Competition is intense as takaful firms gain on conventional insurers

Although the business environment for insurers is challenging, Brunei Darussalam’s small insurance industry continues to expand gradually. Increasingly high court awards to accident victims have impacted the profitability of mandatory automotive and workers’ compensation insurance, while the government’s local business development policies as well as strong support for takaful (sharia-compliant insurance) are squeezing conventional players. These issues add to long-standing factors that have affected insurance take-up, including the Sultanate’s extensive social welfare system, which limits demand for private cover, and the structure of its economy, in which the dominant oil and gas industry needs to insure larger risks than local insurers can handle. The result is a highly competitive industry in which takaful providers are grabbing market share in mass-market products, while conventional insurers are staking out other, more attractive niches.

Insurance Market Structure

Following international practice, Brunei Darussalam’s insurance industry is divided into general insurance and life insurance. Each of those segments includes both conventional insurers and takaful insurers. The sector is regulated by the Autoriti Monetari Brunei Darussalam (AMBD), the central bank, and the main regulatory laws are the Insurance Order of 2006 and the Takaful Order of 2008.

Within general insurance, the largest business segments are automotive and workers’ compensation, which are mandatory, and fronting for the international firms that insure the oil and gas industry. The Insurance Order requires that all insurance of risks within Brunei Darussalam be handled by local insurers, but since local insurance firms lack the capital to carry the oil and gas industry’s large risks, local insurers typically pass on the risk to reinsurers and earn a fronting fee.

There are six conventional general insurers, one of which recently announced its exit. Two are subsidiaries of international insurers operating under parent company brands: Japan’s Tokio Marine and Malaysia’s Etiqa, the insurance arm of Maybank. National Insurance is majority locally owned, including a 10% stake held by Baiduri Bank, but is managed by 25% shareholder Allianz of Germany. Standard Insurance and Audley Insurance are local independent firms. MBA Insurance, a subsidiary of local automotive retailer GHK Group, announced in January 2014 it was not taking new business. Competing with those are two government-linked general takaful insurers, Takaful Brunei Am (TBA) and Insurans Islam TAIB (IITAIB). IITAIB is a subsidiary of Perbadanan Tabung Amanah Islam Brunei (TAIB), a government-owned Islamic bank.

TBA is controlled by the Sultan Haji Hassanal Bolkiah Foundation, which owns 69% of parent company Takaful Brunei and is also the controlling shareholder of Bank Islam Brunei Darussalam, another Islamic bank that owns the remaining 31% of Takaful Brunei.

Life Cover

In the life segment, the three conventional insurers are all subsidiaries of multinationals: Japan’s Tokio Marine; Hong Kong’s American International Assurance, a pan-Asian group spun off from American giant AIG in 2010; and Singapore’s Great Eastern Life Assurance, the leading life insurer in South-east Asia.

These conventional firms compete with family takaful insurers Takaful Brunei Keluarga and IITAIB Family, affiliates of TBA and IITAIB, respectively. Much of the life segment’s products, especially family takaful, are investment products. Life insurance and family takaful providers also sell health care coverage, mainly international insurance to people who frequently travel or temporarily live abroad.

Agent & Brokers

Currently, there are more than 600 insurance agents in Brunei Darussalam, according to a recent AMBD estimate, the vast majority of whom are independent individual entrepreneurs. Most individual agents work for a single insurer, while corporate agents, many affiliated with car dealerships, typically sell multiple insurers’ products.

The international insurance broker Willis and international claims adjuster McLarens have subsidiaries in the country to serve the oil and gas industry. The Sultanate also has an offshore life insurance firm, Orion Life Insurance, which markets tax-free investment products mainly to Europeans, supported by secrecy, segregation and bankruptcy-protection laws.

Top-Line Growth

The domestic insurance industry has shown good top-line growth in the past few years, with gross premiums rising from BN$266m ($208.6m) in 2011 to BN$307m ($240.8m) in 2013, according to AMBD data. That represents an annual top-line growth rate of 7.4%, which compares to a 5.2% average nominal growth rate for domestic demand during the same period, according to data from the government’s Department of Economic Planning and Development.

