Cooperative Insurance Companies Control Law in Saudi Arabia

The Cooperative Insurance Companies Control Law in the Kingdom of Saudi Arabia is a set of legal rules governing the operation of cooperative insurance companies in the Kingdom. It aims to regulate the activities of insurance companies in a manner that is not inconsistent with Islamic law (Sharia) and to safeguard the rights of policyholders who engage with these companies.

The Cooperative Insurance Companies Control Law was issued by Royal Decree on July 31, 2003, during the reign of King Fahd Bin Abdulaziz Al Saud. It consists of twenty-five articles, and the Implementing Regulations for the law were issued by ministerial decision on April 20, 2004.

Several articles of the Cooperative Insurance Companies Control Law have been amended, including Articles Twenty and Twenty-Two, which were amended on April 8, 2013. Later, Articles Two, Three, Six, Eighteen, Nineteen, Twenty, and Twenty-One were amended on August 31, 2021.

The Cooperative Insurance Companies Control Law adopts the exclusive form of insurance practiced in the Kingdom, which is cooperative insurance. It outlines the process for establishing cooperative insurance companies and reinsurance companies. The law defines the structure of cooperative insurance companies, the process for issuing licenses, and the authority responsible for inspecting company records to ensure the legality of their transactions and compliance with the provisions of the Cooperative Insurance Companies Control Law. The Companies Law applies to all matters not specifically addressed in this law, to the extent that it aligns with the nature of this type of company.

According to Article One of the Cooperative Insurance Companies Control Law, insurance in the Kingdom must be provided by insurance companies registered in the Kingdom that practice cooperative insurance in line with the provisions of the Articles of Incorporation of the National Company for Cooperative Insurance issued by Royal Decree dated December 8, 1984, and in a manner that is not inconsistent with the provisions of Sharia.

The law outlines the jurisdictions of SAMA, which—according to Article Two of the law—include:

1- Receiving and studying applications to form cooperative insurance, reinsurance companies, and companies providing insurance support services to ensure that these applications satisfy the licensing regulations set by SAMA. Upon approval of these applications, they are referred to the relevant authority for completing the establishment procedures.

2- Issuing licenses, supervising, monitoring, and regulating the activities of insurance companies, reinsurance companies, and companies providing auxiliary insurance services. SAMA exercises its authority in accordance with the provisions of this law and its Implementing Regulations.

SAMA has the authority, in particular, to regulate and approve rules for the investment of premiums of insurance and reinsurance operations and create a formula to distribute the surplus of insurance and reinsurance operations among shareholders and policyholders, provided that separate accounts are kept for shareholders, policyholders, and insurance operations. SAMA also determines the sums of money that should be deposited in one of the local banks in order to engage in each of the different classes of insurance. Additionally, it approves standard forms of insurance and reinsurance policies and determines the minimum amounts of third-party insurance coverage, subject to the provisions of applicable laws in this regard. Furthermore, SAMA sets rules to determine how the assets of insurance and reinsurance companies are to be invested, in addition to setting general rules determining the assets each company must allocate inside and outside the Kingdom, the minimum and maximum for each class of insurance, the conditions that may be observed in each class, and the minimum and maximum underwriting premiums and insurance contributions as they relate to the capital of the company and the reserves. Additionally, SAMA sets rules and regulations which protect the rights of the beneficiaries and ensure the ability of the insurance companies to satisfy claims and obligations.

3- Collecting fees for the licenses and services it provides, with the fee amounts determined by a decision from the Governor.

According to Article Three of the law, no person in the Kingdom may engage in insurance, reinsurance, or provide auxiliary insurance services without obtaining a license from SAMA. The conditions for establishing an insurance or reinsurance company include the following: it must be a joint-stock company, its principal objective must be to perform any insurance and reinsurance activity, and must not undertake other objectives unless they are necessary or complementary to its principal objective. Additionally, insurance and reinsurance companies are not permitted to apply for a public offering of their shares without the approval of SAMA, which sets the regulations governing such approvals.

Insurance companies may not directly own companies or brokerage establishments, and reinsurance companies may not own reinsurance brokerage companies or establishments. The capital may not be changed without the approval of SAMA, and pursuant to the Companies Law. The Implementing Regulations set the minimum paid-up capital for insurance and reinsurance companies, which must not be less than SAR300 million.

Article Five of the Cooperative Insurance Companies Control Law stipulates that an insurance or reinsurance company - upon commencing business - may not suspend its insurance activities without the prior approval of SAMA to ensure that insurance companies take all necessary measures to safeguard the rights of their policyholders and investors. SAMA may inspect the records and accounts of any insurance or reinsurance company through the bank’s employees or auditors appointed by it provided that the inspection is carried out at the site of the insurance or reinsurance company. In this case, the employees of the company may submit whatever is in their possession or under their authority, as well as any records, data, and documents requested from them, and disclose any information they have, relating to the company, to the employees of the bank or whoever it may appoint as auditors.

An insurance or reinsurance company may not open any branch or office inside or outside the Kingdom, agree to merge with, own any insurance or banking activity, have control thereof, or own shares of another insurance or reinsurance company without the written approval of SAMA.

Article Thirteen of the law stipulates that all insurance and reinsurance companies may submit their zakat or tax returns, the audited financial statements, and any other information or documents that the department deems necessary for the purpose of determining the amount subject to zakat or taxation in accordance with the provisions of the Tax Law, Zakat Collection Law, and their Implementing Regulations, and payment of the sums due within the times specified by the law.

Insurance and reinsurance companies governed by this Law may make a statutory deposit in one of the local banks according to the order of SAMA, and the Implementing Regulations may determine the rules relating to this deposit.

The Cooperative Insurance Companies Control Law requires insurance and reinsurance companies to allocate a part of their annual profits, not less than 20 percent, as a statutory reserve, until the total reserve amounts to 100 percent of the paid-up capital. All insurance and reinsurance companies may set up the required reserves for their insurance classes, and other reserves as provided for in the Implementing Regulations of this law.

It is prohibited for any person who obtains any information while carrying out any work related to the application of the provisions of this Law, to disclose or benefit from it in any way. Employees of SAMA—designated by a decision from the Governor of SAMA—are responsible for conducting inspections, monitoring, and identifying violations of the provisions of this law or its Implementing Regulations. The Implementing Regulations outline their responsibilities and the rules governing their work. The governor has the authority to assign technical tasks—supporting inspection, monitoring, and enforcement activities—to the private sector.

The Cooperative Insurance Companies Control Law specifies the penalties imposed on violating companies. Anyone who engages in insurance activities or provides auxiliary insurance services without a license from SAMA is subject to a fine not exceeding SAR2 million or imprisonment not exceeding four years or both. Additionally, anyone who violates any provision of this law is subject to a fine not exceeding SAR2 million. If the violation persists, a daily fine not exceeding SAR10,000 may be imposed for each violation day. The decision imposing a penalty may also include a provision requiring the violator, at their own expense, to publish a summary of the decision in a local newspaper or any other appropriate medium. This is determined based on the nature, severity, and impact of the violation. The publication can only occur once the decision has become final.