Healthy prospects: The proposed implementation of compulsory medical insurance promises to boost revenues

In line with the kingdom’s reputation as a financial centre, Bahrain’s insurance sector has a large number of companies and a varied array of business models. Some insurers domiciled there serve only the regional market in addition to the more conventional in-country model. In the past several decades Manama has been the chosen home base for several syndicates, specialists and support institutions. The domestic market is a highly competitive one, and in the current environment an increased focus is being placed on risk-based underwriting to ensure profitability.

MODEL MARKET: The domestic insurance industry shares some characteristics with many developing countries, such as low penetration rates and a reliance on motor insurance, because it is the only type of coverage consumers are required to have by law. The result of a competitive market for auto policies in 2013 was thin margins for insurers and an evolving business model. As a result of the surging economy before the global financial crisis of 2007-08, the model was highly tailored toward a strategy of chasing market share, foregoing underwriting profits if necessary to win more business and relying on investment income. However, since the global financial crisis, that investment income is harder to find and insurers are working to implement better underwriting policies that are more closely aligned with the risks of the insurance coverage. Reinsurers in Bahrain have reported tightening their treaty terms and working together with local insurers to help this process.

One thing the industry has not witnessed as a result of the financial crisis is a drop in capacity. To be sure, the pace of market entries has slowed – just one new licence was issued in 2012. However, insurers and reinsurers in Bahrain are anticipating a positive future. In the domestic market, the strong likelihood of a law mandating medical insurance presents a significant opportunity on top of the other positives that come from an outlook that features long-term economic expansion; increasing awareness of the benefits of insurance or its sharia-compliant alternative, takaful, particularly through market-wide campaigns to promote uptake; and the growth-from-a-small-base nature of Bahrain’s current insurance climate. For insurers focused on the GCC region or beyond, the expectation is for a wave of infrastructure projects on the Arabian Peninsula that will create direct opportunities, but also feed through to the wider economy and boost demand across a range of product lines.

LONG HISTORY: Insurance became an economic activity in Bahrain in the 1950s, when taxi drivers formed a mutual organisation to provide motor insurance. Mimicking the structure of the sector today, with twin engines composed of local and foreign interest, the 1950s also saw the first overseas insurer to set up in the kingdom, a local office of the UK’s Norwich Union, which opened in 1950. The first policy, according to a CBB history of the sector, covered a consignment of pearls packed in an Ovaltine tin and shipped to Aden, Yemen. Life insurance came to the market in 1961.

Today there are 151 licensed insurance bodies in the kingdom, including 25 locally incorporated insurance firms (eight of them takaful providers) and one captive insurance specialist. There are also 11 branches of foreign insurers. In 2012 the one new licence went to HDI-Gerling Industrie AG, a German insurer with global operations that opened up in Bahrain in order to focus on industrial insurance in the region.

Reinsurance is an area of strong activity, with a mix of foreign companies basing their regional operations in Bahrain and several locally incorporated players. An example of the major reinsurance presence is the Arab Insurance Group (ARIG), a company formed in 1980 by the governments of Kuwait, Libya and the UAE. “Since the establishment of ARIG in Bahrain,” stated the CBB’s 2011 market review, “the reinsurance market in the kingdom has been growing steadily and an increasing number of international reinsurers are now using Bahrain as a base of their business throughout the region.” German industry leader Hannover Re has established a Bahrain office, which serves the company as a springboard for the region.

Statistics on the sector indicate the unusually large role reinsurers play in Bahrain’s insurance industry, as the value of reinsurance premiums booked in the kingdom are more than double that of direct insurance premiums from locally domiciled companies: BD349.5m ($919.7m) in reinsurance in 2011 vis-à-vis BD163.9m ($431.3m) in direct business, according to CBB figures. That underscores the growing importance of reinsurance as an area of focus within Bahrain’s status as a financial centre.

PERFORMANCE: According to the 2011 annual review of the insurance market from the CBB, the most recent one available at time of press, the sector finished the year with aggregate assets of BD1.46bn ($3.84bn), up nearly 8% from 2010. Of that total, 92.9% of assets were held by conventional insurers and the balance by providers of takaful. Growth in assets on the year amounted to 11% for conventional insurers and 3% for takaful providers, and insurance penetration was calculated at 2.51%, down slightly from 2.55% in 2010.

Gross premiums written in the kingdom rose to BD214.9m ($566m) in 2011, up 2% from 2010, the CBB data shows. Most of the growth came from the non-life lines of business such as engineering (31% increase in gross premiums) and medical insurance (10% increase). Non-life insurance accounted for 77% of premiums in 2011 and life and long-term savings policies accounted for 23%. Full-year numbers for 2012 were not available at time of press, but results for the third quarter indicated growing demand for insurance products. Gross premiums in 2012 were 9% higher than in the same period in 2011, rising to BD184.1m ($484m). Catalysts included a 17% rise in life insurance and long-term savings policies, to BD42.4m ($112m). Growth also came from motor, the largest single line in Bahrain; the expansion rate in the third quarter of 2012 was 12%, bringing the total value of motor policies to BD46.6m ($123m).

