Low insurance penetration in Brunei Darussalam offers room for growth as takaful expands

Consisting of both Islamic and conventional insurers and insurance products, the Sultanate’s insurance sector has held steady in recent times, despite strong external pressures on Brunei Darussalam’s economy. Non-life remains a dynamic segment, with Islamic takaful products making up the bulk of these general insurance premiums. This pattern looks set to continue in the year ahead, too, with the next 12 months also promising to be one of further professionalisation of the sector’s distribution channels, in response to increased globalisation and liberalisation as the ASEAN Economic Community takes hold. The potential future impact of the Trans-Pacific Partnership Agreement on the sector is also now a subject of debate by industry players (see analysis).

Sector Bodies

As with other elements of the financial services sector, the insurance regulator and supervisor is the Monetary Authority of Brunei Darussalam (AMBD). Set up in 2011, the AMBD functions as the central bank and regulates both the conventional and Islamic sectors. The Takaful/Insurance Unit (TIU) is the body within the authority tasked with overseeing the sector. The unit is in charge of registering, licensing and supervising insurance and takaful firms and their intermediaries and follows the standards laid down by the International Association of Insurance Supervisors. Meanwhile, the Sharia Financial Supervisory Board has the task of examining Islamic products and regulations across the financial sector and judging their compliance with sharia law.

Also important for the sector’s takaful players is the Centre for Islamic Banking Finance and Management, an education and training arm of the AMBD, which runs courses and certification programmes in Islamic finance, including takaful.

A series of laws and other legal instruments form the basis of the TIU’s powers, with these including the Insurance Order 2006, the International Insurance and Takaful Order 2002, the Motor Vehicle Insurance (Third Party Risks) Act, Chapter 90, and the Takaful Order 2008. In addition the Competition Order 2015 may have an affect on the sector, as it seeks to foster competition between companies – an aim that could have implications for the setting of common premiums. Further recent legislative moves with implications for the sector include the unsecured personal credit facility rules introduced in June 2015, which require insurance protection for new or topped up/ restructured bank loans, and their Islamic sector equivalent, and the Unsecured Personal Financing Facility rule, brought in at the same time.

Common Interests

The main professional body for the sector is the Brunei Insurance and Takaful Association (BITA), which has both Islamic and conventional members. It lobbies on behalf of the sector’s takaful and insurance companies, promotes the industry to the public and works to ensure best practices and common standards among members. These include both foreign and domestic players, with 12 members registered on the association’s website. BITA’s bringing together of both conventional and takaful insurers is aimed at promoting their common interests. Prior to the association’s founding in 2013, conventional insurers had been members of the General Insurance Association Brunei Darussalam, while takaful companies had operated separately. BITA has aimed to end this division and boost cooperation and dialogue between the two streams.

Licensing

To be issued a licence to operate as a general or life insurance or takaful company requires minimum paid-up capital of BN$8m ($5.7m), while broker licences require BN$200,000 ($142,000) and adjuster licences BN$100,000 ($71,000). In addition, registration and annual licence fees are also payable.

In an important recent development, an inter-company agreement signed by all BITA’s general insurers with the AMBD in mid-2014 led to the joint production of a General Agency Handbook (GAH). This sets out guidelines and regulations for all insurance and takaful agents operating in Brunei Darussalam. BITA now administers a test – the qualifying examination for insurance and takaful agents (QEFITA) – for any person who wishes to apply for registration as a general insurance/takaful agent.

This has been an important step in professionalising the sector’s distribution channels, and became fully enforced from January 1, 2015. It has led to some shedding of jobs in the agency segment, however, with the number of agents estimated to have fallen by as much as half since the introduction of the QEFITA, according to BITA. Nonetheless, the impact has been generally a positive one, with the remaining agents now fully qualified and competent to present products to the public. The GAH also mandates that agents register as individual sole proprietorships or as companies under the relevant business registration acts, while also being limited to represent a maximum of three different companies. Agents are also required to have a proper company office and maintain normal company filing standards.

The hope is that a similar system of regulation will now be introduced for agents operating in the life/ family takaful business. BITA officials told OBG that a similar exam to the QEFITA was being prepared, with the expectation that this – and a GAH for life agents – would be introduced in the near future.

Assets

According to the latest unaudited AMBD data, the sector’s total combined assets stood at BN$1.37bn ($974.8m) as of the fourth quarter of 2015. This was slightly down on the previous quarter, when assets stood at BN$1.45bn ($1.03bn), but up on the year-end 2014 total of BN$1.338bn ($952m). Asset growth has been slow but steady, standing at BN$1.186bn ($843.8m) in 2011, BN$1.246bn ($886.5m) in 2012, and BN$1.327bn ($944.2m) in 2013. In terms of the breakdown between takaful and conventional lines, the conventional sector has maintained an overall lead in the last five years, although takaful has overtaken conventional in non-life cover.

In the fourth quarter of 2015, the conventional segment’s total assets stood at BN$945m ($672.4m) – or 69.2% of the total – while takaful held BN$421m ($299.5m) – the remaining 30.8%. A year earlier, the respective figures had been BN$953m ($678.1m) and BN$385m ($273.9m), or 71.2% and 28.8%, showing the Islamic segment’s steadily rising market share. Go back to the last quarter of 2011, and conventional and Islamic lines held 72% and 28%, respectively.

