Changing times for Bahrain’s takaful industry

A new regulatory framework governing Bahrain’s sharia-compliant insurance, or takaful, sector is expected to play a key role in generating new growth across the segment by attracting more players to the market as well as boosting competition among operators.

The regulations, which came into force early this year after a lengthy consultation with industry players, have stronger protection for customers and stricter solvency requirements at their core. The Central Bank of Bahrain (CBB), which regulates the sector, noted that further reforms are also on the cards.

An expanding market

Bahrain’s domestic market is served by seven takaful and two retakaful firms, according to data from the CBB, with a further nine players licensed to operate outside of the kingdom.

While Bahrain was among the first to embrace the Islamic financial model, its sharia-compliant insurance sector accounts for 2% of gross contributions in the GCC takaful market, according to a recent report by EY, mainly due to the comparatively small size of the country, it noted.

However, CBB data shows that takaful contributions make up 22% of total gross premiums in Bahrain’s domestic insurance market. Premiums for the segment reached BD57.2m ($151.1m) in 2013 – the most recent year for which results are available – marking a 7% increase year on year. Preliminary estimates for 2014, issued in January, put growth of the sector at up to 10%.

Data also shows that the number of private citizens taking up takaful coverage is on the rise. Contributions from families now account for around 20% of the industry total, up from 10% in 2009. The trend is seen by many as confirmation that sharia-compliant products are becoming more widely accepted among Bahrainis, while also indicating a growing appetite in the kingdom for investment-based life products.

Regulatory boost

In its review of the sector, the CBB identified corporate governance regarding policyholder rights and standardisation in takaful accounting practice and disclosure − especially around capital adequacy and solvency − as challenges that require attention.

The new Operational and Solvency Framework for the Takaful and Retakaful Industry imposes more stringent requirements on firms to ensure they can generate a capital surplus through operational efficiencies. Measures include provisions for capital injections to meet any deficiencies in policyholders’ funds and a more clearly defined method of calculating an operator’s total capital. The revised model also focuses on strengthening financial reporting requirements and improving transparency and accountability.

The revised rules are expected to encourage new takaful operators to enter the market, while existing policy writers should be better placed to compete against their peers and conventional counterparts.

Growth and protection

The development of the new framework has been a measured process, with the CBB unveiling a draft for industry comment in October 2013. The final version was released in late 2014, before coming into force early this year.

Addressing an insurance seminar in February, Abdul Rahman Al Baker, the CBB’s executive director of financial institutions supervision, said the amended regulatory framework would facilitate faster growth of takaful business in Bahrain, while protecting the interest of stakeholders. “It is also expected that the changes to the model will attract new entrants to the market and will foster competition,” he said.

In its most recent report on the international takaful sector, EY appeared to endorse the CBB’s stand, saying the framework would heighten the sharia-compliant insurance industry’s appeal to investors and that the development is likely to boost the country’s broader Islamic finance sector. The measures are also expected to strengthen the solvency position of Bahrain’s takaful operators, the report noted, enhancing operational efficiency of the business and safeguarding the interest of all stakeholders.

More change to come

The CBB plans further revisions to the rules and requirements covering both takaful and conventional insurers. Speaking to the Middle East Insurance Review in January, Al Baker said proposed measures included reinforced corporate governance for takaful business and enhanced training and competency requirements.

Al Baker anticipates a further review and bolstering of risk management practices for both takaful and conventional insurers as Bahrain moves to better meet the shifting requirements of the industry. “As this is an evolving field, more changes and updates to the rules are expected to be released in the future,” he said.

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