Domestic insurers’ assets grew more quickly, from BN$1.02bn ($800m) in March 2011 to BN$1.36bn ($1.1bn) in March 2014, according to AMBD data. That represents a 10.2% average annual growth rate. The industry as a whole accounted for 6.1% of financial sector assets as of December 2012, including offshore insurers’ assets of BN$177m ($138.8m), according to the latest data available from the AMBD.

However, gross claims have risen even more rapidly, from BN$98m ($76.9m) in 2011 to BN$132m ($103.5m) in 2013, a 16% average annual growth rate. Insurance executives told OBG the rise in claims was mainly due to increasing personal injury awards.

Takaful Rising

Breakdowns of the AMBD data show the extent to which takaful insurers have been gaining on conventional ones. The rise has been especially strong in family takaful, the Islamic equivalent of life insurance, where gross premiums went from BN$30m ($23.5m) in 2011 to BN$51m ($40m) in 2013, a 30% average annual growth rate. Family takaful assets similarly rose from BN$102m ($80m) in March 2011 to BN$182m ($142.7m) in March 2014. Family takaful gross claims were up from BN$7m ($5.5m) in 2011 to BN$10m ($7.8m) in 2013.

While family takaful has grown rapidly, conventional life insurers have struggled. Conventional life insurers’ gross premiums were flat at BN$72m ($56.5m) in 2011 and in 2013, while their gross claims rose from BN$56m ($43.9m) in 2011 to BN$63m ($49.4m) in 2013. Conventional life insurers’ assets increased gradually from BN$723m ($567m) in March 2011 to BN$789m ($618.8m) in March 2014. Due to their different structure, financial data for conventional life insurance and family takaful are not directly comparable. Insurance executives told OBG that there were multiple reasons for takaful’s rise. Takaful insurers, as affiliates of government-controlled Islamic banks, have relatively strong financial backing, and they benefit from a widespread perception that if necessary they could draw on additional support from the state. Takaful pricing is aggressive, especially in automotive insurance, and appears designed to deliberately eschew profits in order to grab market share. Finally, the Bruneian government has been promoting takaful publicly, stressing its conformance with Islamic religious values.

In the general insurance sector the rise of takaful has been more gradual, with the takaful share of gross premiums increasing from 58% in 2011 to 60% in 2013. However, because of their higher concentration in automotive and workers’ compensation, takaful operators are more exposed to rising injury awards. Therefore, they have been absorbing a rapidly growing share of general insurance gross claims, up from 61% in 2011 to 71% in 2013. General takaful operators’ assets have also been boosted dramatically, from BN$82m ($64.3m) in March 2011 to BN$263m ($206.3m) in March 2014, while conventional general insurers’ assets have grown gradually from BN$112m ($87.8m) in March 2011 to BN$131m ($102.7m) in March 2014.

Overall, the general insurance market grew from BN$168m ($131.8m) of gross premiums in 2011 to BN$182m ($142.7m) in 2013, representing a 4.1% average nominal growth rate, while gross claims rose from BN$36m ($28.2m) in 2011 to BN$58m ($45.5m) in 2013, a 27% average annual growth rate.

Oil & Gas Fronting

Because the oil and gas industry is so large relative to the rest of the economy, it needs to insure far bigger risks than any other economic sector. Thus, it has been difficult for Brunei Darussalam to grow an insurance industry capable of insuring its oil and gas sector, as the scale of capital that would be required is so much greater than is needed to service the rest of the economy. The government tried to address this situation in the Insurance Order of 2006 by requiring that all insurance of risks within the Sultanate be issued by local insurers. However, local insurers are allowed to pass on up to 100% of the risk to reinsurers, and such use of a local insurer with 100% reinsurance has become standard practice for the oil and gas industry. Oil and gas companies or their insurance brokers typically agree first with an international insurer that is able and willing to carry the ultimate risk before any local insurers are contacted.

