The size of the insurance market in Brunei Darussalam, in terms of population and economic activity, is relatively small given that most locally registered companies do not have the capital or financial muscle to underwrite large-scale projects in the lucrative oil and gas sector. Nevertheless, the industry is slowly gathering momentum. Competition is strong, and the emergence of a takaful (Islamic insurance) offering has added further dynamism and price competitiveness to the market. With insurance uptake starting from a low base, there is also ample opportunity to grow business within the Sultanate, while the regulatory environment, although in its infancy, is becoming more robust.

MARKET PLAYERS: The local insurance market remains highly competitive. However, with the 2006 Insurance Order and Insurance Regulations, the sector was pared down. These regulations increased the minimum paidup capital from BN$1m ($778,800) to BN$8m ($6.2m), a move that caused significant consolidation in the sector, reducing the number of registered insurance companies from 18 to the current 12. This comprises nine conventional and three takaful players. There is also one registered insurance broker and one loss adjuster operating in the market.

The conventional insurers in the market are American International Assurance, Audley Insurance, MBA Insurance, ETIQA Insurance, National Insurance Company, Standard Insurance, Tokio Marine Insurance Singapore, Tokio Marine Life Insurance Singapore and Great Eastern Life Assurance. There are also three takaful operators: Takaful Brunei AM, Takaful Brunei Keluarga and Insurans Islam TAIB. These are governed by the Takaful Order of 2008. Since the beginning of 2011, the newly established Autoriti Monetari Brunei Darussalam (AMBD) has been responsible for regulating the sector, taking over the duties of the financial institutions division of the Ministry of Finance.

SECTOR DYNAMICS: While the number of players may have fallen over the last five years, in a market of this size, there remain a high number of operators. These are supplemented by a substantial agents segment.

Indeed, the number of insurance agents rose 4.15% to 376 agents in 2012, according to data supplied to the ASEAN Insurance Council (AIC) by the General Insurance Association of Brunei Darussalam.

In a market with a population of about 425,000 in 2012, according to the IMF, the potential for premium growth in individual lines may seem limited.

Indeed, with the sector’s contribution to GDP remaining below 2%, the economic importance of the industry within the country remains marginal. However, many of the firms maintain a bullish outlook for the sector over the coming years. Indeed, with the government taking strong action to combat consumer indebtedness and encourage personal savings, there is a feeling that the industry could witness something of a sea change in the next 12 months.

The decision of the Ministry of Finance to impose new, more stringent limits on credit card terms in 2010 has sent an encouraging sign to the financial sector that the government wants to address the excessive borrowing culture in the country. The new regulations, enforced by the AMBD, require collateral behind a card in the form of a deposit account and cap the limits on cards according to an individual’s monthly salary. There is also a minimum monthly payment requirement of 8%.

Any outstanding credit card debt that does not fit within the new parameters has been bundled into lower rate personal loans and must be paid off within 36 months.

The market in Brunei Darussalam is expecting a cleaner slate in 2013 as borrowers begin to shrink their debt. A more secure financial base is expected to boost appeal for insurance products and customers’ ability to purchase them. Peter Lim, general manager of American International Assurance in Brunei Darussalam, told OBG that the final maturity of the personal loans developed to bundle individual’s excess credit card debt is good news for the insurance market. “More will be able to save, create wealth and build their retirement funds,” Lim said.

INDUSTRY PERFORMANCE: The idea of personal saving is likely to be felt most forcefully in the life insurance segment of the market, particularly for pension plans. However, non-life insurers feel that the market is gaining in potential as well. According to Paul Kong, managing director of Standard Insurance, “We are growing as a sector, and we see many more insurable things.” The general trends in the market prove this to some extent. Gross premiums in the non-life market (both conventional and takaful players) grew at 16.1% to $127.7m in 2011, according to figures from the AIC. In the life market, there was a slight 9.9% increase in net written premiums to $75.8m in 2011. The non-life market continues to be dominated by the motor segment, accounting for 42% of all gross premiums. Other important lines are fire (8.58% of gross premiums) and workmen’s compensation (6.80%).

FRONTING UP: However, using gross premiums as an indicator of sector-wide growth is somewhat misleading. The industry has a large share of fronting business – local insurers writing business locally for global insurers – a result of Bruneian regulations requiring a local end-user policy. Many of the local players write premiums, particularly in the contractors all risk (CAR) and liability segments, for international players handling insurance requirements of multinational firms. Much of this business is for the oil major Shell’s local subsidiary, Brunei Shell Petroleum, and related entities. Beyond the oil and gas segment, local players also conduct fronting business in the construction sector.

