Upheld by strong fundamentals, Bahrain’s insurance sector has continued to grow through the years, but the slump in oil prices could cast dark clouds on prospects.
Despite Bahrain’s efforts to diversify its economy, its dependence on high oil prices could have negative repercussions on the insurance business.
In December 2014, Standard & Poor’s revised its outlook on the Kingdom to negative from stable, commenting that “the negative outlook reflects our view of Bahrain’s weakening fiscal profile and its uncertain policy response”.
It added: “We think a period of lower oil prices will exacerbate existing structural weaknesses in Bahrain’s public finances. If the resulting squeeze on government revenues does not translate into reform that improves the sustainability of Bahrain’s fiscal position, this could put pressure on the ratings. However, our growth expectations for Bahrain remain stable, linked to forthcoming disbursements from the Gulf Cooperation Council (GCC) Development Fund and to Bahrain’s relatively diversified economic base that government policy has encouraged. These factors support the ratings.”
According to S&P, through end-September 2014, Bahrain derived 65% of its fiscal revenues from crude oil receipts, which are part of the 84% of total revenues stemming from the oil and gas industry.
Impact on insurance
As economies such as Bahrain’s depend more on high oil prices to sustain their current levels of economic development and to balance their budgets, insurers operating in these markets will face a greater challenge in maintaining their business profiles over their GCC neighbours, said an A.M. Best Briefing.
More generally, lower oil revenues could translate into lower growth in GDP, which may reduce economic stability and make employment within the Middle East less attractive. “This could be a major concern for primary insurers, resulting in a possible contraction in the core personal lines of motor and medical,” said the note. “Coupled with this, reduced volumes of infrastructure projects may reduce the generous inward reinsurance commission primary insurers receive from large commercial risks, as this business largely tends to be ceded into the international reinsurance market. This potential change in insurers’ profiles could be further magnified as they balance higher expenses against declining business profiles.”
Takaful contracts
Bahrain’s insurance industry has so far maintained its momentum over the years, although annual growth rates have remained at single digits since 2009 (see Table 2).
In 2013, takaful growth fell into single-digit range for the first time, to 7%. While this could be just a sign of moderation, it is noteworthy that family takaful contributions, which make up around 18% of the overall life market in Bahrain, slid nearly 20% between 2012 and 2013.
“Takaful has certainly helped to increase awareness and in the early years, helped to increase sales through newcomers to the market and particularly through bancassurance links, but has not led to any dramatic demand,” said Mr Robert Grey, General Manager of Bahrain National Life Assurance (bnl). The drop in the takaful business in 2013 suggests that “after the increase seen in the early years, now like conventional life business it has to be correctly sold to meet demand”, he added.
General takaful contributions performed better during the period, increasing 15% to BHD46.2 million (US$122.5 million) in 2013 and forming 26% of the overall non-life pie, up slightly from 22% in 2012.
As an industry, takaful is not yet profitable, said Mr Fadi Al Khatib, General Manager of Al Ahlia Insurance. “From an investors’ standpoint, the return on equity is not yet rewarding. On the other hand, conventional insurance companies are performing much better.”
Medical to take off
In the absence of compulsory health insurance which has been government’s agenda for years, the medical business managed to expand by 10% in 2013 and 300% since 2007, making it a bright spot in Bahrain’s insurance sector.
“Medical has been driven partly by recognition of medical coverage as an employee benefit, constant rumours of compulsory insurance and demand for private healthcare,” said Mr Grey.
There is clearly a latent potential for medical insurance; the CBB expects the compulsory scheme for expatriates to increase premiums by “at least 20% to 25%”, said Mr Abdul Rahman Al Baker, Executive Director of Financial Institutions Supervision, Central Bank of Bahrain (CBB).
Fund for hit-and-run victims
Since last September, a law has been in place to set up a fund to compensate hit-and-run victims. The CBB is now in the process of working out the composition of the board members and it is expected that the fund will become functional “in due course”, it said.
Details of the fund have yet to be finalised, but preliminary discussions propose that all insurers in the Kingdom contribute 1% of their motor premiums to the fund, or at least BHD5,000 (US$13,262.60) a year. Victims of road accidents in which the culprit is not found could then apply to the fund for compensation.
Hit-and-run victims or their families, in the event of death, currently get nothing if the offender is never caught. While victims do receive emergency care free of charge and can apply for disability benefits if they are seriously injured, they are not entitled to a lump-sum payout if they are not covered by insurance.
The Bahrain Insurance Association (BIA) initiated the idea because they want to do their bit for societal responsibility, said Chairman Younis Jamal Al Sayed. The fund will be managed by a board of trustees appointed by the CBB governor and will include representatives from the CBB, BIA, Interior Ministry and independent members. It would cover both fatal and non-fatal injuries. No time frame has been set for the fund to be launched.
The future
It remains to be seen how the macroeconomic situation will affect Bahrain and the region. Bahrain’s insurance industry has so far remained resilient and underpinned by strong fundamentals; it continues to be a hub for several global finance companies and boast the Gulf region’s highest penetration rate of 2.3%, while the CBB expects a 10% growth in 2014. With a proactive regulator at the helm, the industry may be in good hands to weather the challenges.