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Middle EastNovember 4 2004

Islamic insurance sector gets a boost in Bahrain

Against the background of its solid reputation as an international banking centre, Bahrain is expanding the scope of its activities with the development of its insurance market.
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Overall rates of insurance penetration in the Middle East are not high. However, Bahrain, having established its credentials as a financial services hub for the region, is looking to boost its insurance sector by taking a proactive approach, both in terms of product development and in terms of implementing an effective regulatory framework.

As a key player in the Middle East, Bahrain provides unique opportunities for product development. One area that is receiving increasing attention is the further development of Islamic insurance (takaful).

Takaful distinguishes itself from conventional insurance by being structured along mutual lines. Although customers pay premiums, as in conventional insurance, under takaful, members contribute money to a common pool in which losses are divided and liabilities repaid according to the pooling system rules. As with Islamic banking, funds are invested in a Sharia-compliant manner (The Banker, October 2004 p158).

Financial evolution

The evolution of the wider Islamic financial sector has supported takaful’s rise in the past few years. Whereas, in the past, the takaful industry was hindered by Islamic portfolios lacking tradeable fixed income components, the appearance of Sukuk (an Islamic bond) instruments now offers an asset class that, in turn, can enable the creation of annuity products.

The Bahrain Monetary Agency (BMA), the regulator to the Gulf region’s pre-eminent financial centre, anticipates a steady increase in takaful licences as consumer awareness grows. “We are encouraging market innovation and development in takaful, which can build on the solid infrastructure we already have in Islamic banking,” says Tawfiq Shehab, director of the Insurance Supervision Directorate at the BMA. “We’re working on rules specifically to regulate the takaful sector. While it has not yet achieved the same level of maturity as Islamic banking, we believe that the takaful market is well positioned for growth.”

In August 2002, the BMA assumed regulatory responsibility for the insurance and capital markets, resulting in the BMA becoming a truly integrated financial sector supervisor, the first in the Gulf Cooperation Council (GCC). While these new responsibilities meant that the BMA had much to do in terms of transforming itself to undertake the challenges of becoming an integrated supervisor, it also provided an opportunity to create a new regulatory framework for the insurance sector, addressing the unique needs of the region, while at the same time reaching out to new markets and products.

Armed with these new responsibilities and with the help of outside consultants, the BMA has started putting in place the framework for a new insurance rulebook.

Anwar al-Sadah, executive director, financial institutions supervision, says of the project: “Over the course of the last 18 months, the BMA has issued eight consultation papers to the insurance industry, highlighting the importance of feedback from the industry in putting in place a solid regulatory framework specifically designed to meet the needs of the local and regional markets. In addition to individual comments received on these documents, the Bahrain Insurance Association (BIA) has been taking an active role in this process, putting in place various committees analysing each set of consultative documents and liaising directly with the BMA. Close co-operation between the BMA and its regulated firms is the only way to achieve a workable insurance regulatory framework.”

Efficient infrastructure

Such an approach to the development of the insurance regulatory framework highlights the importance given by the BMA to having a transparent and efficient supervisory infrastructure. This is in line with the principles promoted by the International Association of Insurance Supervisors (IAIS), of which the BMA is a member.

The rulebook is being designed to address the unique characteristics associated with takaful and retakaful (Islamic reinsurance) firms, as well as those of conventional insurers. The BMA’s proposed rules cover issues such as the segregation of shareholder and policyholder funds, capital adequacy and solvency, valuation of assets and liabilities and the conduct of business. Bahrain will become one of the few countries to set solvency margins and other prudential requirements tailored for takaful and retakaful firms.

But Bahrain is about more than just Islamic insurance, and its new set of rules clearly reflects this. Mr Sadah says: “Another area where the BMA has taken an active role, is in the development of a regulatory framework and infrastructure that caters to captive insurers. These regulations will facilitate the development of captive insurance services, for which there is clear demand in the region.”

Increasing awareness

One of several reasons for the low penetration rate of insurance products in the Middle East has been a lack of awareness of insurance products in general. The BMA has recognised this and is now actively involved in a marketing campaign aimed at providing prospective clients with a greater awareness of the insurance products on offer and the benefits associated with such products. Part of this marketing strategy also focuses on offering consumers a choice of product, taking into particular consideration the need to develop products for the local Islamic market.

“In the last four years, the demand for Islamic insurance products has been growing very fast,” says Samir al-Wazzan, chairman of the BIA and general manager of the recently established Solidarity Islamic insurance firm. “The sector has not yet reached the same market share as the conventional insurance sector, but the pace of growth is faster, with annual increases of 10%-20%.”

Methaq Reinsurance Company (Methaq Re), the region’s first retakaful company, was granted a license in 2003. Although the few retakaful companies in operation only have a small capital base, more companies are being established, with two new ones in the pipeline. The region’s largest insurer, Arab Insurance Group (Arig), has also moved into the takaful sector. A $50m rights issue completed in October will underwrite the establishment of a retakaful business.

Solidarity, which raised $100m in paid-up capital through a private placement last year, is another pointer to the growth potential. Mr Wazzan says his company has the largest paid-up capitalisation of any Islamic insurance company.

In the past year, the BMA has also licensed new insurance managers, with a view to the development of captive insurance in the Gulf. With several large multinationals operating in the region, captive insurers would offer companies more choices in managing their notes.

New finance centre

To meet the needs of an ever expanding financial market, Bahrain is planning a major real estate development: the $1.3bn Financial Harbour project. Along the Manama corniche, there is a hive of activity where the Financial Harbour will be situated. What is of particular interest for the insurance industry, is the active part the BMA has taken in promoting the Bahrain International Insurance Centre (BIIC) which will form a key part of the Financial Harbour project. The BMA recognises that, for world class insurance players to take full advantage of Bahrain’s unique geographical location, a state-of-the-art facility for providers of insurance, reinsurance and ancillary services needs to be in place. The BIIC will offer an environment where insurance companies will be able to position themselves strategically and attract an ever expanding regional insurance market.

Bahrain is fully aware that new laws and buildings are only two of the key components needed in the development of its insurance market: a pool of talented and experienced manpower is also required. Bahrain is now developing this through the Bahrain Institute of Banking and Finance (BIBF).

The BIBF, launched in 1981, offers various programmes for the financial sector. Now it has identified the need for training in the insurance sector and has expanded its activities by developing the Insurance Learning Centre. This offers several insurance programmes providing individuals with the opportunity to take specialised insurance diplomas.

  • This article is sponsored by the Bahrain Monetary Agency

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