Bahrain's insurance sector to benefit from new distribution and partnerships

Compared with many of its peers in the GCC that remain largely dependent on hydrocarbon revenues, Bahrain has a relatively diversified economy. The country pioneered the development of new economic sectors that are now common throughout the Gulf. Bahrain was the first GCC state to begin oil exports in 1934 and later became the first in the region to develop into a financial centre, starting in the 1970s. The parallel development of a vibrant insurance sector has helped limit the risks involved in investing in these new sectors. As a result, Manama has become an important base for several syndicates, specialists and support institutions. Automobile insurance was introduced to Bahrain in the 1950s, while licensed life and accident insurance came to the market in 1961. Formalisation of the insurance sector furthered economic diversification in the 1970s, encouraging foreign companies to set up regional bases in the country. By the early 2000s, Bahrain was a regional insurance centre. While the 2008 global financial crisis slowed the growth of the industry, the country was second only to the UAE in terms of the total number of active underwriters, according to rankings from 2011.

Penetration

As a result of its comparatively long insurance history, clear regulation and the large number of companies involved in the sector, Bahrain boasts the highest insurance penetration rate in the GCC at 2.3% of the population, according to a 2013 report by Alpen Capital. Bahrain’s insurance density, a calculation that measures insurance premiums against GDP, is higher than the regional average, at $543.90. By this indicator the kingdom ranks third in the Gulf bloc, following Saudi Arabia at $1299 and Qatar at $707.

However, insurance penetration in the kingdom sits slightly below the global average for a country with Bahrain’s per capita income. This suggests that there is room for further growth. Nevertheless, in this regard, Bahrain’s situation reflects regional trends. Within the Middle East, insurance penetration stands at one-fifth of the global average. “Bahrain has a relatively small, sophisticated and already well-advanced insurance market,” Ashraf Bseisu, group chief executive at Islamic insurance group Solidarity, told OBG. “For the sector to insure medium- and long-term sustainable growth, it requires sizeable and well capitalised insurers that are competitive globally and regionally.”

The financial services sector, of which insurance is a part, currently contributes 17% of the kingdom’s GDP. Despite the outbreak of the global financial crisis, between 2008 and 2012, the industry maintained a compound annual growth rate (CAGR) of 3.8%, according to 2012 figures (the most recent available) from the Central Bank of Bahrain (CBB).

Value

The total balance of payments of the financial sector in 2012 was BD122m ($323.3m). More recently, the market capitalisation of insurance companies traded on the Bahrain Bourse reached BD171.4m ($454.21m) in the third quarter of 2014, up 6.1% from BD161.5m ($427.98m) in the same period of 2013. “In 2013 growth in the insurance market was substantially better than what was budgeted and expected,” Bseisu told OBG. “The sector achieved premium growth of 12% and the most profitable segments were motor and medical insurance.” Moreover, according to the CBB’s figures for 2012, the gross premiums (or contributions in the case of sharia-compliant insurance, or takaful) have increased by 9% on a year-on-year basis, reaching BD239.05m ($633.48m). The total assets of the insurance and takaful firms in 2012 reached BD1.61bn ($4.27bn), compared to BD1.46bn ($3.87bn) in 2011. This increase of nearly 10% includes shareholders and participant funds as well.

LIine By Line

Motor insurance, which is mandatory for all drivers, is the primary source of revenues and claims within the sector. Motor lines represented almost 26% of the premiums and contributions written in the market in 2012. In raw terms, total motor insurance premiums and contributions grew from BD52.59m ($139.36m) in 2011 to BD60.16m ($159.42m) in 2012. Further growth in the segment is likely given the high level of automobile ownership. According to World Bank figures, there are roughly 352 vehicles for every 1000 people in Bahrain, ranking the kingdom among the top 30 nations in terms of automobile ownership. Similarly, medical insurance subscriptions saw roughly 7% growth in gross premiums and contributions from BD34.84m ($92.33m) in 2011 to BD37.17m ($98.5m) in 2012. Health insurance was extended to all Bahraini nationals in 2003, building on the legacy of previous social welfare schemes implemented in the 1970s. Expatriates have been obliged to provide their own health insurance since 2013, though enforcement has been suspended pending ministerial level approval. Non-nationals are allowed to use foreign health insurance policies, including those purchased online from within Bahrain to meet this new requirement. Moreover, liability, fire and engineering insurance remain important given Bahrain’s construction boom and expanding skyline. In 2012 fire and engineering insurance together accounted for 17% of the total written premiums and contributions in Bahrain. Insurance products for white goods and other consumer products represent an emerging opportunity in the country.

