What is Actuarial valuation in Saudi Arabia

With the recent transformation in KSA, businesses deal with the growing pressure to keep financial planning and long-term sustainability coordinated. And actuarial valuation plays a foundational role in it, no matter if it’s about managing pension obligations, employee benefit schemes or insurance reserves, actuarial valuation is essential to ensure financial resilience and regulatory compliance. From the conference halls of financial institutions to the public health care companies and national energy giants, actuarial data helps to not just predict the future liabilities but also turn down the chances of risk and elevate governance. This article further dives into what actuarial valuation stands for, unveils the regulatory landscape in KSA, highlights the key methodologies and explores how businesses can achieve a competitive edge through professional actuarial guidance.

What is Actuarial Valuation?

An actuarial valuation is a complete financial analysis that is led by actuaries to find out the present worth of upcoming obligations and risks. It utilizes statistical, mathematical and economic theories to roughly calculate liabilities that typically span over long time. These valuations are critical because of:

• Employees benefit schemes like EOS benefits, pension plans etc.
• Reserving for insurance and risk management
• Financial predictions and thoughtful decision making
• Merger acquisitions and restructuring of business operations
• Finding the funding possibilities for long term commitments
• Assessing demographic trends in employee’s population

The outcome of an actuarial valuation assists stakeholders in understanding the financial durability of programs and ensures full compliance with regulatory standards. A consistent valuation is the reason for gaining trust among stakeholders, board members, employees and regulators.

Regulatory Landscape in Saudi Arabia

As KSA is working progressively to build up the financial and risk management systems, actuarial valuation in Saudi Arabia is also mandated by legal authorities across various areas. In case of non-compliance businesses can go through financial mistreatments and regulatory penalties.

1.      GOSI (General Organization for Social Insurance)

GOSI look after the social insurance framework in KSA. Companies are required to precisely account for End-of-service benefits (EOSB) for employees, and with the aid of actuarial valuations they get realistic, data driven calculations based on factors like employee’s turnover, salary progression and mortality rates. With the rise in expatriate employment and the push to nationalize the workforce, these estimates have not just become more complex but also more critical.

2.     IFRS and SOCPA Compliance

Businesses in KSA are required to adhere to the International Financial Reporting Standards (IFRS) or frameworks presented by Saudi Organization for Chartered and Professional Accountants (SOCPA). These standards mostly obligate actuarial valuation for post-employment benefits as mentioned by IAS 19. Non-compliance with these standards not just damages reputation but also impacts the credibility of financial statements that become stumbling block in raising funds and investment possibilities.

3.     SAMA (Saudi Central Bank)

The KSA insurance sector is looked after by SAMA, which calls for actuarial assessments for insurance companies. With these evaluations businesses can maintain sufficient reserves, pricing products accordingly and managing risks proficiently. SAMA routinely reviews the actuarial reports during the audits and inspections and any Divergence from conservative reserve management causes hefty penalties or license suspension.

Methodologies Used in Actuarial Valuation

Actuarial Valuations depend on both deterministic and stochastic models according to the nature of liabilities and the regulatory requirements. Common processes include:

1.     Projected Unit Credit Method (PUCM)

PUCM is mostly used under IAS 19. It evaluates the present value of future benefits as per accrued service, considering salary progression and other assumptions. It is generally used in businesses with dynamic salary structures.

2.     Entry Age Normal Method

It is utilized for funding valuation, mainly in pension schemes, this method widens the cost of benefits evenly over the working lifetime of an employee. It assists in maintaining predictable contribution over time.

3.     Aggregate and Attained Age Methods

These methods are not used quite frequently but are reliable in certain cases, particularly when funding levels are being checked out and reviewed over time. These are often times used in multi-employer pension plans.

Common Applications of Actuarial Valuation in KSA

• End-of-Service Benefits (EOSB)

As per the Saudi Labor Law, employers are mandated to offer their employees EOSB upon the termination of employment legal contract. Actuarial Valuation offers a detailed evaluation of EOSB liabilities by determining factors like years of services, employment turnover rates, discount rates and expected increase in salaries. During the last couple of years, businesses have also started to analyze the impact of EOSB on economic shifts like inflation and changes in workforce structure.

• Defined Benefit Pension Schemes

The culture of Defined benefit pension plans is not recognized widely in KSA, yet they exist in some larger enterprises and government related institutes. Actuarial valuations in Saudi Arabia assist in finding out the funding status and needful contributions. Additionally, these business valuations guide any changes in policy such as increasing the retirement area or reorganizing the benefit formulas to ensure long-term growth and sustainability.

• Insurance Reserves

Insurance companies mainly depend on actuaries to assess the resources needed to meet future regulatory needs. Business valuation helps them ensure that the companies remain solvent and compliant with the legislations introduced by SAMA. This comprise of assessments for life insurance, health insurance, motor claims and reinsurance arrangements

• Employee Benefits Accounting (IAS 19)

With Actuarial valuation in Saudi Arabia business ensure precise financial reporting for long term employee benefits as per listed in IAS 19. The valuation focuses on present value of obligations, fair value of plan assets, service and interest cost, actuarial gains, losses and past service cost and curtailments. This data is merged into annual financial statements and audited by independent firms to verify its accuracy.

Benefits of Conducting Actuarial Valuation

• Facilitates the alignment with international and local standards requirements like IFRS, SAMA and SOCPA
• Give a clear picture of future liabilities to reduce the chances of any unexpected surprises
• Assist in precise budgeting and forecasting of employees benefits and insurance reserves
• Helps to build trust and credibility among investors, auditors and legal authorities
• Manages risks more proactively regarding long term obligations
• Ease the financial planning and HR structure which boosts operational efficiency
• Open the doors for better and smoother annual audits and statutory requirements

Challenges of Actuarial Valuation in Saudi Arabia

Regardless of the increasing awareness, there are multiple challenges that come along in the adoption and implementation of actuarial valuation in Saudi Arabia, some of them we will mention below:

• Skill gaps and limited understanding of local talent hence firms mainly depend on foreign consultants for business valuation
• Outdated and traditional ways of storing employee’s data with missing updates may lead to comprises in records
• Many businesses don’t emphasize on actuarial input until they reach the regulatory deadlines which is when they force actuarial valuation
• Forecasting the ever-changing economic landscape leads to miscalculated inflation, turnover and growth rates.
• Deploying the advanced actuarial models can be demanding and time consuming specifically for HR and finance systems

To clear these obstacles, it demands better coordination between HR, finance departments, external consultants.

The Role of SS&CO in Actuarial Valuation in KSA

SSCOKSA is one of the premier actuarial consulting firms in Saudi Arabia which not just facilitates the Saudi businesses in meeting regulatory needs but also managing financial risk efficaciously. We offer our clients:

• Custom made valuation reports that are aligned with IFRS and SOCPA guidelines
• Analysis of Data and actuarial modelling
• Help in audit reviews and disclosures
• Thoughtful guidance on funding strategies and benefit design
• Building smart and advanced actuarial software solutions
• Capacity building and training teams regarding actuarial valuation and business valuation

SS&CO team of expert actuaries are fully aware and expert in local and international regulations. We provide dedicated services personally designed according to industry specific needs and business demands. Not just that, our team also offers bilingual reporting with sharia compliant report to ease the process further.