Local insurance companies are then offered what is called a fronting contract, in which they earn a fee for being the insurer of record. The local insurer also bears the small but potentially devastating risk of being wiped out by a very large claim if the international reinsurer goes bankrupt. There is also substantial fronting for the military, done mainly by takaful insurers, and some smaller-scale fronting in which a smaller insurance firm with a closer relationship to the client issues the policy but passes on the risk to a larger local insurer.

Although the fees from fronting are modest relative to the scale of the insured risk, they have been a steady source of income for companies that can get it. The scale of the fronting business is expected to grow when the Chinese group Zhejiang Hengyi begins building the $4.3bn first phase of a oil processing and petrochemicals complex, expected to get under way in 2015.

Insurance executives told OBG that fronting for oil and gas industry contracts is going increasingly to takaful insurers, due to the government’s local business development policies. Those policies require oil and gas operators and their contractors to hire companies with bumiputera, or ethnic native, ownership whenever possible. The effect for the industry has been to gradually squeeze out conventional insurers from oil and gas industry insurance contracts, as most conventional insurers are owned either by multinationals or by local ethnic Chinese. Also as a result, international Islamic retakaful reinsurers are taking a growing share of local energy- and government-related insurance business. Major multinational reinsurers such as Munich Re and Swiss Re have retakaful arms with offices in Kuala Lumpur, which were set up to serve the Malaysian market. Malaysian groups are active locally in conventional reinsurance and retakaful as well.

A snapshot of how these dynamics have played out on the balance sheet of a relatively successful conventional insurer can be seen in National Insurance’s annual reports. They show that in the liability insurance segment, where most fronting is done, National’s gross premiums shrank from BN$6.1bn ($4.8bn) in 2011 to BN$5.2bn ($4.1bn) in 2013, while net premiums were flat at around BN$700,000 ($549,010) and underwriting profits fell from around BN$532,000 ($417,248) in 2011 to some BN$119,000 ($93,332) in 2013.

Paul Kong, the managing director of Standard Insurance, told OBG, “Takaful is becoming stronger and stronger. But the entire Brunei insurance industry relies on reinsurance. I pay. Takaful pays. Everybody pays for reinsurance.” In AMBD data most fronting falls into the other non-life category, which accounted for BN$56m ($43.9m) or 20% of industry gross premiums in 2012, up from BN$39m ($30.6m) or 15% in 2011. Reflecting the relatively rare payouts on such insurance, the other non-life category accounted for just BN$2.8m ($2.2m) or 2.4% of industry gross claims in 2012 and BN$2.5m ($2m) or 2.5% in 2011.

Automotive

As Brunei Darussalam has very high car ownership rates, mandatory automotive insurance is the largest segment in the general insurance sector. The segment accounted for 42% of the general insurance market by gross claims in 2011, the latest data available. Workers’ compensation insurance, mandatory for employers, and fire insurance are also major segments. However, the profitability of all of three of those segments is generally poor. Although workers’ compensation liabilities are capped, automotive insurers are barred by law from capping third-party liability, and therefore reinsurers generally refuse to take over that risk. The increasing frequency of high court awards has become a serious risk for the country’s smaller insurers, some of which have only slightly more than the BN$8m ($6.2m) minimum capital required by law.

According to AMBD data, motor insurance accounted for BN$79m ($62m) or 28% of industry gross premiums in 2012, up from BN$69m ($54.1m) or 26% in 2011. However, reflecting its higher risk, the motor segment accounted for BN$35m ($27.4m) or 31% of industry gross claims in 2012, up from BN$27m ($21.2m) or 27% in 2011. Kong told OBG that the Sultanate’s personal injury lawyers are learning to adopt a business model that originated in the US, in which lawyers recruit and coach injury victims to sue in court for maximum damages. “I call these kinds of lawyers ambulance chasers. If you look at trends here and in Singapore and Malaysia, you can see that ambulance chasing is growing. That’s why we and others have been raising our rates and pushing away the mass-market automotive business to takaful. And now you’re seeing takaful start to raise their prices.”