The takaful segment’s annual growth in terms of assets has exceeded that of asset growth overall, with conventional insurance products underperforming. However, conventional insurers dominate the life/ family takaful market. Indeed, total life assets for conventional insurers stood at BN$809m ($575.6m) in fourth-quarter 2015, while total family takaful assets stood at BN$186m ($132.3m). Life assets thus represented 85.6% of the conventional sector’s entire assets that quarter, while family represented 44.2% of the takaful segment’s entire assets.

Takaful Outperforms Conventional

The fourth-quarter 2015 figure represented a small rise for family assets on the same period of 2014, when total assets stood at BN$177m ($125.9m), while conventional life declined slightly from BN$826m ($587.7m) in fourth-quarter 2014. Growth in this segment has been more in keeping with overall sector asset growth during the last few years, demonstrating that the most impressive growth story has been in takaful non-life. This is due to many factors. First, the Sultanate is a majority-Muslim country, with close to 70% following the faith. Recent times have also seen a greater emphasis placed on the religion, with the phased introduction of sharia law. Another factor to takaful’s attractiveness is that its profit-sharing model provides a rebate to policyholders who have not made a claim – a provision similar to a conventional no-claims bonus, but which is an intrinsic part of takaful (see Islamic Financial Services chapter).

When it comes to gross premiums, the AMBD figures for the last quarter of 2015 show that the insurance/takaful sector overall recorded a total of BN$70m ($49.8m), with this breaking down into BN$35m ($24.9m) for the conventional segment and BN$34m ($24.1m) for takaful. In conventional, premiums were made up of BN$15m ($10.7m) for non-life and BN$21m ($14.9m) for life, while in takaful, BN$27m ($19.2m) in premiums were non-life and BN$7m ($5m) family. Gross premiums were up in comparison with previous years. For the whole sector, fourth-quarter 2014 saw a total of BN$61m ($43.4m), indicating annualised growth of 14.8%, while for the same period of 2013, the total was BN$60m ($42.7m), up 1.7% year-on-year. Between the final quarters of 2012 and 2013, the total rose by 7.1%, after a 12.5% decline between the same period of 2011 and 2012.

Gross claims, meanwhile, have also been steadily increasing in recent years. The AMBD figures show these at BN$33m ($23.5m) in fourth-quarter 2015, up from BN$32m ($22.8m) in the same period of 2014. The 2015 figure comprised BN$18m ($12.8m) of gross claims in the conventional segment and BN$15m ($10.7m) in takaful. Within conventional, life was the largest source of claims, at BN$15m ($10.7m), while non-life was the largest source in takaful, at BN$9m ($6.4m). While gross non-life claims have remained at fairly constant levels over the years for both conventional and takaful, quarterly totals have fluctuated significantly. For example, while second-quarter 2015 saw gross claims in conventional non-life of BN$4m ($2.8m), in the next quarter the total was BN$11m ($7.8m) followed by a decline to BN$3m ($2.1m) in the fourth quarter. This is largely due to the small size of a sector in which a few major claims can distort the statistical pattern. They may also impact individual insurers dramatically, a factor behind many debates in motor and accident in particular.

Sector Players

The leading takaful company in the Sultanate is Syarikat Takaful Brunei Darussalam (STBD), which was established in 1994 and has two arms – Takaful Brunei Am (TBA) and Takaful Brunei Keluarga (TBK). TBA offers general and non-life takaful, including motor, fire, marine, aviation, performance bonds and miscellaneous accident, while TBK offers family products, including employee protection, savings and mortgage protection, group hospital and surgical benefits.

Other takaful outfits include Insurans Islam TAIB, which also has general and family takaful companies. Insurans Islam TAIB General Takaful offers a wide range of products in motor, fire, marine hull and cargo, among other areas, while Insurans Islam TAIB Family Takaful offers education, health, group family, mortgage and other family schemes.

On the conventional side, Singapore’s Great Eastern Life Insurance Company is present, along with AIA, National Insurance, Standard Insurance Brunei, and Tokio Marine, which has both general and life companies operating in the Sultanate. Audley Insurance, meanwhile, is a captive insurer dealing with Brunei Investment Authority (BIA) assets only. Audley is a subsidiary of BIA and has recently expanded its coverage to many other government-owned assets.

Non-Life

The motor segment is the largest single line of business in non-life, according to the most recent AMBD data, from 2014. Motor accounted for 46.8% of gross premiums in 2014, down slightly on 47.3% in 2013. Motor thus accounted for some BN$90.8m ($64.6m) in premiums in 2014, up 5.2% from the year before. The second-largest segment was fire, at 8.3% in 2014, followed by workmen compensation, at 7.5%, marine, aviation and transit, at 4.8%, public liability, at 3.8%, and performance bonds, at 0.2%. Other lines made up the remaining 28.7%.

