of the insurance companies in the nation. Despite the fact that the issues have created an immense impact on the economic activities undertaken in the nation, research explains the notion that company managers in most insurance industries have not realized the impact created by poor corporate governance and how their performance has been reducing (Cuomo, Mallin and Zattoni 2016, p.222). Therefore, there is a need to develop strategies that will provide a lasting solution to the various issues experienced with corporate governance in Arabia. The chapter discusses the reasons for issues experienced with corporate governance in Arabia’s market and solutions to remedy the issues in Arabia’s insurance market.

The figure below illustrates the market portfolio by product type in Arabia, and it is evident that the GWP’s have increased in 2015 by 19%, and has led to the attainment of SAR 35.6B. The health insurance has been maintaining its position over the years, and the figure shows that it is the largest distributor in the market with its market share being 53.32% of the total GWP. The motor insurance has a GWP of 28.89 market share, and the other share has been divided into different products.

Figure 1: The Saudi insurance market portfolio by product type

(Source: Insurance Sector Report 2015, Al-Bilad Capital)

REASONS FOR ISSUES EXPERIENCED WITH CORPORATE GOVERNANCE IN ARABIA’S INSURANCE MARKET

There are different issues that have been highlighted by scholars that are related to corporate governance in Arabia insurance companies, which are discussed in the study. Despite the notion that there are remedies developed to assist in making sure that the problems have been handled, there are some national policies that have led to reduced rates of effectiveness in implementing new strategies (Habbash 2016, p.740). Some of the issues that have been addressed by scholars are aimed at illustrating the problem so that decisions can be developed to assist in solving them. The company managers and government administrators in Saudi Arabia should ensure that the rules governing activities undertaken by individuals in the nation have been modified to allow for changes, which will reduce issues experienced with corporate governance in the business environment. Disclosure and transparency issues, regulations addressing market abuse, level of compliance and poor corporate governance and poor performance of insurance firms in Saudi Arabia are some of the concepts that will be addressed to explain the corporate governance problems that have been faced over the years and analysed by scholars in Saudi Arabia (Tricker and Tricker 2015, p.78).

Disclosure and Transparency Issues

Disclosure and transparency is an important aspect of improving operations undertaken by employees in any industry in the international market. In Arabia, there are policies that have been developed with an aim of governing the transparency issues, which include the CG and CMA regulations that follow the guidelines that have been provided in the international standards. However, the fact that the laws are not followed by company managers in Arabia has led to issues with corporate governance being experienced in the business environment, which has affected the economic activities negatively (Al-Janadi, Abdul and Alazzani 2016, p.871). The national administrators have developed strategies that are aimed at making sure that economic growth and stability has been attained successfully in the nation.

Research studies have found out that the regulations implemented enforceable and transparency legal requirements, which were considered as being strong in the nation of Arabia and other surrounding nations. However, the application of the requirements has been attained moderately in the market. Therefore, there is evidence that rules are being introduced in the nation, but the chances of the practices being carried out are minimal. The failure to follow rules have led to reduced success levels, and increased issues in corporate governance in the financial and insurance companies in the nation (Abdulla, Percy and Stewart 2015, p.262).

Disclosure of important information has been found to be weak based on the notion that there is an inadequacy in foreign competition being experienced by the insurance companies in the nation. The policies that have been developed clearly state that disclosure and transparency are significant and is aimed at articulating various responsibilities that have been defined for the enforcement, regulatory and supervisory authorities in the nation. The rules require that organizational performance is based on specific standards and principles that are governed by the national authorities (Al-Bassam, Ntim, Opong and Downs 2015, p.45). The framework has been developed and entails vital strategies and regulations that guide external auditors on procedures to be followed when reviewing reports of the investment funds, brokerage organizations and stock exchange in the insurance companies. The policies also apply to the industries that have been developed in the nation with an aim of improving the economic success processes.