The long-term insurance sector – comprising life and savings products – has experienced the most rapid expansion in recent years, increasing by some 14% in 2012. The long-term insurance segment grew to BD60.16m ($159.42m) in 2012 from BD52.59m ($139.36m) in 2011. Traditionally, this sector’s growth has been driven more by expatriate workers rather than demand from Bahraini nationals. According to Eric van Biesen, chief financial officer of investment services firm Takaud Savings and Pensions, there is a need to develop a culture of savings among locals. “Around a third of MENA citizens do not save and 84% of GCC citizens think their savings are inadequate for retirement living,” Van Biesen told OBG. “There is an over-reliance on the state; this thinking has to change.”

Regional Importance

Manama remains an important regional insurance centre that provides access to the larger Saudi Arabian market, which numbers 27m. Medgulf Bahrain, a local insurance company, generates approximately 80% of the group’s premium revenue from Saudi Arabia. International insurance providers have been attracted by a regulatory regime that allows for the free movement of capital and 100% foreign ownership of companies. The highly skilled workforce in Bahrain is another factor that brings companies to Manama. The Bahrain Institute for Banking and Finance has trained Bahrainis for work in the financial sector since 1981 and has traditionally offered insurance training as well. In 2008 the Gulf Insurance Institute opened its doors in Bahrain specifically to train insurance professionals.

Bahrain’s importance to the regional insurance markets was highlighted in February 2014 at the 10th Middle East Insurance Forum (MEIF). The event at Gulf Convention Centre included 553 leaders and 250 organisations from across the region, a substantial increase from the 106 delegates at the first MEIF.

Market Regulation

The chief regulator of Bahrain’s insurance market is the CBB, the successor to the Bahrain Monetary Agency. From 2003 to 2004, the CBB undertook the development of new comprehensive regulations for the insurance sector in line with the International Association of Insurance Supervisors (IAIS) concepts. The CBB is also the only MENA representative on the executive committee of the IAIS. The bank has encouraged the expansion of international insurance companies operating in Bahrain.

At the start of 2013, the number of international insurance companies and organisations in the kingdom stood at 152. Indeed, only the UAE has more licensed insurer entities within the GCC states. This is partly due to its regulatory structure, whereby the minimum capital requirement for insurance businesses based in the country is BD5m ($13.25m) for Tier 1 insurance firms. For Tier 2 reinsurance firms, the minimum is BD10m ($26.5m). International insurance companies with a local office in the kingdom do not need to maintain a minimum Tier 1 capital, but instead must have a minimum fund requirement ranging from BD75,000 ($198,750) to as much as BD500,000 ($662,500), as well as a sufficient solvency margin.

Within Bahrain, product innovation is encouraged through government regulations. New products are sent to the CBB for review and if the bank does not respond within 60 business days, the insurance company is permitted to begin providing the product without further interdiction. Bahrain allows for the free movement of capital and 100% foreign ownership of companies operating within the kingdom. Another example of the innovative insurance environment has been the development of takaful. Within the GCC, only Bahrain, the UAE and Qatar currently have specific regulations for Islamic insurance.