Indeed, the 12 insurers in the local market do not have the funds necessary in the global market to bear the risk for multi-country operations. Given the minimum required paid-up capital of local firms of BN$8m ($6.23m), under the 2006 regulations, most firms adhering to this level do not have the capital to bear the large-scale risks associated with the oil and gas industry onshore either. According to Kong, “Our own paid-up capital is only BN$8m ($6.23m), so I doubt there is anything we could retain. I do not see anything being written here. Reinsurance brokers tend to arrange everything first before they come into Brunei Darussalam, so we do not see anything here.”

GROWING LOCAL: While the hydrocarbons sector made up 62% of GDP in 2010, according to the Department of Economic Planning and Development, Kolja Klawunn, general manager of National Insurance, believes that local players will have to look outside major contracts in the oil and gas segment to grow. “Local insurers would not see much of the big, multi-billion dollar investments. It’s all fronting business, most of which goes overseas. We can’t handle the big projects. We need projects in the range of BN$ 50m100m ($38.9m-77.9m). This would help the sector much more,” Klawunn told OBG.

The figures for net premiums in the market demonstrate the scale of the risk retained in the local market and how much revenue seeps out of the system overseas. According to figures provided to the AIC, net premiums totalled $76.7m in 2011, falling by 10.1% in 2011. This suggests that despite the expenses and reinsurance overseas, the net retained premium has increased in 2011. Some estimates suggest that there is BN$10m ($7.8m) of fronting business in the market.

However, local insurers continue to do decent business. While fronting does not help local firms grow their underwriting business, they still receive significant revenue from handling fees associated with these transactions. Although local insurers that write the policy do not bear any insurance risk, they do bear a counterparty risk, holding the liability in case the overseas company becomes insolvent, for example. As such, they charge fees, and in Brunei Darussalam, these range from 2% to 7.5% of the premium, according to market estimates. Given the high volume of fronting in the market, these fees provide significant revenue for local players. Furthermore, primary investments in the oil and gas sector provide spin-off opportunities for local insurers across a number of segments.

MOTOR: However, it is personal lines that continue to dominate the local industry. Motor insurance is still the most significant policy in terms of premium volumes in the market, accounting for 42% of the general insurance market in 2011 (both conventional and takaful). With a legal requirement that all drivers hold third-party cover and 15,700 vehicles sold in the Sultanate in the first 10 months of 2012, a 31% increase on 2011, according to the ASEAN Automotive Federation, the segment provides a significant volume of premiums for the industry.

However, many conventional insurers are trying to reduce premium volumes in this segment given the increase in third-party claims. “We are coming from a large motor portfolio, but we have had some problems with third-party liability,” Klawunn told OBG. National Insurance now has a 26% market share in the motor line amongst conventional insurers, with premiums of some BN$3.2m ($2.5m).

CUTTING LOSSES: It is understandable that National Insurance and other conventional insurers are trying to reduce stakes in motor. Gross claims in the sector have been increasing steadily, rising by 13.6% between 2010 and 2011. In the five years to the end of 2011, gross claims in the motor segment grew 68.9%. Indeed, while motor premiums account for 42% of the general insurance market, claims in this segment make up 77% of total claims, totalling $20.7m. With regulations allowing for unlimited claims for bodily injury under third-party liability, there is heightened risk exposure in this segment. As such, with this unlimited provision in the regulation, several reinsurance companies are refusing to provide capacity to this segment.

TAKAFUL IMPACT: Meanwhile, increasing competition in the segment, particularly from the three takaful players, Insurans Islam TAIB, Takaful Brunei Am and Takaful Brunei Keluarga, has reduced premium prices. Klawunn estimates that motor premiums in a market such as Germany could be almost five times those charged in the Sultanate.

The motor premium prices of takaful players are as much as 30% cheaper than conventional insurers, while takaful players absorb approximately 80% of claims in the segment, according to industry estimates. With low premiums and increasing claims, the segment has a higher risk profile than many other lines of business. The loss ratio in the motor segment stood at 31.2% in 2011, compared to 24.5% for the sector as a whole.