The national authorities have raised concerns on issues facing the insurance sector related with corporate governance, institutional structures, and aspects of disclosure and transparency with an aim of making sure that there are reduced problems being faced in the capital market. The transformation has helped in creating a transformation in the recent years, regardless of the fact that there are still instances where the policies are not taken into consideration by individuals from various communities in the nation. There is a general support that has been applied by the administrators to facilitate effectiveness in guaranteeing that corporate governance transparency and disclosure requirements, as well as the market integrity, have been attained and improved on a regional and an international level, which is based on the national standards that govern operations undertaken in the business sector (Elmagrhi, et. al. 2017, p.459).

The reports provided by the World Bank of 2009 indicate that disclosure and transparency requirements in Arabia that are related to tasks accomplished by stakeholders could not be analysed suitably as it was still new and had not created an immense impact in the business operations. However, the other aspects of transparency and disclosure that created concern in the nation included the fact that there was substantial weakness related to non-financial issues such as rating agencies and conflict of interest that had not been applied in any institution (Hamdan, Buallay and Alareeni 2017, p.295). The company managers argued that the core principles and officials who were concerned had not been authorised into the structures that had been developed to guide the general corporate governance.

The public disclosure and transparency have developed an illustration that listed companies are, in a much stronger way, controlled by the government policies despite the concept that there are areas that have not been covered, especially relating to the ownership processes that is essential in the national administration. The World Report has criticised the compliance of the policies that have been introduced in the market sector in Arabia and explains that the compliance is still weak with respect disclosure and transparency of information related with corporate governance (Elmghaamez and Ntim 2016, p.89). The other aspect of disclosure and transparency that has not been taken into consideration thus causing issues with corporate governance in insurance companies in Arabia entail the fact that ownership processes and information has not been made publicly available, which is to be carried out by the application of a methodological approach provided by the government rules and regulations. The World Bank recommended that the nation should adopt, CMA, which will assist in ensuring that the listed corporations and its ownership information have been made public by publishing them and producing ownership reports (Al-Ghamdi and Rhodes 2015, p.78).

Regulations Addressing Market Abuse

There are procedures that have been developed based on issues related to market abuse and how they should be handled in Arabia, but lapses in transparency and disclosure have also affected its effectiveness. The process has led to reduced levels of economic development and financial market increase, which also creates adverse impacts on the performance of the industries in the international market. The failure of company managers implementing the provided regulations addressing market abuse has led to issues with corporate governance in Arabia that has affected the national economic progress (Al-Janadi, Abdul and Alazzani 2016, p.873).

There are loopholes that have been identified by the stock market regulators relative to market regulation, which have an intensified impact in eliminating poor disclosure and irregular trading as it helps in encouraging participants to increase their investment in the market equities. The marketing manipulation processes have not been taken into serious consideration in the nation, and the process has been extensively and continually creating adverse impacts on the corporate governance in the nation and its market structures and trading activities.

The government administrators should develop strategies that will assist in making sure that policies introduced and implemented in the nation have been followed by investors and company managers in various industries in the nation. The process will help in reducing the impact of issues related to corporate governance in the nation, which has created adverse impacts on the economy and market activities that assist in improving the national competitive advantage in the global market (Cuomo, Mallin and Zattoni 2016, p.225).

Level of Compliance

Listed insurance companies in Arabia have been provided with rules that require a high level of compliance, which has not been attained in the nation over the years. The regulations explained in both SAMA and CMA are aimed at governing and supervising the levels of compliance by company managers and the methodologies applied by the rules have been based on the national and international standards required of the market and trade processes. Failure to follow the guidelines provided in the laws has led to issues with corporate governance in insurance companies in the nation, and proper measures should be developed to ensure that the initiative has been adopted successfully in business operations (Habbash 2016, p.750). The process will assist in guaranteeing that there are reduced negative impacts of corporate governance in the industrial operations carried out in Arabia.

The guidelines provided by SAMA and have been neglected in the nation explain that proper measures should be introduced to monitor organization compliance, which is applicable to all rules, regulations, and laws that have been issued by the government administrators. Researchers have illustrated the notion that the SAMA and CMA guidelines are developed with an aim of favouring various activities undertaken by the company managers, and its failure leads to reduced productivity in the nation (Tricker and Tricker 2015, p.100).