Another industry body is the Bahrain Insurance Association (BIA), which received its charter in 1993 and began operations the following year. The organisation was initially overseen by the Ministry of Social Affairs, although it now falls under the auspices of the CBB. Currently, it has 48 members, a crowded market given the relatively small size of the country (Bahrain’s population is under 2m). This has meant that prices for insurance policies remain low as competition is stiff between insurance companies. Indeed, with so many entities involved in the market, consolidation seems likely. In July 2013, for example, the Bahrain National Insurance Company (BNIC) announced its intention to acquire a controlling stake in Al Ahlia. The company remains profitable, earning BD2.5m ($6.63m) in profits and posting total revenue of BD11.4m ($30.21m) in 2013, up from some BD11.2m ($29.68m) the previous year.

Building Awareness

Following MEIF 2014, the BIA sponsored the annual Bahrain Insurance Week, which served as an opportunity to raise awareness of insurance products. The event focused on promoting health, home and life insurance. While similar events are held elsewhere in the region, the BIA’s 2014 campaign was creative. First, it had support from multiple government institutions, including the CBB and the Municipality of Manama. Second, it was a multimedia campaign that made use of a number of media vehicles to promote its message. The campaign included outdoor banners, SMS advertising, and the broadcasting of radio jingles and advertisements in both the Arabic- and English-language press. Some of the outdoor banners along Bahrain’s major highways were kept in place well into April 2014. The print advertisements followed a three-day “answer and win” teaser campaign that enabled the readers to win surprise gifts by using their knowledge of insurance products, while a commemorative postage stamp designed by BIA and the CBB was issued by the Bahrain Post as well.

The third reason for the campaign’s success is Amna. Amna is the BIA’s new insurance mascot: a cartoon image of a woman wearing red robes in the style of Bahraini national dress. A female name, Amna also denotes qualities of security and peace. The character was created for the BIA by local graphic design studio Muharraqi in 2013. “The past couple of years have seen a number of promotional innovations like Amna, which have helped improve awareness of the insurance sector,” Lakhdar Moussi, an advisor at Pine-Bridge Investments Middle East, told OBG.

Bancassurance

New distribution channels will likely be important to access Bahrain’s increasingly well informed potential customers. One key distribution channel is bank insurance or bancassurance, a growing segment in the region. The bancassurance market in the GCC is expected to reach $1.2bn by 2016, according to the Dubai Islamic Bank. The large number of financial institutions in Bahrain means banks are well placed to play an important role in distribution. As of April 2014, the total number of financial institutions in the kingdom stood at 406, according to CBB figures, offering plenty of potential partners for insurance companies to work with.

The bancassurance model has already become popular in several EU countries with a similar per capita GDP to Bahrain. However, given that there are significantly more banks than insurance companies, the insurance providers have ample choice when selecting potential partners. The development of bancassurance in the GCC should also serve the interests of both insurance companies and banks. It has the capacity to allow banks to diversify their businesses and gives insurance companies to access new clients. In Bahrain, banks are prohibited from developing and providing their own insurance products. There are also bancassurance possibilities involving takaful. For example, the Takaful International Company (TIC) has been exploring a strategic alliance with Bahrain Islamic Bank as part of the bancassurance programme to provide a new distribution channel.

Takaful Segment

The first sharia-compliant finance company in Bahrain, TIC was incorporated in 1989. TIC is also distinguished by the fact that it became the first insurance company in Bahrain to be given a rating of “B++” stable from the international credit rating agency AM Best in 2013. The company grew by 12% that year, its highest rate of expansion since 2008. As the history of the firm suggests, takaful is a quickly growing sector within Bahrain. Islamic insurance now accounts for a sixth of all insurance premiums paid in the kingdom. The sector saw gross contributions rise in 2012 to BD53.67m ($142.23m) from BD43.91m ($116.36m) in 2011, equivalent to growth of 22% measured on a year-on-year basis.

Institutions

Today there are seven takaful institutions and two retakaful companies in Bahrain. The kingdom is already an important centre for Islamic finance, contributing to the growth of the takaful sector. The contributions of the kingdom’s takaful firms represented roughly 22% of total gross premiums in 2012, according to the CBB. The profitability of the takaful sector is not yet on par with its conventional counterpart, according to CBB figures. This trend is not unique to Bahrain and is found in other markets where takaful is available. In a bid to increase profitability, the sharia-compliant sector has unveiled new product innovations and distribution channels.