TAKAFUL: One way in which Bahrain’s market follows common global patterns is that its conventional insurers are more profitable than its takaful providers. Underwriting profits for the conventional sector ticked up from BD18.4m ($48.4m) to BD19.2m ($50.5m) in 2011, whereas the loss widened for sharia-compliant providers from BD973,000 ($2.6m) to BD5.44m ($14.3m), according to the CBB’s 2011 market review.

The takaful sector’s aggregate total flipped from a loss to a profit in 2011 when compared with 2010, but this was largely due to strong results from one company, t’azur, that compensated for significant losses or very minimal profits reported by the other companies. According to a study by accounting firm Ernst & Young, which has an Islamic finance research unit in Bahrain, returns on equity for takaful are lower than for conventional insurers in both the GCC region and in South-east Asia, the world’s other established takaful market as of early 2013 (see Islamic Financial Services chapter). That is in part because of the slow process of expanding the penetration rate for medical insurance in the GCC, Ernst & Young found. In Bahrain, the UAE and elsewhere, however, takaful providers can look forward to a rosier future when medical insurance is mandated by law.

The brokerage segment includes 31 licensees serving the domestic market and four restricted to business outside Bahrain. The CBB1 register also includes two licensed insurance managers; five insurance consultancies, plus two consultancies that are restricted to operating only outside Bahrain; 31 actuaries; and 11 loss adjusters. The CBB has been the sole regulator for the insurance sector since 2002, when it was known as the Bahrain Monetary Authority and was made the single regulator over all financial services.

In addition to the typical insurance sector players, both conventional and Islamic, the country’s position as a financial centre for the region means there are a number of specialist organisations in prominent roles. Two insurance syndicates are licensed, for example. The Arab War Risks Insurance Syndicate (AWRIS) is focused on insurance for transportation risks in the region, such as shipping oil through the Gulf. Access to this coverage goes through existing insurers that are members of the syndicate and not through direct contact with AWRIS. The syndicate was formed in 1980 by Arab insurers across the region and relocated to Bahrain in 1994. Its role is to cover primarily transportation risks that would arise from war, political instability, sabotage, terrorism or other political risks. AWRIS covers land-transiting cargo but, given the focus on oil exporting in the region, its business is heavily skewed to shipping and marine-related policies. AWRIS now has 177 members operating from 18 Arab countries, with coverage prices and levels set at the syndicate level. The second syndicate, also focused on the energy sector, is the Federation of Afro-Asian Insurers & Reinsurers (FAIR) Oil & Energy Insurance Syndicate. This syndicate is a reinsurer to the energy sector and was incorporated in Bahrain in 1999 and now has 36 insurers and reinsurers as members. Representation on a national basis includes 22 African or Asian countries, among them Bahrain and all other GCC countries with the exception of Saudi Arabia.

There are 27 licensed insurance companies that are restricted to business outside Bahrain – the insurance market’s equivalent of a wholesale banking licence (see Banking chapter). These are companies that were created mostly in the 1980s and 1990s to service the Saudi market, where there were no insurance firms until regulatory reforms began in 2006. Servicing the large Saudi market has helped to make Bahrain a financial services centre for the region, but now that the Saudi Arabian Monetary Agency has created its own domestic insurance market, offshore insurance is not expected to be a future growth area. Companies that had been serving this segment are in some cases switching their licences to allow them to operate within the kingdom whereas others are opting to move to Saudi Arabia, according to the CBB.

Other key actors include the Bahrain Insurance Association, which was created in 1993 and is the industry trade group for insurers and brokers, as well as other service providers, and the Bahrain Institute of Banking and Finance (BIBF). The BIBF was created in 1981 as a response to an official push by the government to improve vocational training and has evolved into a training centre for the financial sector with 18,111 participants in 2011. BIBFs role is a formal one – it is regulated by the CBB and all financial services licensees pay a 1% levy on social insurance contributions to provide it with capital. Another provider of training services, this time focused exclusively on the insurance sector, is the Gulf Insurance Institute. Formed in 2007 in Bahrain by a group of mostly international insurers, the institute has about 2000 students, half of which are Saudi. The institute is also planning an expansion into consultancy services with a specialty in recruiting for insurance companies. Overall, training has played an important role in making Bahrain’s insurance sector a source of employment for Bahrainis – in 2011, 1661 people worked in the sector, 62% of them nationals.