Therefore, the issues with corporate governance has been increasing in the nation of Arabia and the market strategies as there has been failure to follow the primary measures that have been developed by the national administrators, which are aimed at improving performance and reducing risks experienced in the business environment (Abdulla, Percy and Stewart 2015, p.269). Therefore, proper measures and strict regulations should be implemented so that company managers can apply the required regulatory measures and ensure that all policies have been adopted in the industrial tasks carried out by employees.

The structure, responsibilities, and roles of investors have not been attained in the operations carried out in diverse insurance and financial companies in the nation, and its impact has led to negative consequences and increased problems with corporate governance. There are strategies that have been developed to help in solving the problem, but there is evidence that there are some persons that have failed to undertake necessary precautions based on the national policies, which has affected the general performance of the market and industries in the international economic increase processes. The company managers should be encouraged to adhere to the rules, and the issues with corporate governance in the nation will be reduced to create a positive impact in the primary activities undertaken in the market (Al-Ghamdi and Rhodes 2015, p.78).

Poor Corporate Governance and Poor Performance of Insurance Firms in Saudi Arabia

Poor corporate governance in Arabia has been explained as the primary reason as to why various industries in the nation have demonstrated poor performance in the businesses. Scholarly works illustrate that low market liquidity is caused by poor corporate governance and the concept also affects the general performance of the national market. The market and business environments in Arabia have been faced with issues that have led to the fluctuation of prices, and there are decreased levels of attainment of client requirements in the local and international market, which also affects the competitive advantage acquired by the companies. The strategies that are adopted by the company managers in Saudi Arabia are essential in guaranteeing increased performance and readiness of company managers to compete with other industries from other nations (Elmagrhi., et. al. 2017, p.460). However, poor corporate governance has led to a situation where the market strategies employed are not effective in creating a positive impact on organizational performance.

The operations undertaken by employees in the insurance and other financial institutions have been low compared to what the current market requires, and the process can be improved if proper measures are implemented to guarantee stable and reliable corporate governance by the national administrators. The fact that there are some policies that have not been taken into consideration by the company managers should be considered a challenge by the government administrators, and new strategies and rules are developed to facilitate effectiveness in ensuring that the market strategies have been developed to suit the needs of individuals in the society. The process is essential in ensuring that a competitive advantage of the insurance companies in the global market has been attained and that the growth of economic activities in the nation is experienced (Hamdan, Buallay and Alareeni 2017, p.300).

Market strategies and corporate governance are significant factors in the society that should be analysed and proper standards be introduced in the nation of Arabia. The challenges that have been encountered over the years should also be used to implement decisions that will assist employers and employees in handling various tasks in the business environment with an aim of ensuring that the economic processes are increased in the nation. Therefore, there is a necessity of the national administrators to develop strategies that will help in making sure that corporate governance policies are established and all businesses in the nation have adhered to them successfully (Al-Janadi, Abdul and Alazzani 2016, p.880).

SOLUTIONS TO REMEDY THE ISSUES IN ARABIA’S INSURANCE MARKET

The government administrators in Arabia have developed measures that are aimed at reducing risks and issues related to the corporate governance in insurance companies in the nation. However, the process has been helping in improving the situation gradually and has created a slow rate of economic growth and stability, which also creates a negative impact on activities undertaken in the international market. The remedies to the insurance market include changing some of the policies that have been implemented in the nation over the years and have not been helpful in improving industrial performance in the international market. The major areas that are discussed in the study that illustrates the solutions to issues with corporate governance in Arabia include: corporate governance regulations; regulatory response to the market crash of February 2006; Arabia’s approach to disclosure and transparency; disclosure provisions in the capital market law; Saudi compliance with the OECD principles of corporate governance and the development of Saudi regulations (Hamdan, Buallay and Alareeni 2017, p.302). The discussions are based on primary data collection that has been carried out in the years by scholars and are aimed at explaining the concept of corporate governance and why there are issues being faced by the government administrators and insurance companies in Arabia.