In terms of claims, motor was also far in the lead, with AMBD figures showing total gross claims of BN$34.86m ($24.8m) in 2014, or 64.66% of the total. The monetary number was down on 2013, when total gross claims stood at BN$38.54m ($27.4m), although that had represented 65.47% of total gross claims that year. Indeed, overall, gross claims fell between 2013 and 2014, with fire down 30.2%, marine, aviation and transit down 23.7% and the non-life segment overall down 8.4%. Again, many of the major fluctuations result from the small size of the line of business – marine, aviation and transit had gross claims of BN$760,000 ($541,000) in 2013 and BN$580,000 ($413,000) in 2014, for example. In these circumstances, an individual claim can have a major effect.

Lines Of Business

Third-party motor insurance is compulsory in Brunei Darussalam. Car ownership has been increasing strongly in recent years – the number of newly registered vehicles in the Sultanate grew 19% between 2011 and 2013, according to statistics issued by the Department of Economic Planning and Development (JPKE). This helped the country maintain one of the highest car ownership rates in the world, at 2.65 people per vehicle.

According to a 2015 report from the Road Safety and Research Unit, some 3366 road accidents were reported to the police in 2014, up from 3338 in 2013. Figures from JPKE for first half of 2015 show the number of accidents at 1687, down from 1729 in the first half of 2014, and including seven deaths and 236 injuries. Sector players have raised concerns that claims in motor are being inflated by uncapped third-party liabilities, with the Sultanate operating a system under which personal injury lawyers sometimes encourage victims via no-win-no-fee agreements to sue for maximum damages. In some cases, the amounts awarded have been devastating for insurers, with million-dollar pay-outs cutting capital.

BITA has been a leading voice in addressing this concern, with the AMBD placing the issue under review. The high cost of these claims also puts pressure on insurers to increase premiums, a difficult move in such a highly competitive industry. This has led BITA to try and reach consensus among motor insurers over minimum premiums, yet this too requires further examination in the light of Competition Order 2015 from the AMBD. This recent order seeks to ensure healthy competition between companies – in insurance and other industries – and could have implications for the common insurance tariffs that are still being worked out. Nonetheless, BITA has established common tariff and underwriting guidelines for motor lines, which are due to come into effect in 2016, subject to the AMBD’s approval.

Fire, meanwhile, has shown some growth in premiums in recent times, with AMBD figures showing a 4.2% increase between 2013 and 2014. This segment is an area in which conventional companies have been able to leverage an advantage over takaful – that of the formers’ access to global reinsurance markets. Companies such as Malaysia’s Etiqa, the insurance and takaful arm of Maybank Group, and Japan’s Tokio Marine Insurance have networked international reinsurance programmes extended to Brunei Darussalam, while the local, takaful companies have to purchase reinsurance elsewhere, increasing their costs – and therefore rates – for the consumer.

One segment that is also largely dominated by international insurers and reinsurers is energy, where the size of the investments needing insurance often precludes local players. The Insurance Order of 2006 sought to end a near-total international monopoly in this area though, by requiring all insurance risks in the Sultanate be issued by local insurers. The order did, however, allow those locals to pass on up to 100% of the risk to reinsurers. The oil and gas sector is thus characterised by these agreements, with locals fronting for internationals. This has also given the local industry considerable expertise in handling energy, marine, aviation and other contracts.

Life & Family

The life and family segments continue to demonstrate resilience, with family outperforming conventional life in terms of asset growth in recent years, although total premiums have been more unpredictable. Family gross premiums went from BN$9m ($6.4m) to BN$20m ($14.2m) to BN$12m ($8.5m) and BN$7m ($5m) during the four quarters of 2015, while conventional life premiums were largely stable in a range of BN$19-BN$21m ($13.5m-14.9m).

Overall, though, the penetration rate for insurance policies remains low, giving ample room for growth. In 2013 data from Research & Markets suggested a penetration rate of 0.64%, in contrast to Singapore’s 7.7%. BITA figures for that year showed that life premiums contributed just 0.9% to the Sultanate’s GDP, while non-life contributed 0.55%. Figures quoted in the local press also suggest that in 2015, the insurance sector represented just 6% of the financial sector’s total BN$22.4bn ($15.9bn) in assets.

Thus, a major part of the work of insurers and BITA remains the promotion of the sector, with efforts also being made to convince legislators that more types of compulsory insurance or takaful would be beneficial.

Outlook

With the Sultanate’s economy currently experiencing the negative impact of low oil and gas prices, with this cutting government revenues and expenditures, Bruneians are likely to continue to tighten their belts. This will likely have a downside for non-compulsory insurance and takaful products. Slow premium growth is thus predicted in 2016, although this would also be balanced by low claims growth. In such times, the industry has an opportunity for deepening rather than widening, with efforts under way to increase sector professionalism set to continue. Market consolidation is likely going forward, as smaller outfits feel the economic pinch. For example, Etiqa announced in late 2015 that it would be taking 12 months to transition out of the market.

Meanwhile, the sector will also be looking to raise its profile and boost financial literacy among the population to assist Bruneians in determining their need for insurance and takaful products. Indeed, in more challenging times, consumers and businesses require more protection, with products that address this need perhaps likely to do well in the year ahead.