Bahrain’s insurance industry continues to expand – albeit at a slower pace – with market saturation, political disturbances and shrinking profits all creating an impact. However, the potential in the market still draws big names looking for a regional base.
By Wong Mei-Hwen
On 21 March 2012, the Bahrain Insurance Association (BIA) launched the country’s first-ever Insurance Day. The ceremony honoured pioneers of the insurance industry in the Kingdom, and featured an exhibition documenting its history and achievements.
Events like these highlight how far the Kingdom’s insurance sector has come since Norwich Union opened its first office in the Arabian Gulf in 1950. Insurance penetration in the country now is one of the highest in the MENA region – even though at 2.4%, there is certainly room for improvement.
The level of saturation and market size – Bahrain’s economy is small compared to the rest of the GCC – makes the slower insurance growth in recent years rather inevitable. Following a high of 33% in 2008, the growth rate fell to 2% in 2011, according to figures from the Central Bank of Bahrain (CBB). This was a continuation of a downward trend, where premiums grew 7.5% and 4.9% in 2009 and 2010, respectively.
However, other insidious factors have contributed to this declining trend. Among them is the political unrest which delayed many planned infrastructure projects and government spending. “The overall slowdown – for instance, projects put on hold, discontinued or cancelled – had a direct impact on the insurance industry,” said Mr Mahomed Akoob, Managing Director of Hannover ReTakaful in Bahrain. “Budgeted volumes could not be achieved in many instances.
However, the situation relatively turned around in 2012, and we expect 2013 to be even better.”
Rate competition
Another important factor for the slowdown was the price competition that has led to rate reduction in the primary markets, added Mr Akoob.
The trend was clearly apparent in motor, which constitutes nearly a third of Bahrain’s insurance market. Motor rates, said Mr Nagib Bahous, President & CEO of Bahrain-based Saudi Arabian Insurance Co (SAICO), “have reached a level where, with deteriorating claims experience, many insurers are not able to make a profit”.
Local trends mirror the region
But while these rates are starting to go back to normal, as noted by some observers, the market as a whole is still suffering from intense price competition, coupled with dismal investment returns. This is “weakening the already meager profitability margins in the sector”, said Mr Yassir Albaharna, CEO of Arig. “A greater emphasis on service quality rather than price is needed to avert insurance company failures.”
The trend in Bahrain is a region-wide one. “What we hope to see in Bahrain is no different than the rest of the markets we operate in,” commented Mr Bahous. “We hope that competition becomes rational and insurers will work and underwrite to make technical profit.”
There are also initial indications that a rise in claims in 2012 has created additional pressure on profitability, said Mr Jonathan Matchett, Manager, MENA Insurance Sector, Ernst & Young. “However, we believe there is still opportunity in the Bahrain insurance market if insurers can generate cost efficiencies while not affecting the customer experience.”
In 2011, underwriting profit among Bahrain’s insurers increased by just 4% year-on-year to BHD19.17 million. On the other hand, the net investment income decreased by around 9% to BHD22.7 million.
Engineering premiums – a case of overseas underwriting?
Bright spots in 2011 included the 31% surge in engineering insurance premiums – although there are suggestions that this figure may encompass a significant share of overseas business. “As far as domestic projects are concerned, opportunities before the Arab Spring were few and far between in relation to neighbouring countries like Saudi Arabia, Qatar or the UAE,” said Mr Xavier Luscan, Property & Engineering Underwriting Manager - Corporate Solutions/ Large Risks for AXA Insurance (Gulf). “The political events did not have much effect on the already small construction market in Bahrain.”
He pointed out: “Some companies have aggressively developed their overseas underwriting, thus generating an appreciable growth reflected in the CBB figures. Caution should therefore be exercised in regard to their interpretation.
Relating the growth exemplified by the CBB figures to some market expansion driven by local construction projects could be a case of misinterpretation, even if the Bahrain market sees recovery growth in almost all segments in 2013 as 2012 volumes were low.”
The potential in other lines
The year 2011 also saw a 10% growth in medical insurance, likely to be further boosted when the long-awaited compulsory medical insurance law takes place. The project is now being studied by the government and will be up for discussion by the Shura Council in 2013, said Mr Younis Jamal Al Sayed, BIA Chairman.
Like other countries hit by the Arab Spring, unrest in Bahrain spurred demand for specialty covers like political violence. Yet, “the insurance market was not involved with any significant political peril claims,” noted Mr Bahous.
Bancassurance, introduced to Bahrain in the 1980s, has “tremendous potential” as a distribution channel in Bahrain, said Mr Matchett. “Insurers need to react and respond by knowing their customers, understanding their wants, needs and issues, and putting into place the products and processes that will support future growth.”
Publicising the sector
Stakeholders in Bahrain have made commendable efforts to raise the profile of insurance. Insurance Day was launched last year to strengthen relations between employees in the insurance sector and encouraging professional excellence. It will also provide a forum for the members to meet and discuss issues in the insurance industry, said BIA.
This year’s Insurance Day, on 26 March, will see the BIA and CBB introduce a new animated character to act as the voice of the insurance industry, revealed Mr Al Sayed, who is also the CEO of Takaful International. The previous character, “Taamina”, was created in 2005 and featured in an animated booklet, published by BIA to explain insurance, and distributed to educational institutions.
Attracting new players
Political unrest notwithstanding, the CBB continues to attract players to site their regional operations in the country. Among them is Takaud Savings & Pensions, which received its licence in 2011. “The CBB has functioned as a single regulatory authority since 2002, creating a business-friendly financial regulatory environment which played a part in our decision to locate our MENA hub in Bahrain,” said Mr Paul Bromley, Takaud’s Chief Marketing Officer.