Kolja Klawunn, the general manager of National Insurance, made similar comments to OBG, saying that certain local lawyers had made themselves “professionals in building up huge cases out of almost nothing. It’s very difficult to fight against.” However, both Kong and Klawunn said their companies have preserved profitability in the auto segment by serving only the high end of the market, insuring cars such as Mercedes and BMWs that tend to be conservatively driven.

Rafezah Rahman, senior manager of insurance/takaful supervision at AMBD, told OBG her department was well aware of the issue of uncapped liability and rising awards. “We’ve been looking at the insurance system issue holistically, including how to limit thirdparty liability and improve the system for out-of-court settlements. We’re still in the process of gathering statistics, but it’s clear that awards for loss of future income can be quite high.” The issue is one of several that are being discussed between AMBD and the recently formed industry association, the Brunei Insurance and Takaful Association (BITA). The group replaced an older association of conventional insurers, bringing them together with takaful operators under takaful leadership. Conventional insurers are hoping that by unifying behind takaful leadership they can better press the industry’s case on common concerns. Besides caps on automotive third-party liabilities, insurers have pressed for regulations limiting agent commissions (see analysis).

MBA Insurance, which announced in January 2014 that it would no longer take on new business, was clearly the worst hit, which reflects its specialisation in insuring the mid-market automobiles sold by its parent company, GHK Group. However, National Insurance’s annual reports show that despite the difficulties, the company has managed to increase its top and bottom lines in the auto segment, earning a BN$1.5m ($1.2m) underwriting profit on BN$4.1m ($3.2m) of gross premiums and BN$3.8m ($3m) of net premiums in 2013, up from a BN$900,000 ($705,870) underwriting profit on BN$3.2m ($2.5m) of gross premiums and BN$2.9m ($2.3m) of net premiums in 2011.

Workers' Compensation

Workers’ compensation insurance, mandatory for employers, is another major market segment and suffers from similar profitability issues due to rising awards, although not as severe since workers’ compensation awards are legally capped. This segment contributed BN$12m ($9.4m) or 4.2% of industry gross premiums in 2012 and BN$11m ($8.6m) or 4.2% in 2011, while accounting for BN$2.6m ($2m) or 2.2% of industry gross claims in 2012 and BN$3.7m ($2.9m) or 3.7% in 2011. National Insurance’s Klawunn said workers’ compensation insurance was treated as a loss leader – an unprofitable category of insurance which insurers undertake for the sake of building a long-term relationship with a client. But the company has been reducing its losses in the segment, according to its annual reports. The company recorded an underwriting loss of BN$600,000 ($470,580) in 2013 on BN$5m ($3.9m) of gross premiums and BN$4.5m ($3.5m) of net premiums, down from a BN$1.6m ($1.3m) underwriting loss on BN$4.9m ($3.8m) of gross premiums and BN$4.4m ($3.5m) of net premiums in 2011.

Fire Segment

Fire insurance is a major segment and this segment also suffers from weak profitability, mainly because of high commissions paid to agents, as most sales are made through direct marketing to home and business owners. Fire insurance contributed BN$15m ($11.8m) or 5.3% of total industry gross premiums in 2012 and BN$14m ($11m) or 5.3% in 2011, while accounting for BN$2m ($1.6m) or 1.8% of industry gross claims in 2012 and 0.9% the previous year.

National made an underwriting loss in the fire segment of around BN$181,000 ($141,958) in 2013 on BN$6m ($4.7m) of gross premiums and BN$3.6m ($2.8m) of net premiums in 2011, after making an underwriting profit of BN$600,000 ($470,580) on BN$6m ($4.7m) of gross premiums and BN$3.4m ($2.7m) of net premiums in 2011.

