Bahrain’s sharia-compliant insurance industry has developed rapidly in the years following the turn of the century. According to a report by multinational professional services firm EY, in 2001 takaful (Islamic insurance) accounted for 3% of the sector’s gross written premium (GWP), but by 2016 it had expanded to capture nearly a quarter of the market, or 22% of GWP, according to statistics from the Central Bank of Bahrain (CBB).
Over recent years, the growth of takaful has significantly outstripped that of the wider insurance sector, running at a compound annual growth rate (CAGR) of 12% between 2010 and 2015, compared to an industry CAGR of 5.3% over the same period. The sharia-compliant model has performed particularly well in the motor and medical insurance segments, where it accounted for more than 30% of GWP in both business lines in 2016.
Increased awareness of the benefits of insurance and a preference to secure sharia-compliant cover continue to drive the growth of takaful in the kingdom. Aggregate sector data compiled by the CBB presents an encouraging trend in the expansion of family takaful, a segment where product awareness is of great importance: the share of family takaful increased to 14.5% of total takaful contributions in 2015, compared to 10% in 2009.
REGULATORY SUPPORT: One reason for this robust performance is a regulatory structure that has allowed the takaful industry to grow in a stable and sustainable fashion. Bahrain is known for its progressive approach to the monitoring of its Islamic financial services (IFS) industry, and as home to a number of sharia standard-setting bodies, it has been influential in the development of the global takaful and IFS industry (see IFS chapter).
With regard to the kingdom’s young takaful industry, the CBB has overseen a gentle evolution of regulation since the early 2000s, providing the industry with adequate time to successfully adapt to alterations to the framework. Planning for the most recent significant change to takaful regulations began in 2010, when the CBB initiated a revision of the takaful operational model, which in Bahrain was based on the hybrid design of wakala-mudaraba (agency-profit sharing). A period of industry consultation followed thereafter, resulting in the publication of draft rules outlining an enhanced takaful and re-takaful framework in 2013.
SOLVENCY & INTEREST-FREE LOANS: In early 2015 the CBB implemented its new takaful rules, which it hoped would facilitate faster growth in the industry while protecting the interests of all stakeholders – that is, participants, operators and shareholders. Key to this ambition was the question of solvency, which, on the world stage, has been driven by the Solvency II directive in Europe. The Bahraini initiative sought to harmonise the solvency standards being adopted by the global insurance industry with the demands of domestic sharia-compliant insurers, thereby ensuring that they can more effectively balance risks on their books with future obligations to policyholders.
The new framework also addressed the issue of qard al hasan (interest-free lending), which had become a systemic challenge for the domestic industry. The practice of qard al hasan arose from a peculiarity of sharia-based insurance, which calls for the separation of shareholder and policyholder capital. This limitation presents a challenge to takaful operators, as it prevents them from transferring shareholder funds to the policyholder pool should it fall short of operational requirements. The response to this restriction was to use the principle of qard al hasan to extend a loan to policyholder funds on a voluntary basis in order to meet any deficit.
While a theological case could be made for the practice, not all sharia scholars approved of its application, with opponents of the qard hasan method arguing it should only be used when a policyholder fund is completely depleted of capital, and not as a measure to meet recurring regulatory deficits. Its continued use in the domestic industry, therefore, threatened to throw takaful into theological question, an outcome which would have had negative consequences for the industry’s development. The CBB’s new takaful framework addressed this challenge directly, replacing the qard hasan principle with a new means by which insurers can meet shortfalls in their policyholder pool.
The total capital of a takaful company is now calculated by combining the available capital of shareholder funds and the net assets of policyholder funds. This figure is then compared to the new solvency requirements, and any deficiency is subsequently met by capital injections rather than a qard hasan process. The new operational and solvency framework for the takaful and re-takaful industry also establishes more rigorous financial reporting standards, as well as measures to improve transparency and accountability.
CONTINUED DEVELOPMENT: In late 2016 Abdul Rahman Mohammed Al Baker, executive director of financial institutions supervision at the CBB, announced that the regulator was planning to introduce new takaful standards. While no timeframe was given for the introduction of any new rules, the regulator has previously identified market characteristics it views as challenges to future growth. These include inadequate corporate governance, an ad hoc approach to accounting standards, the lack of suitably qualified candidates for takaful jobs and a limited range of Islamic investment instruments.
Scant investment options, in particular, have threatened sustainable growth in recent years. Takaful operators are required to direct their investment capital solely to sharia-compliant destinations, and the shortage of high-quality sukuk (Islamic bonds) has meant that their investment portfolios have come to be dominated by security and real estate interests. Consequently, takaful operators in the Bahraini market have been adversely affected by the economic turbulence which began in 2011, resulting in volatile returns and, in some cases, mediocre performances in their income statements. For example, return on investment for takaful companies in Bahrain averaged 0.82% between 2008 and 2011, compared to 3.98% in Malaysia over the same period, according to a study carried out by multinational professional services company Deloitte.
HEALTH: Nonetheless, takaful’s strong performance in the medical segment bodes well for its future expansion as an insurance model. In 2016 gross health premium in Bahrain rose by 19% to reach BD62.1m ($164.7m), and as the government pushes ahead with its mandatory health insurance scheme, the segment is likely to remain one of the most interesting areas of the insurance spectrum.
However, this development places the kingdom’s takaful industry at the centre of a debate concerning the mechanics of the government’s health insurance framework. While mandatory health coverage sends the gross revenue of insurance companies skyward, this does not necessarily translate to improved profits. Fierce competition in the market is likely to place downward pressure on premium, for example, with some companies willing to risk underwriting losses in order to gain market share.
The rollout of similar schemes in the region shows that net premium can be limited on basic health care packages and are sometimes exceeded by claims. Therefore, much depends on the ability of takaful providers to compete with more established specialists to provide more profitable ancillary or enhanced health care packages to the domestic market. This is the aspect of health care coverage in which regulators have tended to grant insurers more freedom in terms of pricing and service provision, and the regulatory framework’s influence on these operations is therefore a frequent topic of industry discussion. Given the increasing prominence of takaful operators in the health care segment, there is room for the industry to make a significant contribution over the coming years.
Strong growth performance in takaful insurance, especially in the medical and motor segments, is in large part due to continued government commitment and tangible action. By managing what was becoming a problematic regulatory vulnerability, the CBB has greatly strengthened the domestic takaful industry with regard to solvency and the regulator’s ability to monitor it, bringing it in line with international industry standards. The clarified regulatory framework has also removed theological uncertainty, thereby making the insurance sector more attractive to both investors and new market entrants, which the regulator believes is essential in order to cultivate healthy competition in the sector.