Another recent entrant is Hannover-based HDI-Gerling Industrie Versicherung (HD-I), which opened a branch in Manama last year to offer all major lines of business in industrial insurance. It chose Manama as its insurance hub in the Middle East “due to its solid regulatory environment, liberal economy and favourable foreign investment regime. Besides, Bahrain offers decent living and better cost efficiency,” said Mr Jens Wohlthat, a member of the Board of Management.
HD-I also saw an added advantage for its Bahrain branch to combine forces and capacity with its sister company, Hannover Re, which already has a physical presence in Manama, he added.
Revisions to regulations
The CBB has also continued to develop and update regulations to meet changing norms. In 2012, the CBB revised its module on client money, with changes taking effect on last July. The rule emphasises the need to handle clients’ money in a way that prevents it from being used by insurance brokers and appointed representatives, and from being mingled with the assets of these individuals.
The Business Conduct module, issued in 2005, was revised in October 2011 in respect of “Customer Complaints Procedures”, which came into effect on 31 March 2012. Consequently, insurers are required to appoint a customer complaints officer, implement written complaints procedures, and respond within the deadlines set by the CBB, with quarterly reporting to the latter. In October 2012, the CBB added guidance on the appointment of a customer complaints officer, allowing this position to be combined with that of the compliance officer.
Aspirations for the industry
With around 30 insurers and nearly the same number of brokers in Bahrain, further consolidation is necessary, although there have been few moves in this direction. “I expect (consolidation) to come about mainly through market forces, rather than an increase in capital requirements or further legislation,” said Mr Ayman El Hout, Managing Director of Medgulf Allianz Takaful.
“For the insurance sector in Bahrain as a whole, I am in favour of more cooperation between the companies, particularly against unjustified increases in the cost of claims (especially in health and motor), and to put more emphasis on service and product development rather than cutting prices,” he added.
“Insurers need to take a new approach to restoring healthy profitability by realigning their organisation around a customer-centric view where customer is king,” said Mr Matchett. “This means properly segmenting the market, understanding the wants and needs of each segment, creating segment-specific product offerings, developing appropriate distribution channels and putting in place the technology to support. In short, insurers need to create and make available the right product in the right place at the right time.”
While Bahrain has the sufficient level of talent, it will never be enough, commented Mr Akoob. “I hope for the highest calibre possible in the insurance industry to be based right here in Bahrain,” he said. “More must be done every day to make sure we produce, acquire and more importantly retain the needed talent within the market. Other regional and international financial hubs are competing on home-grown talent pool.”
In pole position
Despite having its issues, Bahrain still leads many of its neighbours, with its talent pool, reasonable insurance penetration and well-established regulations. The insurance market can utilise these strengths to make the necessary improvements and corrections for a more successful future.
Bahrain as a reinsurance hub
In the face of competition from neighbours, does Bahrain still have what it takes to fulfill the CBB’s dream for it to become a reinsurance and retakaful hub?
“The CBB has a well-established reputation for effectiveness and sustainability and is considered by many to be the regulator of choice within the region. It has demonstrated commitment to adopting international best practices. In all, it has an excellent infrastructure and logistics. By paying close attention to the legal and regulatory framework and maintaining a policy of an open and diversified economy base, the CBB is in a strong position to further establish Bahrain as a reinsurance and retakaful hub.”
– Mr Yassir Albaharna,
CEO of Arig
“Bahrain is the oldest financial centre in the GCC. The CBB is one of the most solid and sophisticated regulators we have dealt with. The location is central to regional markets and key international markets as well. The local workforce is talented and well educated. The CBB, Bahrain Institute of Banking & Finance (BIBF) and Gulf Insurance Insitute (GII) invest a lot of time and effort into producing high-calibre staff to join the industry.
“Bahrain is also an expatriate-friendly place should there be a need to draw on the experience of a foreign workforce. The overall cost of living and running a business is reasonable. The infrastructure is well designed and well maintained. These are all aspects that contribute to the attractiveness of Bahrain as a reinsurance and retakaful hub. These were also important factors in our own decision as Hannover Re Group to establish our presence in Bahrain to cater to the MENA region on the reinsurance side and worldwide on the retakaful side.”
– Mr Mahomed Akoob, Managing Director, Hannover ReTakaful
“The Kingdom of Bahrain is an ideal place for reinsurers to use a regional hub. (It) has a proven corporate regulatory framework that encourages and supports the formation of new corporates. The insurance regulation system is advanced and has been in place for a long period of time. The geographical location is strategic and is a centre point between the West and East and within the MENA region. Finally, Bahrain has local talent who have the experience, and a good percentage holds professional qualifications. This is what encouraged our group to use Bahrain as a hub for our regional business and recently we formed a joint venture in Bahrain with Cigna to service the entire region.”
– Mr Nagib Bahous, President & CEO of SAICO
“Bahrain has a proven track record in its ability to serve the region as a hub for financial services, and has many positive attributes, including business-friendly regulations, an educated workforce of both locals and expats, and good communication infrastructure. However, in the face of intensified competition from other financial centres, such as Qatar and the UAE, Bahrain needs to respond with improvements in regulation and enforcement, with a renewed focus on risk management.”
– Mr Jonathan Matchett, Manager, MENA Insurance Sector, Ernst & Young
BHD1 = US$2.65