Economic Update

Benefitting as it does from a respected regulatory environment and rising demand, Bahrain’s insurance industry already performs well among its peers. An increase in infrastructure spending, however, and a renewed government focus on the sector stand to boost its growth even further.

Bahrain’s insurance penetration level, which stands at around 3% and is the highest in the GCC, according to the Bahrain Insurance Association, still leaves room for medium-term growth prospects, a fact highlighted by Abdul Rahman Mohammed Al Baker, the executive director of financial institutions supervision at the Central Bank of Bahrain (CBB), in a speech at the Middle East Insurance Forum (MEIF) 2012 in Manama in February.

Al Baker noted that GCC member states are expected to invest around $960bn in more than 1600 infrastructure projects in the region over the next decade, potentially providing a wealth of opportunities for insurers and reinsurers.

Bahraini insurers in particular should be well placed to benefit after a decade of solid growth. The sector’s gross premium volume has increased steadily over the past 10 years, according to a decennial report published by the CBB in late 2011, rising from BD58.6m ($155m) in total premiums in 2001 at a compound annual growth rate of 15% to BD210.5m ($558m) in 2010.

The director of the MEIF 2012, David McClean, said that the choice of Manama as the host of the annual event confirmed “Bahrain is still the powerhouse in the regional insurance industry”. Indeed, the CBB is widely regarded as setting the pace for insurance regulation in the region, and looks to maintain and enhance that reputation by pushing on with structural reforms within the sector.

Al Baker said the regional market is developing as the insurance sector in the Gulf evolves, adding that national regulatory bodies such as the CBB will have to work closely with counterparts in other countries and international organisations such as the International Association of Insurance Supervisors (IAIS) to strengthen regulation and oversight.

The international financial crisis made it necessary to create a platform for the growth and development of insurance worldwide, Al Baker said. He drew attention to the CBB’s ongoing reform measures, which include new rules on the use of clients’ money, solvency guidelines, and the requirement that insurance industry employees be qualified.

In addition to the opportunities arising from infrastructure growth, the expansion of takaful (sharia-compliant insurance) is also a segment targeted for expansion, particularly for the CBB. As with other areas of Islamic finance, regulation has not always kept pace with growth, partly due to disagreements over what constitutes sharia compliance, as what is accepted in one jurisdiction is not necessarily accepted in another.

“The regulatory framework is very satisfactory at the moment, but it needs to continuously cater to changes in the market,” Ashraf Bseisu, the group chief executive of Bahrain-based insurer Solidarity, told OBG. “Takaful is maturing quickly, and it will certainly experience faster growth than conventional insurance. Regulations have to adapt accordingly.”

The opportunities for expansion in both the conventional insurance and takaful industries are enticing. While Bahrain has one of the highest insurance penetration rates in the region, it is below the developed world average of 8%, Mahmood Al Soufi, the chief executive of multi-line insurer Bahrain National Holding (BNH), told OBG, which suggests substantial scope for growth. Al Soufi agreed that takaful has particular potential, and that Bahrain can enhance its position itself as a regional leader in sharia-compliant insurance.

Many industry leaders feel that consolidation in a somewhat fragmented sector would be beneficial. Dozens of insurers are present in what is still a moderately sized market, and some of the smaller players are undercapitalised and deliver low returns on investment. Mergers and acquisitions are expected to create leaner, stronger companies that can control larger market shares and deliver better services for their clients, benefitting the industry as a whole.

Indeed, one recent merger may pave the way for future consolidations. In September Bahrain-based Allianz Takaful transferred 75% of its ownership to MedGulf BSC, which has allowed Allianz to continue selling its range of takaful and conventional insurance products in the Kingdom.

“Consolidation in the market should be left to market forces, but the CBB should put regulations and incentives in place to encourage consolidation in the future,” Tawfiq Shehab, the general manager of Al Ahlia Insurance, told OBG. “Consolidation would definitely be a positive factor for consumers, improving the services rendered to clients and creating a broader base of products within a single company.”

Having cemented its reputation as a leader in financial services in the Middle East, Bahrain is now setting an example for insurance growth as well, largely the result of the CBB’s prudent regulatory measures.