Enhanced choice: Legal and regulatory changes to bring takaful products to the market

Legislation is likely to drive development in Oman’s insurance sector in 2014 and beyond. A new insurance law will update the existing legislation, with the biggest impacts expected to come from a new minimum requirement for paid-up capital that could trigger consolidation in the sector and also from a rule mandating that any new licensee must sell shares on the Muscat Securities Market (MSM), the Omani bourse. Additionally, a new law for takaful (Islamic insurance) will bring a new type of competitor to the sector.


Oman’s first insurance law was created in 1979, and has been updated several times since. The biggest change to the new version will be the doubling of the minimum paid-up capital, from OR5m ($13m) to OR10m ($26m). There are two reasons for the change; the first is to add to the overall capital base of the sector, and therefore increase capacity to retain risk as an alternative to passing it along to reinsurance companies, which ultimately allows profits form the sector to flow to foreign reinsurers, save for what goes to Oman Reinsurance, the only local reinsurer; and the second reason is to encourage consolidation.


Oman has 21 insurers, many of them smaller companies, but a small pool of larger insurers is seen as a more sustainable path for sector development. Existing firms have thus far been reluctant to merge their operations, and raising capital requirements is a proven method for encouraging consolidation worldwide – as long as the increase is large enough to make it difficult for smaller players to meet the new threshold. At the time of writing in late 2013, two companies – Falcon Insurance and Vision Insurance – were in the process of negotiating a potential merger. Once the current round of capital hikes is completed, the regulator plans to seek approval for another boost, to OR15m ($39m), which would come in the next few years.

“The future of the sector is very much based on the opportunities of further consolidation,” Gautam Datta, CEO of Al Madina Insurance, told OBG. “We have already seen one merger in the sector and believe that some more will follow.” That could mean two existing insurers merging, but it may also mean foreign firms with a larger capital base purchasing local insurers.

The first merger in recent years in Oman was the combination of the local branch of RSA Oman with Al Ahlia Insurance (AAI), which was announced in 2010. AAI is among one of the oldest insurers in the country, and RSA Oman was a branch of the UK’s RSA Insurance Group, often called Royal and Sun Alliance. While there are no other proposed mergers beyond Falcon and Vision, a successful result for that proposition could help provide another example to emulate, along with that of RSA and AAI. That, as well as a new uptick in minimum capital, could create the environment needed to promote the consolidations deemed necessary to ease competition in the market and boost profits.

Bourse Support

In addition to having a smaller number of insurers, the Capital Markets Authority (CMA), the sector regulator, wants to see more of them publicly traded on the MSM. Insurers have in the past been reluctant to list because they have not had the need for additional capital, in addition to being reluctant to share equity and take on the burden of disclosure that comes with a listing. There are currently few incentives to list in most economic sectors in the country, which is in line with the region as a whole.


As of late 2013 two insurers were trading publicly: Dhofar Insurance and Oman United Insurance. The authorities hope to develop the bourse by adding more equities, and have had growing success in recent years encouraging companies to list. The new insurance law will formalise a practice that has been in place for several years in the financial services sector of making licensing conditional on listing.

For the insurance sector, this would mean that companies wishing to enter the market will need to list, while existing insurers may also choose to take up the option as they work to comply with other sector changes. Those that struggle to meet the new capital requirements of $26m are prime candidates, for example.

Stock Sales

The rule may also apply to branches of foreign insurance companies that wish to convert to local operations, such as Arabia Insurance (AI), a regional insurer with operations across the GCC. AI has announced plans for an initial public offering (IPO) in coming years in line with its switch from foreign branch to local company, but as of the time of writing in late 2013 had not provided specific details of the sale, such as the size of the stake, the value it will set for the shares, or when the trading will commence.

In addition to the potential IPO flow from conventional insurers, the introduction of takaful providers should also create listings on the bourse. Of the three announced licensees, one – Al Madina – is a conventional insurer that is converting to takaful. The others are Oman United Insurance, which plans to list 40% of a new joint venture sharia-compliant operation, and Takaful Oman, which counts the Oman National Investment Corporation as a minority shareholder. As of late 2013, Al Madina and Takaful Oman had both launched IPOs and the former was trading, with the latter expected to list in January 2014. Oman United Insurance plans its IPO for the first quarter of 2014.

Takaful Law

The CMA hired UK-based law firm Clifford Chance to consult on the development of its takaful law. Oman has opted to create a separate law for the sharia-compliant segment instead of incorporating elements into existing legislation. Details of what is expected when a law is in place include an approach that maximises the separation of Islamic and conventional operations. Existing insurers are not expected to be allowed to establish branches or subsidiaries offering takaful, for example. The law is likely to be based on the takaful standards of the Islamic Financial Services Board, the Malaysia-based standards body.

In addition to the takaful law’s contents, the development of sharia-compliant banking in the sultanate could also provide indications of how a takaful sector may take shape. Progress toward a mature market for Islamic financial services has come faster in banking than insurance, as there was a fully articulated legal framework in place for that sector in 2013. The rules have made sharia compliance paramount. Oman has allowed conventional banks to offer sharia-compliant services, but only in separate bank branches, as opposed to the common practice in many countries of using separate counters in existing bank locations.

Sharia Scholars

Another example of Oman’s commitment to Islamic financial services comes from the mandate for sharia scholars to be involved. Islamic financial institutions typically establish a panel of experts in both sharia and finance to vet the institution’s products and procedures for compliance with Islamic principles. They typically work, and are compensated, in a similar way to company director; they meet periodically and are paid a fee for their services. Sharia scholars are also required for roles such as sharia advisors, sharia auditors and sharia-compliance officers. Sharia scholars cannot sit on the board of more than one Omani bank. The expanding role of these experts is likely to increase costs at banks and be replicated for insurers.


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The Report: Oman 2014

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