NEW HORIZONS: For general insurers, the potential beyond motor is expanding, with new opportunities to grow underwriting profit. The second-largest line in the Sultanate, fire, has witnessed robust growth in the last 12 months. In this class, gross written premiums increased by 3.7% in 2011 to $10.9m, according to the AIC. Workmen’s compensation has also emerged as a steady class of business for general insurers. Gross written premiums in this segment grew by 25.5% to $8.6m in 2011. This is part of a wider trend that has seen workmen’s compensation grow by 79.3% in the five years to 2011. The loss ratio for this class, however, is relatively low; in 2011, it stood at 10.8%.

The largest player in the conventional general insurance market is National Insurance. The firm is 70% owned by Bruneian investors (Sumber Mulia Holdings 29%, Baiduri Holdings 10%, Others 31%) and 25% owned by Allianz Global Corporate & Speciality’s Singapore branch, with the remaining 5% held by Mitsui Sumitomo Insurance. In 2011 the company had a 39% market share in the general conventional insurance market, down from 40% in 2010, according to its annual report. National Insurance posted strong results for the year, with a 15% increase in net profit to BN$1.3m ($1m). As such, a BD$0.05 ($0.04) per share dividend was proposed, resulting in a total payment to shareholders of BN$400,000 ($311,520).

Given the low interest rates on fixed deposits in the Sultanate, investment income remained minimal at BN$280,000 ($218,000), and as such, the vast majority of the profit after tax came from the underwriting business. This suggests that the firm is on a sound financial footing, a position backed up by large surplus of assets over liabilities (BN$11.5m, $9m), 49% above the minimum margin required by law.

DIVERSIFYING: The company has been reducing its business in the motor line and looking to bolster premium volumes in other areas. National Insurance now has a 26% share among conventional insurers in the motor business, while it has a share of over 50% in fire, bond, workmen’s compensation, CAR and public liability. In 2011 the three lines generating the most revenue from premiums were liability (BN$6.1m, $4.75m), fire (BN$6m, $4.6m) and workmen’s compensation (BN$4.8m, $3.7m). Although the firm witnessed an 8% decline in gross written premiums in 2011, excluding fronting business, they rose by 4%. Its net claims ratio grew from 29% in 2010 to 38% in 2011 as a result of an increase in workmen compensation claims.

Klawunn suggests that the general insurance industry in the Sultanate is largely steady and stable, with limited opportunities for growth. “We expect our premium income to grow with a moderate rate of 2-5% in the coming years,” he told OBG. Indeed, with the exception of 2008, the company’s gross written premiums, have stayed within a range of BN$21m ($16.35m) and BN$27.9m ($21.7m) over the last five years.

EXPANSION PROSPECTS: Potential growth will likely be determined by government-led development. Indeed, public sector plans to invest in infrastructure expansion and upgrades, as well as additional housing for Bruneians, could provide opportunities for insurers in the construction segment, such as in CAR and workmen’s compensation, as well as further opportunities in lines related to personal property.

REINSURANCE: The introduction of a local reinsurer with substantial paid-up capital would also present significant opportunities in the local market. Although the concept is not currently being contemplated in an official capacity, the idea has been floating around the local industry for some time. A highlighted benefit of a local reinsurer is that the scheme would help keep funds within the country, which is not currently the case. Most of the money earned by domestically operating reinsurers of local insurance schemes goes overseas with the insurers themselves.

Beyond the difficulty of finding the necessary capital to establish such a company, it would take some time for a local reinsurer to develop experience and necessary expertise. Nevertheless, many local insurers would welcome such a development and believe it could be successful. According to Kong, “A local reinsurer could also play in the region. It would provide an ample outlet for its services because Brunei Darussalam has solid fundamentals and quite strong regulations. The only issue is the lack of expertise.”

REDUCING COSTS: With limited opportunity to increase premiums, the general insurance sector has to run a tight ship. The loss ratio in Brunei Darussalam, which was 24.5% in 2011, suggests that it is largely achieving this. However, the industry has to contend with high expenses fuelled by large commission fees for agents. While combined ratios are not available, according to Klawunn, “Loss ratios in Brunei Darussalam are relatively low and commission levels are relatively high, so combined ratios are pretty much at break even.” The agent commission level for National Insurance is 38% of gross premiums, a figure likely to be on the high side for the market, given their relatively small motor portfolio in which commission levels are lower.

