Reinsurance growth in Bahrain supported by robust regulatory system

The large amount of business ceded by Gulf insurers to domestic, regional and global reinsurers has, for many years, been a hot topic in the sector. The downside risks of this market characteristic are frequently rehearsed at industry conferences and regulatory seminars: Middle Eastern insurers, it is argued, have grown accustomed to the easy commissions made while passing business on to reinsurers and have little appetite for higher retention and its associated risk. The consequence of this is that the core activity of sound underwriting has been neglected over recent years, as insurers have been happy to pass the risk on to reinsurers. This is particularly prevalent in the facultative market, where short-term profit is a larger motive force than in treaty arrangements, the renewals of which must negotiated with reinsurers on an annual basis.

These concerns are being addressed by regulators across the region, which have been particularly focused on improving the technical performance of insurance firms, as well as ensuring that they are sufficiently solvent to weather underwriting losses. From the point of view of Bahrain’s insurers, however, the high cession rates exhibited among MENA members equate to ample growth opportunities: according to the “MENA Reinsurance Barometer 2015”, a survey by the Qatar Financial Centre, about 30% of non-life insurance premiums are ceded to reinsurance companies, which amounts to around $13bn worth of reinsurance business.

Local Players

The presence of some of the region’s largest reinsurers in Bahrain means that much of this volume is channelled through Manama. Bahrain’s emergence as a financial centre in the 1970s marked the beginnings of its modern insurance industry, but it was the creation of the Arab Insurance Group (Arig) in 1980 that kick-started reinsurance activity in the kingdom. Established in Bahrain by the governments of Kuwait, Libya and the UAE, Arig’s assets, which amount to $1.15bn as of September 2015, make it one of the largest Arab-owned reinsurance organisations in the MENA region. Its prominence within the GCC market played a large part in the establishment of Bahrain as a centre of reinsurance, and helped to attract the growing number of international reinsurers that have chosen the Kingdom as a base for their operations. Arig’s main rival in terms of size is Trust International Insurance and Reinsurance Co (Trust Re), which posted assets of $1.5bn in June 2015. The two companies enjoy a dominant position among the locally incorporated reinsurers, which also include the firms ACR Retakaful, Gulf Union Insurance and Reinsurance, Hannover Retakaful, and the Medgulf Group.

Regional Hub

In Bahrain, the cession rate is slightly higher than the MENA average, standing at 34%. However, the relatively small size of the local market means that Bahrain-based reinsurers are more concerned with serving the region than the domestic market. Around 37% of Arig’s premiums, for example, are gained from their participation in a syndicate with Lloyd’s of London, while 35% is derived from the Middle East, 19% from Asia and 9% from Africa. Trust Re’s geographical scope, meanwhile, includes the Middle East, Africa, Asia, Central and Eastern Europe, South-east Europe, Russia and the Commonwealth of Independent States. The factors underpinning Bahrain’s status as a regional reinsurance hub are numerous. “Manama has the best geographical position, and is well connected regionally by Gulf Air. The workforce has many years of experience with financial services. The quality of life is high, and relaxed by regional standards. The cost of living is also competitive, especially when it comes to things like property prices,” Charles Forward, head of finance at Trust Re, told OBG. Most important to Bahrain’s ability to attract large reinsurers, however, is its legal and regulatory regime, which is recognised as world class and was ranked second in the GCC in a 2014 survey of 152 countries conducted by the Fraser Institute. Maintaining this competitive advantage in the context of regulatory reform in the region will be an important concern for the Central Bank of Bahrain in the years to come.

Industry Challenges

The ability of the central bank to defend its jurisdiction’s competitive edge is made more important by what is an increasingly challenging operating environment for the Middle East’s reinsurers. One of the advantages of the traditional focus on regional markets by Bahrain’s reinsurers is the low incidence of natural catastrophes that these markets have been exposed to. Recent flooding in Saudi Arabia and Oman are rare exceptions to the norm of low earthquake, windstorm and flood activity, and commercial risk is therefore the primary source of losses in the segment. This limited spectrum of risk has helped to keep the technical performances of Bahrain-based reinsurers more stable than would otherwise have been possible.

However, recent trends in the primary insurance segment have made the task of risk assessment more complex for insurers in the MENA region. The principal cause is a shift towards more facultative policies by direct insurers. Many regional insurers engaging in facultative business are “followers”, in that they are one of a number of insurance companies covering a risk, headed by a programme lead. The latter often determines the terms, conditions and prices for the entire undertaking, yet its ability to take on risk is generally markedly different from the smaller insurers in the programme, due to their more diversified portfolios and bigger balance sheets. There is also the question of geography: while primary insurers tended to concentrate on one or two markets in the early stages of their development, as they have increasingly involved themselves in facultative placements their exposures have, in general, extended to a larger number of markets, making it difficult for reinsurers to keep track of the original risk. For regional reinsurers, the increasing number of primary insurers participating on facultative placements therefore, makes the task of monitoring the level of risk they are assuming through their treaty programmes a more difficult undertaking.

A Crowded Field

An increasingly crowded regional reinsurance market is also a significant challenge for the segment. One of the by-products of the maturation of the regional insurance industry has been increased interest from international reinsurers keen to claim a share of the market. These have made their home in well-regulated offshore centres, like Bahrain, and in dedicated financial hubs such as the Dubai International Financial Centre and Qatar Financial Centre. The result is a heightened level of competition which has undercut profit growth over recent years.

The scale of this challenge varies from company to company. In a recent study of the issue, US-based ratings agency AM Best differentiated between “established participants” such as Arig, and “new entrants”. The former were typically established with government affiliations in order to retain risks within the region, and often continue to benefit from government support through state ownership or legislation which generates compulsory cessions from the direct market. The new entrants, meanwhile, are characterised as having entered the market over the past 15 years or so, with ownership structures that are typically comprised of local, regional and foreign private investors.

The Upper Hand

Facing the reinsurance oversupply that a crowded market has led to, it is the more established players which have, not surprisingly, fared better. According to AM Best, the combined ratio of established MENA players between 2010 and 2014 stood at 98%, meaning that losses and expenses together did not exceed premium take. Conversely, the combined ratio for new entrants over the same period stood at 114%, meaning that the segment made an aggregate loss in terms of technical performance. While a solid performance on the investment side of the business might mitigate the problematic ratio for the majority of reinsurers, the findings highlight a vulnerability in the segment. Looking ahead, any slowdown in big-ticket projects as a result of a government budget tightening in reaction to low oil prices threatens to reinforce this trend.

Bahrain’s larger reinsurers are in an advantageous position to compete for market share: both Arigand Trust Re hold ratings of B++ and A- , respectively, from AM Best. However, the technical performances of all reinsurers in the region are likely to remain under pressure in the coming year.