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Jul 2019

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Still thriving despite losing some of its shine

Source: Middle East Insurance Review | Jul 2019

Bahrain’s insurance market continues to thrive and remains the domicile of choice for a number of foreign operations despite being hampered by the lack of innovation and slightly antiquated regulations, says Mr Salman Siddiqui of AM Best
 
 
Once considered a centre of excellence for Middle East insurance and reinsurance, Bahrain’s status as a regional insurance hub has been overtaken by some of its neighbours. Bahrain used to possess the most comprehensive and forward-looking regulatory environment in the GCC. However, it appears to have stagnated, with limited innovation or change. Other GCC and Middle East jurisdictions have developed their own risk-based regimes, whilst Bahrain continues to operate on slightly antiquated rules. Despite this, Bahrain’s insurance market continues to thrive and remains the domicile of choice for a number of foreign operations. While political instability has eased, economic uncertainty remains, despite significant financial support from the other GCC countries – Kuwait, Oman, Qatar, Saudi Arabia and the UAE.
 
Market dynamics 
The Bahraini insurance market is one of the smallest in the world, with GWP consistently below $900m (Exhibit 1). However, compared to other GCC countries, its insurance penetration is relatively high due to the kingdom’s early adoption of strong insurance regulations. Bahrain’s insurance penetration also compares favourably to larger GCC markets such as Qatar and Saudi Arabia, and is the second highest in the GCC region (Exhibit 1). 
 
GCC market size and penetration (2017)
 
The Bahraini market is fragmented, with a large number of companies and also concentrated, with approximately 45% of GWP generated by the five largest insurance companies, namely, gig Bahrain, Bahrain National, Takaful International, Solidarity Bahrain and AXA Gulf. Given the number of companies and limited size of the overall market, price competition is intense, particularly in retail lines, with insurers often looking to focus on top-line growth over bottom-line profitability. 
 
Like their counterparts in the wider Middle East region, Bahraini companies tend to be generalists that provide a well-diversified portfolio mix, with a focus on the key business lines of motor and medical insurance. However, unlike Saudi Arabia and the UAE, the kingdom has not yet made medical insurance mandatory for expatriates. Should this change, there is significant potential for an increase in market size.
 
Large commercial lines (including property, marine and engineering) are largely ceded out to the international reinsurance market, with higher retentions on motor and medical insurance (Exhibit 2). Consequently, underwriting returns are driven largely by the profitability of these two business lines, with expense ratios benefiting from material inwards reinsurance commissions.
 
Bahrain insurers –  Business mix by line of business (2017)
 
Takaful continues to evolve 
Bahrain was the first country in the Middle East to establish specific takaful regulations (in particular, relating to policyholder protection), and now has the highest level of takaful penetration in the Middle East excluding Saudi Arabia. Takaful penetration (takaful contributions relative to total market premiums) has consistently averaged around 22% in recent years, which compares favourably with countries like the UAE, where takaful penetration has averaged around 16%.
 
Additionally, Bahrain’s takaful regulatory environment has also been a positive factor for international groups looking to set up their retakaful operations. However, as other Middle East countries have now updated their takaful regulations, it remains to be seen whether this has an effect on the level of takaful penetration in the wider Middle East market and changes Bahrain’s status as a leader in the takaful space.
 
M&A: A hot topic
The Bahraini market has seen a number of M&A deals in recent years, with companies looking to obtain market share through inorganic growth. The two biggest deals – gig Bahrain’s acquisition of Takaful International and Solidarity’s acquisition of Al Ahleia – were conducted in the takaful sector. Additionally, both acquired companies were quickly integrated into their parent’s operations. In the case of Solidarity, this was done through legal entity merger, whilst gig Bahrain integrated its branding and underwriting guidelines. 
 
The small size of the market and the high level of competition mean that organic growth opportunities are limited. While it would not be surprising to see more M&A activity as companies seek to consolidate their market positions through acquisition, a number of barriers still remain. These include the shareholding control of entrenched families and the limited companies available for sale that could be considered attractive in terms of market share to potential buyers. Nevertheless, takaful business continues to remain of interest in the region, with a number of conventional operators looking to either start or acquire takaful platforms. 
 
The end of Bahrain as a reinsurance hub?
The early-mover advantage of Bahrain’s regulatory environment meant that foreign insurers have set up their local affiliates in Bahrain to access the MENA region, including Hannover Re, Asia Capital Re (ACR), Ace/Chubb and AXA. Additionally, capital investors for regional reinsurance operators also saw Bahrain’s strong and coherent insurance regulations as attractive for domiciling. This resulted in the two high-profile names of Middle East reinsurance – Trust Re and Arab Insurance Group (Arig) – setting up in Bahrain, which became the insurance and reinsurance hub for the Arab world. 
 
However, Bahrain’s failure to continue innovating and developing regulation has led to a situation where it has been overtaken by the DIFC as the region’s main hub for reinsurance operations – particularly for facultative placements – as well as an attractive centre for groups from outside the region to operate from. 
 
Additionally, in recent years, three of the four major Bahraini-domiciled reinsurers have faced material issues. ACR Retakaful entered runoff due to poor performance; Arig has made a similar decision recently (subject to regulatory approval); and Trust Re’s issues related to concerns over governance and their inability to publish timely audited financial statements. 
 
While none of the above-mentioned reinsurers’ issues can be directly attributable to being domiciled in Bahrain, they have dampened the attractiveness of the domicile for reinsurance investors and that over the long term, this represents a material threat to Bahrain’s status as a reinsurance hub for the Arab world. M 
 
Mr Salman Siddiqui is an associate director, analytics at AM Best.
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