Regulatory intervention to aid the recovery of Bahrain's insurance sector

A low oil price environment has presented a number of challenges for Bahrain’s vibrant and fiercely competitive insurance sector. Downward pressure on premiums and a dearth of underwriting opportunities across the region have negatively affected the bottom lines of most Manama-based insurers. However, new opportunities in areas such as health care insurance and the extension of compulsory cover to more areas of the economy are offering routes to growth during this difficult period.

RAPID RISE: Bahrain is a regional centre of insurance activity, renowned for its progressive regulatory framework and home to the Middle East Insurance Forum, the largest and most significant annual gathering of regional insurance entities. The kingdom’s rise to insurance pre-eminence has taken place over a relatively short period of time, beginning in the 1950s, when a number of local taxi drivers gathered to form a mutual insurance company in order to meet the requirement for third-party liability cover for their vehicles. This small operation evolved into the Cooperative Compensation Society, which later became known as the Vehicle Insurance Fund. By the close of the 1950s this local institution was already competing for market share with a number of foreign insurers keen to establish regional operations in Manama.

The first of these to enter the arena was the UK’s Norwich Union, which opened its Bahrain office through an agency agreement with Yusuf bin Ahmed Kanoo, a family-owned multinational. The new arrival began its operations in the country with marine or all-risks cover for a consignment of pearls being transported by dhow (traditional sailing vessel) to Aden, a reflection of Bahrain’s status as an ancient trading hub. The trading activities of local merchants underpinned the growth of a number of domestic insurance firms, such as the Zayani Group of Bahrain, which began to compete with international players after the 1950s. In 1961 the arrival of a US firm led to a widening of this early-stage insurance activity in the kingdom: the American Life and Insurance Company was the first firm to be granted a licence to offer long-term insurance products – a term used in Bahrain to define life and accident cover.

Another important industry milestone was reached in 1969, when the Bahrain Insurance Company became the first public shareholding insurance company to be incorporated in the country. The following decade saw a number of other public shareholding firms enter the rapidly expanding market, including the Bahrain Kuwait Insurance Company (BKIC) and Al Ahlia Insurance, both of which commenced operations in 1976.

The inauguration of the King Fahd Causeway in 1986 strengthened trade ties between Bahrain and its larger neighbour Saudi Arabia, and provided a useful fillip to insurance sector growth. The United Insurance Company was created for the sole purpose of extending cover to vehicles crossing the 25-km link between the two nations, and is now owned by a conglomeration of six insurers from both countries.

The 1980s also saw the birth of one of the most important segments of today’s sector: takaful (Islamic insurance). The incorporation of the Bahrain Islamic Insurance Company (BIIC) in 1989 brought sharia-compliant insurance products to Bahraini citizens for the first time, and the kingdom has established itself as an important player in the global takaful industry in the intervening years.

THE MODERN SECTOR: Bahrain’s modern insurance sector reflects the kingdom’s status as an important financial hub, and is populated by domestic, regional and global insurers competing for business both within Bahrain and beyond its borders. As of February 2018 some 24 locally incorporated insurers were licensed by the Central Bank of Bahrain (CBB) to operate in the country, one of which is a captive insurer for its parent company, Masheed. The sole captive insurer in the market is also the most recent arrival, having been established in 2009. A separate category of 19 locally incorporated firms are restricted to pursuing business outside Bahrain, all of which began operations in the 1980s and 1990s.

A further 12 global firms are licensed to operate in the domestic market, including operators from the US, Germany, Switzerland, the UK, Iran, Lebanon and India. The most recent market entry in this segment came in 2015, with the arrival of the UAE’s Orient Insurance. Bahrain is also home to a number of reinsurance companies, which, like some of the locally-based standard insurance companies, have established themselves in the kingdom in order to benefit from its status as regional hub.