Corporate Governance Regulations (SGR)

In 2003, there was a shift that occurred in Arabia when the Capital Market Authority (CMA) was being established and various roles that were related with the Saudi Arabian Monetary Agency (SAMA) were transferred in the process. The approaches applied by CMA and SAMA were aimed at developing a strategy that would help in improving various problems that had been associated with corporate governance. There was an addition of other strategies and policies by the government administrators, which were aimed at monitoring and governing diverse activities that were being carried out in the insurance companies. However, in 2009, reports from the World Bank indicated that the response and compliance to the regulations that had been implemented was relatively low compared to what had been perceived by the national administrators after the implementation procedure were carried out successfully (Al-Ghamdi and Rhodes 2015, p.78). SAMA has taken the initiative of producing a manual that will explain the requirements of corporate governance, especially aimed at the financial institutions in Arabia. Despite the notion that there have been challenges in enacting new laws and policies in the nation including making sure that they are followed and activities are adjusted to suit the new rules, there has been a genuine desire by the Saudi government administrators to guarantee that the economic stability and growth has been restored and maintained to create a positive impact in the international market.

The changes applied in the corporate governance operations have led to efforts that have assisted in the enacting and establishment of sophisticated regulations and laws. The requirements of the global standards have been attained in Saudi after the introduction of the Corporate Governance Regulation that was issued in November 2006 and was divided into four main parts. The first part covers the preliminary provisions in the companies; the second part covers the rights of the general assembly and shareholders; the third part covering disclosure and transparency, which has been an issue of immense concern over the years; and the fourth part, covers the organizational board of directors (Al-Janadi, Abdul and Alazzani 2016, p.878).

Regulatory Response to the Market Crash of February 2006

The nation of Arabia experienced a market collapse on February 2006, which was caused by the manipulation of the market. Individuals and company managers with large resources exploited employees in the industries and took advantage of investors that had developed adequate experience in handling various issues in the business environment. The market regulators had no experience and they contributed largely to the problems that were being faced in the nation including abuse of market activities. The crisis led to the recovery process being applied by the national administrators and company managers since the economic activities had been adversely impacted and the various activities undertaken by employees had reduced impact on the production levels in the business environment. A new market structure was introduced that assisted in increasing transparency, and the process has helped in improving operations undertaken in the financial and insurance companies in the nation. The process also led to increased participation, sharing of resources and skills among employees in the Saudi market that increased economic growth and stability (Al-Ghamdi and Rhodes 2015, p. 78).

Arabia’s Approach to Disclosure and Transparency

The policies of Saudi Arabia allows for the application of an effective corporate governance strategy that has been approved by the government administrators. However, there are some challenges that have been explained by scholars to be related to the implementation of the strategies, which are sometimes consistent and can create adverse impacts on the economic activities undertaken in the nation. There are two frameworks that have been developed to reduce the negative impact of the approach, which includes the CGR and CL, which are developed for the requirements and governance of business corporations (Cuomo, Mallin and Zattoni 2016, p.235).

Disclosure and transparency of information are the primary determinants of the economic growth and development process. Research illustrates the fact that absence of disclosure and transparency leads to a situation where the economic progress in a nation can be difficult to sustain. The market activity robustness is highly dependent on the extent to which information and resources are allocated in the business environment, which also assist in improving and increasing economic stability and development in the international market (Tricker and Tricker 2015, p.115).

Disclosure Provisions in the Capital Market Law

There are rules and regulations that have been developed by the national administrators with an aim of contributing to the country’s capital market and protecting investors in the nation. The Ministry of Commerce provided a detailed and elaborate listing of the rules that have been essential in making certain that issues with corporate governance have been reduced and that stern measures have been developed by the company managers in the insurance organizations (Tricker and Tricker 2015, p.116). The CML disclosure regulations have been found to attain the primary requirements of the national and international standards that had been developed and implemented by the IOSCO, London Stock Exchange (LSE), and the Basel Committee on the Banking Supervision. The innate differences that have been applied in the structure of policies have been the difference existing between the mature, current and improve market in Arabia compared to the previous undeveloped market (Al-Janadi, Abdul and Alazzani 2016, p.875).