Other Non-Life

Marine, aviation and transit insurance is the other main segment within the general insurance sector, and it is generally profitable. Not all of the business in this segment is local: Standard Insurance specialises in providing aviation insurance in the region, leveraging its strong relationships with reinsurers to insure planes in countries such as Myanmar and Bangladesh. According to AMBD data, the segment accounted for BN$15m ($11.8m) or 5.4% of claims in 2012, down from BN$20m ($15.7m) or 7.7% of claims in 2011. Meanwhile, the segment was responsible for BN$1.6m ($1.3m) or 1.4% of gross claims in 2012 and BN$300,000 ($235,290) or 0.3% in 2011. National does relatively little business in the segment. Overall, National Insurance’s gross premiums were flat from 2011 to 2013 at BN$24.6m ($19.3m), while net premiums increased from BN$14.8m ($11.6m) in 2011 to BN$15.3m ($12m) in 2013, and net income grew from BN$1.3m ($1m) in 2011 to BN$2.3m ($1.8m) in 2013.

National Insurance is Brunei Darussalam’s largest conventional insurer and is thought to be the most profitable company in the insurance-takaful sector, which gives an idea of just how small and fragmented the sector is. Industry-wide gross premiums were equal to 1.5% of GDP in 2013, but after discounting reinsurance and other inputs, the sector’s gross value added was probably less than 0.5% of GDP.

Life & Family Takaful

The life insurance and family takaful sector is a more sales-intensive market, and one that relies heavily on agents to sell person-to-person with limited distribution through sales partnerships with banks. Life insurance products have traditionally been sold primarily by Chinese door-to-door agents to the Chinese community.

Ethnic Malays are mainly employed in the public sector where they enjoy strong public pensions and other benefits, and relatively few ethnic Malay citizens are interested in working as insurance agents. Ethnic Chinese, however, work predominantly in the private sector where the mandatory pension scheme and other benefits are more limited in scope, and many Chinese are eager to work as agents.

Largely for that reason, family takaful is more likely to be marketed by affiliated banks, although there are also growing takaful agent networks. Family takaful is growing very rapidly; however this is coming from a low base. Brunei Darussalam’s overall penetration rates for life insurance and family takaful products are respectable, covering approximately half of the population, according to recent estimate by AMBD.

Driven by family takaful’s rapid growth, the life and family takaful segment accounted for BN$123m ($96.5m) or 40% of industry gross premiums in 2013, an increase from BN$102m ($80m) or 36% in 2012, while life and family takaful accounted for BN$73m ($57.3m) or 55% of industry gross claims and BN$69m ($54.1m) or 60% in 2012. AMBD data does not break down the sector’s premiums or contributions by product, but it does show that life and family takaful accounted for BN$38m ($29.8m) or 34% of industry gross claims in 2012, while life and family takaful surrenders accounted for BN$12.3m ($9.6m) or 10.8%, death benefits for BN$11.7m ($9.2m) or 10.3%, and other life and family takaful benefits for BN$6.3m ($4.9m) or 5.5%.

Outlook

The Sultanate’s insurance sector will continue to grow in line with the broader economy and population, and the rapid growth of family takaful points towards an awakening of interest among ethnic Malays in life insurance-related products.

Additionally, some of the expected boost to growth will come from investment in industrial segments such as oil processing and petrochemicals, as well as from planned government expenditure on infrastructure, which should trickle down to the insurance sector. However, it will continue to be difficult for the sector to significantly accelerate growth given the high level of economic security enjoyed by Bruneian citizens and the limited ability of local insurers to serve the economy’s dominant economic sector.

While takaful providers appear set for continued growth going forward, some conventional insurers are facing an uncertain long-term future, and consolidation among these operators is likely to take place. Much of the sector’s attention will continue to be on confronting the rise of costs, and in that regard it will be critical how the regulatory reform process between BITA and AMBD ultimately plays out.

“The way forward for conventional insurers in Brunei Darussalam is to improve our respective reinsurance divisions and cut costs, ultimately playing a complementary role to takaful,” David Wong Kok Min, branch manager of Tokio Marine Insurance Singapore, told OBG.