The insurance industry supports a range of ancillary service providers, including the 31 brokers through which much of the sector’s premium is channelled, four brokers restricted to seeking business outside of Bahrain, 28 registered actuaries, and the loss adjusters, insurance consultants and insurance managers that constitute the wider sector.

REINSURANCE: The kingdom is also home to a unique institution, which is illustrative of its central position within the regional insurance industry. Established by the governments of Kuwait, Libya and the UAE, the Arab Insurance Group (Arig) is the largest Arab-owned reinsurer in the world, with over $1bn in total assets by the end of 2017. The institution is currently run by Bahraini national Yassir Albaharna. The establishment of Arig in 1980 marked the beginning of Bahrain’s emergence as a regional reinsurance hub. Insurers in the Gulf are known for their high cession rates, and their tendency to pass risk on to reinsurers in advanced markets such as Europe and the US. Regional regulators seek to ensure financial stability by maintaining lists of approved reinsurers in foreign jurisdictions, and in most cases, holding out the option to approve a reinsurer at the request of a local insurance company – a decision which generally rests on the rating of the foreign entity. Boosting retention rates and keeping more risk within their jurisdictions remains a key objective for GCC regulators, but the large amounts of capital that reinsurance companies must retain makes this is a difficult task.

Inadequate regulatory frameworks have also been a traditional handicap for domestic reinsurance in the region, but this is an area where Bahrain has shown a comparative advantage. The CBB was an early mover in terms of insurance regulation and, as part of its strategy to position the kingdom as a financial centre in the region, it was also a regulatory pioneer in reinsurance supervision.

Arig still plays a large part in the reinsurance segment, which has consequently flourished in Bahrain; however, a rival in terms of size now shares market dominance with the company: Trust International Insurance and Reinsurance (Trust Re), a locally licensed, closed-stock reinsurer, which was established in the kingdom in 1981. Like Arig, it has a strong capital position, which is augmented by long-established relationships with blue-chip international insurers. Both companies have a wide international reach in terms of premium take. Approximately 37% of Arig’s premium, for example, is accounted for by the UK’s Lloyds Bank, while 35% is derived from the Middle East, 19% from Asia and 9% from Africa. Trust Re’s geographic scope, meanwhile, includes the Middle East, Africa, Asia, Central and Eastern Europe, South-eastern Europe and the Commonwealth of Independent States.

TAKAFUL: Since 1989 and the arrival of the BIIC, the kingdom’s insurance industry has included an increasingly important sharia-compliant component. Now called the Takaful International Company, the BIIC was one of the pioneers of the modern Islamic financial services (IFS) industry, which, by the end of 2016, consisted of six takaful and two re-takaful companies. Together, these companies contributed BD62.1m ($164.7m) to the insurance industry’s gross contributions in 2016, according to the most recent data from the CBB, which represents about 22% of the total. This figure is a considerable advance on the 3% market share takaful companies claimed in 2001, and this rapid expansion has been one of the more interesting trends in the kingdom’s IFS segment. Much of this success is derived from the kingdom’s regulatory framework. Bahrain was the first country to develop regulations specific to the Islamic banking industry, and the nation’s sharia-compliant insurers have benefitted greatly from the expansion of their banking counterparts. The takaful module operated by the CBB is regarded as a global paradigm of takaful regulation, and continues to evolve as the regulator strives to maintain this important comparative advantage (see analysis).

REGULATION: Conventional insurers have also benefitted from the kingdom’s agile yet prudential regulatory framework. Bahrain’s first insurance rulebook was based on the standards established by the volunteer-driven International Association of Insurance Supervisors and implemented in 2005 by the Bahrain Monetary Agency (BMA).

In 2006 the CBB assumed the regulatory and supervisory functions of the BMA, retaining its predecessor’s insurance rulebook as Volume III of its CBB Rulebook. This regulatory framework remains largely in place, and covers central areas such as business standards, reporting requirements, enforcement and redress, and industry definitions.