The disclosure provisions in the capital market law in Arabia have been effective in making sure that various problems with corporate governance in the nation have been solved. The government administrators have ensured that all policies being introduced in the market activities have been based on the international standards, so as to increase performance effectiveness of the strategies being implemented. Despite the notion that there are some regulations that have been amended to meet the required standards of the international market, the concept has been essential in making sure that corporate governance is improved and actively applied by company managers in the insurance companies. The activities undertaken by employees have also been influenced positively, which has helped in increasing the number of clients as well as improving and maintaining the economic growth and stability processes in the nation (Cuomo, Mallin and Zattoni 2016, p.230).

Saudi Compliance with the OECD Principles of Corporate Governance

The other solution that the government administrators in Saudi Arabia can apply to help in solving the various issues with corporate governance in insurance companies include making sure that the national policies are compliant with the OECD principles of corporate governance. Investor protection is one of the factors that should be analysed and checked for its compliance with the principles, as it creates a direct impact on the rights of shareholders in the insurance companies in the nation (Al-Ghamdi and Rhodes 2015, p.78). Registration of shareholders can also be carried out by the Securities Depository Centre, which also helps in making the company information transparent to all persons that have been authorised to participate in the company’s operations.

The extraordinary general assembly (EGM) should be applied in diverse activities carried out in the business environment, for instance, authorisation of the large transaction, changing the articles of the organization and increasing the capital that has been authorised to be used in accomplishing the business tasks. The inclusion of decisions and suggestions should be provided to the nominated employees, heads of departments and company managers who have a clear understanding of the organizational goals and objectives, as well as the national policies governing operations in the nation (Al-Janadi, Abdul and Alazzani 2016, p.880).

Special attention should also be paid to the transparency and disclosure issues in the insurance and financial industries in Arabia, especially when third parties are involved so as to prompt the disclosure of the CMA policy to guide the transactions that will be carried out in the business environment. Good corporate governance should also be promoted as it will assist in ensuring that the available resources in the company have been used to benefit the business and attain the goals and objectives that have been implemented by the managers (Elmghaamez and Ntim 2016, p.95). The process will help in improving the relations with stakeholders, creditors and workers as well as fostering measures for proper decision making and implementation, which is important in developing an environment that will attract more clients to the business environment and the concept will assist in sustaining a long-term and improved economic activities.

Development of Saudi Regulations

There are laws in Saudi Arabia that require reforms, and they include those that are related to the notions of listing, transparency and disclosure rules. There are strategies that can be applied by the government administrators to help in making sure that the process is successful. Some of the strategies entail ensuring that an understanding of the investor’s thinking and market structure, which will assist in the implementation of proper decision-making processes. The LR and CML regulations have been found to assist in dealing with disclosure, which should also be adopted in the nation following the Basel Committee and the IOSCO standards that have been developed and applied in the international requirements. The national administrators should also introduce the new policies based on the rules that have been developed to govern operations being carried out in Arabia’s market and industries (Hamdan, Buallay and Alareeni 2017, p.305).

Investors are expected to have adequate skills, knowledge, and experience in handling various tasks that are essential in managing investments in the nation, as the concept has always affected the progress of the economic activities in the nation. The fact that there have been wrong transactions being carried out by the investors, proper strategies should also be implemented to ensure that the action is reduced in the society. The process of discouraging the behaviour in industrial environments include encouraging investment institutions and strengthening disclosure and transparency in various tasks carried out by employees, employers, and investors in the insurance organizations. The process assists in guaranteeing the national administrators that there is proper functioning of companies to increase economic stability and growth in the market (Cuomo, Mallin and Zattoni 2016, p.237).

The CMA should also guarantee that immediate disciplinary action is taken for investors and company managers who have not adopted the national policies in the organizational operations being carried out. The standards of the business operations should also be raised to suit the changes that have been experienced over the years, which have resulted to increased levels of competition among industries in the international market (Cuomo, Mallin and Zattoni 2016, p.240). The guidelines provided by the national government are also required to be based on the international standards, which will assist in making sure that all activities undertaken in the insurance organizations have been authorised and they can be applied to attract clients from other n