LIFE: The life segment is broadly labelled as long-term insurance in Bahrain, and it includes group life policies, group credit life policies, level or decreasing term assurance, unit-linked assurance, participating-with-profit policies and savings-for-education policies. The gross amount of premiums written in 2011 slipped from BD51.4m ($135.3m) in 2010 to BD48.9m ($128.7m) in 2011. The longer-term trend, however, is positive – the 2011 total was 29.7% higher than the BD37.7m ($99.2m) in 2007, according to CBB data.

Growth in the non-life segment has been underpinned by motor, which typically provides a steady stream of new business. Of the BD214.9m ($565.5m) in gross premiums recorded in 2011, motor policies accounted for 25.8% of the total. The next-largest lines of non-life business were fire, property and liability coverage, at 18%; and medical insurance, at 16.2%. The fastest-growing category in 2011 was engineering insurance, an area in which gross premiums jumped 31%. That brought this area’s share of the total to 8%, indicating growth from a small base.

Non-retail lines of business such as engineering and other industry-related policies could be an area of growth in the near future because Bahrain expects to be building several large infrastructure projects in the coming years, and because it hopes to help grow the number of small- and medium-sized enterprises (SMEs) through a number of stimulus programmes. This may eventually help insurers diversify away from the current overexposure to the motor segment specifically and, in a broader sense, the retail market.

Gross claims were down by 2% in 2011, to BD106.6m ($280.5m). Of that total 39.2% were motor claims, making auto insurance both the chief source of business and of claims. Motor policies also represent the highest retention level among all lines of non-life business, at 86% in 2011, meaning less of the risk is passed along to reinsurers in this area compared with others. Motor claims are projected to jump along with car sales in 2012 on expectations that regional and local instability in 2011 led some new-car buyers to hold off on their purchases, priming the way for pent-up demand to drive growth in 2012.

BEYOND MOTOR: Fundamentals in the motor segment underscore the difficult task Bahraini insurers have in remaining profitable in the economic environment that has existed since the global financial crisis in 2007 and 2008. The market has been characterised by faster growth in insurance companies than in insurance opportunities – 10 of the 25 licensed local insurance firms arrived within the past 10 years, along with five of the 11 foreign insurer branches present. Competition is robust, and based on pricing rather than on service. Consumers are widely considered to be unlikely to pay more for better service, in particular when it comes to auto insurance.

Before the financial crisis this was not a problem, as insurers could write motor policies for the thinnest of margins, or even at a loss, on the expectation that markets were so favourable that investment income would more than make up for any potential underwriting losses incurred. This was an easy market to operate in for any insurer, offering the scalable returns that successful investments can bring.

Now, however, with stock market returns minimal, an overhang of real estate in the region and some projects on hold or underwater, insurers can no longer count on investment accounts to provide profitable returns. So, as with many insurers across the globe, in 2013 Bahraini insurers will be increasingly focused on risk-based underwriting.

There are also discussions regarding the possibility of consolidation in the sector. Across the Bahraini financial services landscape there is a conviction that consolidation into a smaller number of larger companies would be beneficial for all involved. However, the barriers to consolidation have proven formidable in the past. A common refrain about Bahrain and the wider GCC region is that mergers are a bad cultural fit because, when two parties agree to combine forces, there is a tendency to perceive the buyer as having won the negotiation and the seller as having lost it. Another factor is that ownership structures tend to lack the large numbers of influential minority shareholders, who sometimes can push the controlling owner into a merger or acquisition. Although consolidation has been talked about for years, the buoyant economy has not left any companies in a truly dire situation that would mandate the need to sell. As the region is flush with capital, many insurance company owners can afford to wait out the current conditions in anticipation of better times and bigger profits.

For Bahrain the big boost the market is waiting for is the law mandating medical insurance. This has been on the table for several years, and is expected to become a law at some point in the short to medium term. This has the capacity to provide a new and lucrative line of business for insurers. As of early 2013 the expectation was that Bahrain’s government would wait until all stakeholders – hospitals, insurers, doctors and medical professionals, and others – had had ample time to prepare for the change and the surge in demand that will come with it.

Until then, should any insurers wish to merge, Bahraini banks are in the process of proving it can be done despite the obstacles. Perhaps because banks lack a huge potential new market to tap into in the coming years, as insurers do with medical insurance, several high-profile mergers in that sector have been completed recently. Some guidelines are emerging for how this potentially adversarial process can be conducted in a different way, and to ensure decisions are based on the interests of shareholders. Some successful strategies have included looking for consolidation pairs in which companies have complementary lines of business, and at least one side with a highly diversified shareholder structure. The existence of common shareholders between the two companies is also an indicator of a potential match.

OUTLOOK: As of early 2012 market participants were focused on regulatory developments such as increased restrictions on non-traditional distribution channels. For the future, however, Bahraini insurers remain intent on building capacity in risk management, gaining market share and preparing for growth opportunities such as medical insurance and broad-based economic growth. These future catalysts are likely to push off serious talks of consolidation, but instead push hopes high for a wave of growth opportunities to come.