The central bank’s approach to regulatory change has been gradualistic, with minor alterations to the framework generally carried out after extensive consultation with key industry players, and implemented through quarterly updates to the rulebook and ad hoc communications – a procedure which grants the regulator the ability to respond to market developments in a timely fashion.

Frequently, the CBB works closely with the Bahrain Insurance Association (BIA) to roll out new regulatory rules and functions. The industry body was established in 1993 and was recently reincorporated under the CBB. Its membership of around 50 local and foreign insurance companies, reinsurance institutions, brokers and service providers serves as a useful entity with which the regulator can cooperate to develop its supervisory framework. This was the case with the recent implementation of the Standard Policy Document of Compulsory Insurance for Motors, which aims to streamline the process of claims made against mandatory motor policies, as well as safeguard the interest of policyholders.

The BIA also serves a useful role in raising awareness about insurance, the lack of which is frequently cited as a major block to growth in the GCC. The body organises an annual insurance awareness campaign, with a calendar of events including story book creations for young families, social media projects, direct media engagement, school visits, tie-ups with coffee shops and other social gatherings.

MARKET CHARACTERISTICS: The strength of the kingdom’s regulatory environment has made it a favoured jurisdiction for insurance companies wishing to engage with markets around the Gulf. Many Bahrain-based insurers, therefore, are significantly exposed to regional economies, a characteristic that allows them to usefully diversify their risk.

Looking to the domestic arena, Bahrain shows a relatively high penetration level for a GCC market: its rate of 2.3% of GDP was the second highest behind the UAE in 2016, according to Alpen Capital, and considerably higher than Saudi Arabia’s 1.5%. However, this is notably below the emerging market average of 3.2% and global average of 6.3%. This data suggests that there is significant room for an expansion of insurance amongst local citizens. However, with a small population of just under 1.5m in 2017, according to the World Bank, opportunities for premium growth are necessarily limited.

The relatively large number of insurance companies licensed to operate in Bahrain means insurers focused on the local market face intense competition in securing premiums. As is typical in a crowded market, the battle for premium share is largely fought according to pricing rather than service levels, and in some lines of business, companies write at terms below the cost of capital in an effort to gain a competitive advantage. With the objective of remedying this, the CBB has been vocal in its support for sector consolidation, although the high level of family ownership of insurance companies exhibited across the region has historically made this a complex undertaking.

CONSOLIDATION: The challenging economic environment caused by declining oil prices has, however, given fresh impetus to regional consolidation, and in 2017 the Bahraini market was the location of one of the most significant developments in the GCC insurance industry. In August 2017 the shareholders of Solidarity General Takaful and Al Ahlia Insurance submitted their approval for the merger of their respective companies, the conclusion of which resulted in a rebranded enterprise known as Solidarity Bahrain. The new consolidated company, based in Manama, has a paid-up capital of BD11.2m ($29.7m) and an estimated market share of 15%, making it the largest takaful company in the kingdom. Earlier in 2017 the BKIC signed a memorandum of understanding with Bahrain Islamic Bank to buy its full stake in Takaful International Company. The deal brings BKI’s holding of Bahrain Takaful up to nearly 64%. Given the modest recovery forecast for global oil prices, this nascent trend of consolidation is expected to continue over the medium term, with domestic insurers seeking to boost both their solvency and ability to gain market share by aligning themselves with suitable competitors.

BUSINESS LINES: As with other markets in the region, motor insurance is the single biggest line of business for the kingdom’s insurers, thanks in large part to the compulsory nature of third-party liability cover in Bahrain. Premiums derived from the motor segment accounted for 29% of total gross written premium (GWP) in 2016, according to the CBB. They have also been rising steadily for some years, from just under BD62m ($164m) in 2012 to nearly BD79m ($210m) in 2016. Unlike some jurisdictions across the region, the Bahraini government does not set the premium level for third-party liability cover. Prices are instead determined by market competition, which means that most insurance providers offer low-priced or below-cost compulsory cover, and seek a margin on enhanced cover.

