Regulatory flexibility in Bahrain creates thriving insurance market

The wide array of local and international insurance companies that operate out of Manama have flourished in a regulatory environment that has allowed them to serve the small domestic market while simultaneously extending their operations regionally. A history of sound prudential oversight has protected them from the series of economic shocks that have created a challenging economic environment since 2011, during which time they have continued to post year-on-year expansions in written premiums. While low oil prices mean that adverse conditions are likely to persist in 2017, the promise of new mandatory lines maintains the possibility of renewed growth in the sector.

HUMBLE BEGINNINGS: The development of Bahrain’s insurance and reinsurance market forms a central part of the nation’s economic strategy, but it began as a grassroots affair, arising from a decision in the 1950s by a group of local taxi drivers to establish a simple mutual company to meet the requirements for third-party liability cover on their vehicles. By 1955 this small operation had evolved into the Cooperative Compensation Society, which later became the Vehicle Insurance Fund. The 1950s also saw the arrival of the first foreign insurers, attracted to the kingdom because of its status as a regional trade centre. The first of these, the UK’s Norwich Union, launched its Bahrain office in 1950, inaugurating its operation with a marine or all-risks cover for a consignment of pearls being transported by dhow (traditional sailing vessel) to Aden.

BROADENING THE BASE: Local competition quickly emerged in the form of the Zayani Group of Bahrain, which opened the door for other domestic business groups to enter the market. These early movers focused their attention on the insurance business generated by Bahrain’s extensive trading activity, but in 1961 the arrival of an American firm broadened the base of the insurance business in Bahrain. The American Life and Insurance Company became the first company to be granted a licence to offer long-term insurance products – a term used in Bahrain to define life and accident insurance. Another significant milestone was reached in 1969, when the Bahrain Insurance Company was established as the first public shareholding insurance company to be incorporated in the country. A number of similarly formulated institutions followed, such as Al Ahlia Insurance Company, created in 1976, and the Bahrain Kuwait Insurance Company, which commenced operations in the same year.

The inauguration of the King Fahd Causeway in 1986 provided another boost to insurance sector growth: the United Insurance Company was established to provide cover to vehicles crossing the 16-mile link between Bahrain and Saudi Arabia, 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). Bahrain Islamic Insurance Company was incorporated in 1989, offering Islamic insurance products to Bahrainis for the first time. Since that time the steady growth of this segment has established Bahrain as a centre for insurance activity in the region. Perhaps the clearest symbol of this is the fact that the largest Arab-owned reinsurer in the world, Arab Insurance Group (Arig), has its headquarters in Manama’s Diplomatic Area. Established by the governments of Kuwait, Libya and the UAE in 1980, Arig had over $1bn in total assets at the outset of 2016, and is currently run by Bahraini national Yassir Albaharna.

TODAY’S SECTOR: Bahrain’s modern insurance sector reflects the kingdom’s status as a regional financial centre, and is populated by domestic, regional and global underwriters vying for business both within Bahrain and beyond its borders. As of October 2016 some 25 locally incorporated insurers were licensed by the Central Bank of Bahrain (CBB) to operate in the country, eight of which are run along sharia-compliant lines, and one of which is a captive insurer for its parent company, Masheed. The single captive insurer in the market is also its most recent arrival, having been established in 2009. A further 11 overseas firms are licensed to operate in the domestic market, including operators from the US, Germany, Switzerland, the UK, Switzerland, Iran, Lebanon and India. The most recent arrival in this category is the UAE’s Orient Insurance, which was established in Bahrain in October 2015. A separate category of 19 locally incorporated firms are restricted to pursuing business outside of Bahrain, four of which are sharia-compliant, and all of which entered the market in the 1980s and 1990s. 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 a regional centre.

Lastly, Bahrain’s dynamic 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.

MARKET CHARACTERISTICS: With a population of just over 1.3m, according to the Central Informatics Organisation, the domestic market is limited in scope, and as a consequence Bahrain’s insurance market is the smallest in the GCC by written premiums. Given the large number of firms serving the domestic market, competition is intense. As with other markets in the region, insurers have historically competed on price rather than service levels, and in some lines of business companies write at terms below the cost of capital in an effort to maintain market share.