Estimates within the industry put commission levels for certain lines, such as fire and property, up to 60% for conventional insurers. As such, the expenses of general insurers are quite high and in some sense the usual relationship between insurance firm and agent is subverted. The high level of expenses in the market affects how players view their basic indicators. “For us, claims must be 20% or loss of premiums for the line of property, though it is different for, say, motor, or we would struggle to generate profit.” There have also been ongoing discussions between insurers for several years about regulations to reduce the expense burden in the market. Indeed, general insurers, both conventional and takaful, have agreed in principle to a cap on commission to agents ranging from 15% to 25% across the various lines of business.

However, so far AMBD has not formalised this agreement nor introduced the necessary regulation. The new Brunei Insurance and Takaful Association (BITA), a representative body for both conventional and Islamic insurers due to be established in 2013, could pave the way for this regulation to be introduced. If a cap is implemented, it is likely to have a significant impact on the dynamics of the market.

“If it comes in, there will be a fight on premiums. The gross premium level should come down, which is fine as long as the net premium stays almost the same or goes up slightly,” Klawunn said. A commission limit would give the insurers more room to manoeuvre in terms of setting premium prices. Kong also feels that such regulation would “level the playing field”, given that commission rates from takaful players in certain classes are currently lower than conventional insurers.

MOVING ON UP: Indeed, competition between conventional and Islamic insurers is heating up. The new association will allow them to act as one body and discuss challenges facing the sector together. However, it is clear that the scramble for premiums in a small and highly competitive market is well under way, a trend most clearly felt in the motor segment. With the government pushing for greater uptake of Islamic financial services, and the population becoming more educated about Islamic financial products, the takaful industry has been making significant headway in the Sultanate.

According to the latest available data, sourced from the Ministry of Finance, the takaful companies in the market increased their share in total gross premiums from 31.1% in 2008 to 41.9% in 2010. By the latter year, Islamic insurers had also increased their share of gross claims to 26.3%, up from 15.1% in 2008. By 2010, sharia-compliant companies also accounted for a fifth of total assets in the sector, an increase of 1.4 percentage points in two years. The indications for the performance of Islamic insurers also look strong. Based on data from the AIC, the loss ratio of takaful players in 2010 stood at 33.6%.

REGULATIONS: Introduction of BITA should give Islamic insurers substantially more weight, allowing their concerns to be addressed. Given the requirement for the head of the association to be Bruneian, the president of the new body is likely to come from among the Bruneian takaful players. Once operational, the new association should help the industry come to more agreement, such as the one already verbally agreed on commission limit, to the mutual benefit of both conventional and takaful players in the market.

In other regards, regulations governing the industry are still evolving, and local authorities are in the early stages of development. The Insurance Order of 2006, governing conventional insurers and based on regulations in Singapore and Malaysia, was a good first step. These regulations are much more strict and robust in terms of what insurers are allowed to take on their books then what was in place before.

However, some confusion remains regarding certain regulations in the industry. Elements of accident and motor insurance, as well as mortgage-rate term assurance remain grey areas. Furthermore, the lack of regulatory limitations on compensation and payouts in both motor and the workmen’s compensation lines remain a concern to general insurers. Indeed, the claims in both segments are skyrocketing, affecting the ability of insurers to write business successfully.

OUTLOOK: The insurance sector continues to witness incremental improvements as the regulator gains experience. The relationship between the AMBD and insurers is strong, allowing for fruitful dialogue on several outstanding issues.

However, for the insurance companies themselves, the regulatory environment plays only a secondary role in their performance. In a small market, with a relatively high number of players, room for growth is likely to remain somewhat limited. Most of the large-scale business in the oil and gas and construction sectors will continue to be effectively written overseas, unless a well-capitalised reinsurer can be created at the local level.

Nonetheless, while the fronting business may continue to play a larger role than many of the firms would like, there should also be strong underwriting opportunities that can be retained onshore, either partially or completely, in the coming years. With the Bruneian government placing significant emphasis on infrastructure and housing, there are likely to be good opportunities in the construction sector and for policies on property.

Furthermore, new regulations regarding commission limits for agents are likely to help insurance firms maintain or even boost net premium volumes while offering reduced rates to the end consumer. Therefore, although growth in the sector is unlikely to be spectacular in the coming years, with prudent management, insurance firms in the country can expect a healthy profit. While overall a small market, the insurance sector continues to gather momentum.