Medical insurance is the second-biggest segment in the general insurance category, accounting for 23% of GWP. The growth of medical cover in Bahrain has been particularly rapid, with segment premium rising from BD37.2m ($98.6m) in 2012 to BD62.1m ($164.7m) in 2016. This expansionary trend is likely to continue as Bahrain moves towards a compulsory health insurance system, a decision first approved by the Shura Council over a decade ago in 2005. In June 2016 the Council of Representatives, the lower house of the Parliament, reaffirmed its commitment to a mandatory health insurance scheme, and in the same month the Supreme Council for Health indicated that it would be implemented at the beginning of 2019. An initial proposal suggested that the government would fund the contributions for all Bahrainis towards the mandatory basic health insurance plan, while employers would be required to pay on behalf of expatriate residents.

In February 2018 Sheikh Mohammed bin Abdulla Al Khalifa, chairman of the Supreme Council for Health, made a further announcement that the national health insurance scheme will cover chronic and incurable diseases, and not be capped financially (see Health chapter). Overseas treatment should also become more accessible. In addition, a national health insurance fund will also be established, and the authorities will consult with insurance companies to determine the service coverage.

The anticipated growth in premium that will result from this development should help to mitigate the drop-off in the third-biggest general insurance category – fire, property and liability – which accounted for 15% of sector GWP in 2016. The premium collected from this segment stood at nearly BD41.7m ($110.6m) in 2012, but by 2016 this figure had contracted slightly to stand at BD40.3m ($106.9m).

Beyond the general insurance lines, a similar decline in premium can be seen in the long-term insurance category, which accounts for 19% of the sector’s GWP in 2016. This segment is primarily driven by group life products, but as the industry matures larger contributions are starting to be derived from lines such as unit-linked assurance, participating policies, and group credit life assurance. However, despite growing awareness of the benefits of life cover, companies have been actively negotiating reductions in their premium payments for group insurance since the onset of the Arab Spring in 2011. Consequently, premium in this segment declined from BD60.2m ($159.6m) in 2012 to BD51.6m ($136.8m) in 2016.

PERFORMANCE: The contraction in premium seen in some business lines illustrates the challenges that the insurance sector has faced since the onset of regional political and economic turbulence in 2011, as well as the decline in oil prices from mid-2014. These pressures continue to be felt, with total GWP of the kingdom’s insurance industry declining by 0.3% in 2016, according to statistics from the CBB.

In 2016 Bahrain’s conventional insurers posted an aggregate underwriting loss of BD20.3m ($53.8m), and the net profit of the sector, at BD30.6m ($81.1m), up from BD19.2m ($50.9m) in 2015, was only secured by an improved year-on-year performance in the industry’s investment activities. However, relying on investment returns to maintain profitability is an unsustainable practice in the insurance arena, especially during a period of market volatility.

OUTLOOK: The close correlation between premium underwriting opportunities in the GCC and global oil prices means that increasing GWP in negatively affected segments will be a challenging endeavour over the medium term. However, a number of potential growth drivers promise to provide some relief to the industry in the short to medium term. The rollout of mandatory medical insurance in jurisdictions across the region is granting a timely boost to underwriters exposed to GCC markets, while the upcoming implementation of the kingdom’s compulsory health care cover in 2019 offers an opportunity for locally focused insurers.

The government has also shown a willingness to extend compulsory cover to other areas of the economy; from the beginning of 2018 engineering offices, including foreign branches in the country, must be covered by a professional indemnity policy. The new rule affects around 200 engineering firms in Bahrain, which now have to obtain cover of between BD500,000 ($1.3m) and BD1m ($2.7m), depending on their size. Foreign engineering offices in Bahrain and companies that have their own engineering equipment are required to secure insurance cover of at least BD2m ($5.3m).

Given the important role that compulsory insurance has played in the development of the industry across the region, the kingdom’s insurance sector will no doubt be receptive to further regulatory intervention of this variety for many years to come.