The presence of larger multinationals in the market has done much to raise the profile of insurance in the country, but their capacious balance sheets and the amount of business they are thereby able to retain has further heightened the level of competition faced by the locally incorporated insurers. The competitive and fractured nature of the market has led to speculation regarding sector consolidation, and the CBB has become more vocal in encouraging local firms to merge in the wake of the global economic crisis of 2008, the slowdown in the region’s real estate sector and the Arab Spring in 2011. Speculation became a reality in late December, as Solidarity Group purchased a majority stake in Al Ahlia Insurance for BD10.7m ($28.4m). “The new merged entity will result ultimately in Solidarity being the largest takaful company and one of the leading top tier insurance players in Bahrain,” Solidarity Group chairman, Khalid Abdulla-Janahi, told local media.

STRONG BASE: The local market is also notable for its high growth rates over the past decade. The gross written premium of the life insurance segment is estimated to have expanded at a compound annual growth rate (CAGR) of 7.1% between 2009 and 2013, while non-life insurance grew at a CAGR of 8% over the same period. While aggregate insurance penetration data for the GCC is scarce, a 2015 report by Alpen Capital found that Bahrain exhibited the highest penetration rate in the region, at 2.1% in 2013. Despite its small size, the Bahraini insurance market is regarded as one of the most advanced in the region. The insurers who have chosen Manama as a base to serve the rest of the GCC and beyond are attracted to the kingdom by its advanced regulatory structure, flexible work environment, its proximity to some of the region’s largest markets and – perhaps most importantly for its future in the region – what is generally considered the GCC’s most financially literate workforce. In 2015, according to the CBB, 65% of the workforce employed by local and foreign firms was Bahraini.

KEY PLAYERS: Bahrain’s “big five” insurers, measured by total assets, are all conventional underwriters but are otherwise diverse in both ownership structure and business model, with domestic giants rubbing shoulders with locally incorporated subsidiaries of international concerns to compete for business.

The largest of them, Life Insurance Corporation (LIC), is a locally incorporated subsidiary of LIC India and, according to the CBB’s most recent release of the financial position of its licensees, held total assets of nearly BD569m ($1.5bn) at the close of 2015. It established its Bahrain operation in 1989 as a joint venture with the Bahraini-owned holding company, Intercol. One of the earliest suppliers of life products to the domestic market, today it offers dollar-denominated policies to Bahraini residents as well as providing insurance services to holders of LIC’s Indian-registered policies currently residing in the Gulf.

Axa Gulf, with total assets of BD315.4m ($836.6m) at the close of the same period, is another Gulf mainstay, having been present in the region for over 60 years. It is the largest international non-life insurer in the GCC, and operates in Bahrain on a local licence. MedGulf, with assets of BD206.4m ($547.5m), is one of the leading regional insurance companies. Having started its operations in Lebanon in 1980, it has expanded into the Gulf primarily through its operations in Bahrain and Saudi Arabia, providing risk coverage solutions to both the retail and institutional markets.

Royal and Sun Alliance Insurance (Middle East), with assets of BD129.6m ($343.8m), is a locally incorporated company and a subsidiary of one of the world’s largest multinational insurance groups, which serves around 17m customers globally. It began operations in Bahrain in 2003, building on the successful acquisition of the Northern Assurance Portfolio, which had been operating in the Gulf since the 1950s.

Zurich International Life, with assets of BD112.8m ($299.2m), is the largest firm in Bahrain operating on an overseas licence, and the fifth-largest in the market. The global insurer has been present in the region for nearly 30 years, maintaining offices in Bahrain, the UAE and Qatar from which it oversees the distribution of its protection, savings and investment products.

Other notable conventional insurers include the Bahrain Kuwait Insurance Company, which has total assets of BD104.8m ($278m), and with shares listed on the stock exchanges of both Bahrain and Kuwait is the only company to enjoy national status in both jurisdictions, and the Saudi Arabian Insurance Company, which has assets of BD91.9m ($243.8m).