In 2014, Solidarity, a takaful provider managed by Gulf Assist, the local arm of global insurance company Mapfre Asistencia, and telecommunications provider Zain Bahrain, jointly launched a new insurance product. The resulting coverage for mobile handsets is the first product of its kind in the GCC. The product, known as the SmartInsure Service, provides comprehensive insurance coverage from accidental damage and device theft for both smartphones and tablets for the first year of purchase. The success of such products thus suggests alternative distribution channels could also aid growth in other companies.

New Regulations

Following two years of consultations with both industry leaders and EY, the CBB is expected to unveil new regulations for the takaful sector in 2014. Specifically, these new rules cover the operations and solvency framework of takaful firms, the practice of al qard al hasan (profit-free finance), and smaller reforms meant to improve efficiency. The sharia-compliant concept of al qard al hasan, which allows for loans to be offered on a goodwill basis with only an additional gift being given to the lender, has been criticised for failing to meet sharia requirements and new CBB rules seek to restrict these transactions. Instead, the new rules will only allow an amount to be transferred from the recipient back to the provider that is in keeping with the solvency requirements for policyholders’ funds. These rules allow some flexibility in dealing with excesses or deficiencies of existing capital. Such capital injections are designed to replace existing rules for al qard al hasan.

The proposed calculations will also require the endorsement of the takaful firms’ sharia boards and boards of directors. The reforms can improve the ability of takaful firms to disseminate dividends to shareholders and distribute surpluses to policyholders, though the distribution of surpluses from policyholders’ funds will now require the central bank’s approval.

New solvency requirements operate in a similar manner to capital adequacy ratios for banks. Ratios are used to facilitate the ability of takaful firms to match the risks on their books to their future obligations from their policyholders. Another new rule requires annual financial reporting by takaful firms in Bahrain. Previously, takaful providers were only required to submit reports every three years. While these rules will introduce the concept of earmarked assets, use of performance fees is to be restricted. The earmarked asset rules will allow liquid assets to be allocated in the shareholders’ fund to increase solvency.

Bundling

Another possible growth area is to tie takaful insurance products to luxury goods. In September 2013, Harley-Davidson Bahrain began offering an exclusive Islamic personal finance deal to its customers. Those who had purchased new motorcycles received a free BD150 ($396) voucher that they could use to redeem motorcycle accessories after signing a sharia-compliant personal finance agreement. Such promotions could also prove fruitful in the insurance sector. According to projections by Business Monitor International, private consumption is likely to continue to grow robustly in Bahrain and was expected to see 5% growth in 2014. Automobile sales, for example, seem likely to remain strong in Bahrain.

In the past real estate growth has helped drive insurance penetration in the Middle East. Therefore, as increasing numbers of buyers use mortgages to acquire properties in new housing developments, they may be required to take out life insurance by mortgage providers. With the government set to provide a vast number of new housing units via a social housing scheme, such a requirement could help drive life insurance penetration in the kingdom.

Outlook

Given broader economic trends in Bahrain and the GCC, as well as rising consumer awareness, the insurance sector looks healthy over the medium term. The gross premiums written in the GCC countries from 2002 to 2012 had a CAGR of 21%, a figure similar to that for Brazil or China through the same period. This growth is likely to continue. Indeed, over the next decade, the GCC is set to invest more than $900bn into some 1638 new projects, which suggests that economic expansion is likely to remain strong. For the kingdom’s reinsurance sector, the entrance of another international company would allow Bahrain to emerge as a regionally important reinsurance centre. The outlook of the takaful sector is also positive given international trends that should see the sector’s global value reaching $17bn by 2015.

There remain multiple opportunities for the bundling of insurance with other products and services such as telecoms services. In particular, insurance bundling has been demonstrated to enhance the loyalty of existing customers in some markets. The recent unveiling of Zain Bahrain’s mobile handset and tablet insurance, for example, could be a step in this direction.