Another important player in the sector is ACE, which has rebranded itself Chubb after acquiring the US-based insurer of the same name for $28.3bn in January 2016. For now Chubb will operate in Bahrain under the ACE name, and as of yet it is unclear how the changes to Chubb will affect the marketplace in Bahrain; however, it is sure to bring opportunities, which will be critical as the regional markets have been affected by the drop in oil prices. “The slowdown in government spending, especially in Saudi Arabia, has had a huge effect on insurance opportunities,” Mojgan Khoshabi, regional managing director for MENA at ACE American Insurance (now operating as Chubb), told OBG.

REINSURANCE: Part of Bahrain’s strategy to establish itself as a major financial centre for the region has been to encourage a reinsurance segment within the wider insurance sector. The establishment of Arig in 1980 was the starting point for this process, and the largest Arab-owned reinsurer in the world is still one of the most prominent participants in today’s market. Arig’s key rival in terms of size is Trust International Insurance and Reinsurance (Trust Re), which has eclipsed it in total assets in recent years, posting assets of $1.55bn in June 2016. The two firms enjoy a dominant position among the locally incorporated conventional reinsurers, which also include Hannover Rueck, HDI-Gerling and New Hampshire Insurance. Like its Gulf neighbours, Bahrain’s cession rate is higher than in developed markets, a function of the prevailing model based on direct insurance business, as well as commission and investment income. According to the Qatar Financial Centre, the Bahraini market ceded 34% of its premiums to reinsurers in 2014, a figure slightly higher than the MENA average. However, the relatively small size of the local market means that Bahrain-based reinsurers are just as concerned with serving the region as the domestic market. Around 37% of Arig’s premium, for example, is accounted for by Lloyd’s accounts, while 35% is derived from the Middle East, 19% from Asia and 9% from Africa. Trust Re’s geographical scope, meanwhile, includes the Middle East, Africa, Asia, Central and Eastern Europe, South-east Europe and Russia.

TAKAFUL & RETAKAFUL: As well as conventional insurance operations, Bahrain is also an emerging centre of sharia-compliant insurance. As of October 2016, six takaful operators were licensed to provide Islamic insurance services in the kingdom, the first of which – Takaful International Company – was incorporated in 1989. The gross contributions (the sharia-compliant equivalent of premiums) account for just over 23% of the insurance sector’s total premiums, and the growth of this relatively young segment has been underpinned by Bahrain’s early adoption of takaful regulations and the implementation of the increasingly influential standards of the Manama-based Accounting and Auditing Organisation for Islamic Financial Institutions (see Islamic Financial Services chapter).

The emerging takaful segment is also driving growth of a sharia-compliant reinsurance, or retakaful, industry in Bahrain. The CBB issued its first retakaful licence in 2006 to Hannover Retakaful, which has since been joined in the market by ACR Retakaful. Between them they took BD83.4m ($221.1m) in premiums in 2015, compared to the BD314.1m ($833.2m) posted by the conventional reinsurers in the market.

The sharia-compliant segment made an important advance in 2014 with the CBB’s introduction of an enhanced regulatory structure. The new Operational and Solvency Framework for the Takaful and Retakaful Industry was the result of a long process of consultation between the regulator and market participants, and substantially revised the takaful rules in a way which the CBB believes will spur faster growth of the industry while ensuring that the interests of both stakeholders and operators are protected.

BUSINESS LINES: As with many emerging insurance markets, compulsory lines are the single biggest growth driver in Bahrain. Motor insurance, which is mandatory for all drivers, is the primary source of revenue and claims within the sector, and accounts for around 28% of the premiums written in the market, according to the latest CBB data. Unlike some jurisdictions in the region, the state does not set premium levels for third-party cover, and prices are market driven. Long-term insurance, which includes group life, group credit life and unit linked assurance, as well as participating-with-profit policies and children’s education policies, plays a large part in the sector by regional standards, accounting for 21% of total sector premiums. However, in terms of single lines, the joint-second-largest contributors to sector premium totals are fire, property and liability coverage, and medical insurance (which account for 18% of aggregate gross premiums). Marine and aviation insurance, meanwhile, contributes a relatively modest 3% to the industry’s total. Of these lines, medical insurance has shown strong growth over recent years, a trend that is likely to accelerate over the medium term thanks to a draft national insurance law which aims to establish mandatory health insurance for Bahraini and expatriate workers by 2019 (see analysis).

PERFORMANCE: The precipitous decline in oil prices which began in the second half of 2014 has resulted in fewer premium-writing opportunities across the region. However, Bahrain-based insurance companies have shown considerable resilience during this period.

While gross premiums derived from the important motor segment dipped slightly in 2011, the year of civil unrest in the home market, they quickly rebounded – reaching BD68m ($180m) in 2013 up from BD55.6m ($147.5m) in 2011. The CBB notes that the sector has largely continued to grow in the subsequent five years. However, in 2015, the most recent year for which the CBB has released aggregate information, the industry contracted by 0.67%, with total written premiums of BD272.1m ($721.7m). The largest growth figures were recorded in the health insurance and motor segments, which reached 11% and 4%, respectively. Long-term lines, meanwhile, contracted by 10%, which reflects cost-cutting measures by companies purchasing group cover for employees. Smaller lines of coverage also contracted, including engineering, by 11%, and miscellaneous financial loss, by 8%.

REGULATION: Increased competition in the sector combined with a challenging operating environment means that the prudential role of the regulator is of greater importance than ever in 2017. Bahrain’s first insurance rulebook was formulated by the Bahrain Monetary Agency (BMA) in 2003, and brought the sector in line with the standards set by the International Association of Insurance Supervisors. The new rules came into effect in 2005, and the following year the CBB took over the regulatory and supervisory duties of the BMA, retaining its predecessor’s insurance rulebook as Volume III of its new CBB Rulebook. This framework remains largely in place, and addresses core areas such as business standards, reporting requirements, enforcement and redress, and industry definitions. Minor regulatory alterations are made via quarterly updates and ad hoc communications, allowing the CBB to respond quickly to market developments.

As financial institutions, Bahrain’s insurers are also subject to the Central Bank of Bahrain and Financial Institutions Law of 2006, part three of which addresses the long-term insurance segment and general insurance provisions. The flexibility and clarity provided by Bahrain’s regulatory regime largely accounts for both its popularity as a base for foreign insurers and the history of consistent growth enjoyed by its indigenous firms. To date, the CBB has prevented the emergence of a damaging price war in the industry that some other jurisdictions in the region have witnessed, largely through its requirement that insurers undergo an actuarial review across all lines every two years. The regulator has well-established channels of communication with individual market participants, but Bahrain’s insurers can also address concerns to the CBB through the Bahrain Insurance Association (BIA). Established in 1993, the BIA is mandated to promote the interests of its members, further develop the domestic insurance industry and increase awareness of the benefits of insurance in the marketplace.

OUTLOOK: Bahrain’s insurers are likely to face an array of challenges in 2017. A prolonged period of low oil prices threatens to slow project development in the domestic market as well as the regional markets served by many Bahrain-based insurers. Long-term insurers will be hard-pressed to increase their written premiums at time when employers are seeking savings on their group life schemes and persistently low interest rates render the savings schemes offered by some insurers unattractive. Competition is likely to remain intense, with insurers battling for market share on pricing. Efficiency, therefore, should be a key theme over the short term, and one which encompasses capital, risk management, operations and distribution.

In the longer term, personal lines represent a promising area of expansion, as the government seeks to shift the burden of health care provision onto the private sector. Provision for old age, disability and education are other personal lines that are likely to play a larger role in the premium mix over the coming years. A key question over this period will be whether the CBB can successfully build on Bahrain’s legacy of regulatory excellence at a time when regional regulators are developing best practice frameworks of their own.