Bahrain: Takaful Territory

Bahrain remains a frontrunner in attracting international financial players into the gulf. Whereas growth in the banking sector has shifted down a gear, Sharia-compliant insurance is moving full steam ahead.

Earlier this month, British insurer Legal & General Group was granted a licence to set up in the Kingdom, with the aim of establishing two separate companies - Legal & General Gulf and Legal & General Gulf Takaful - offering life insurance and Sharia-compliant services in Bahrain and in the wider Arab region.

Legal & General joins a growing list of on- and offshore companies that provide both conventional insurance and takaful products in Bahrain, despite the fact that the Kingdom - with less than 1.2m inhabitants - is considered small in terms of the insurance market. As of December, Bahrain counted 37 onshore insurance firms, of which 19 offer Sharia-compliant insurance products, up from 15 the year before, according to the Central Bank of Bahrain (CBB). These include such globally reputed names as AIG Takaful-Enaya, Hannover Re, Allianz Takaful, T'Azur Company and ACR Retakaful. Additionally, the Kingdom boasts another 38 firms registered offshore.

The country's strong financial regulatory system is widely recognised for its contributions to the development of the takaful sector. Industry insiders identify transparency and swift handling of licensing procedures as well as the consultative approach the central bank takes to the private sector as particularly accommodating to sector growth.

As Ahmed Abdul Aziz Al Bassam, director of licensing and policy at the CBB, declared to local media upon announcing the licences for Legal & General, "The supervisory framework, brought into effect in 2005 by the CBB and Bahrain's well developed infrastructure, strategic location and the availability of local professions, have been major factors in attracting reputable companies such as Legal & General to the Kingdom."

The growing list of takaful providers in Bahrain is in line with the growth of Sharia-compliant insurance in the region as a whole, which has outranked the conventional insurance sector throughout the Gulf Cooperation Council (GCC) region for some years now. According to the "The World Takaful Report 2008", published by Ernst and Young, the sector in Bahrain grew by 52% from 2004 to 2006, compared to 22% in the case of conventional insurance. Kuwait saw a growth rate of 30% and 19% for takaful and conventional, respectively, while in the UAE, Sharia-compliant services grew by 46%, compared to 32% for conventional.

The Kingdom is a frontrunner in an emerging industry. Ashraf Bseisu, chairman of the Bahrain Insurance Association, told OBG, "Bahrain is the most developed market in the GCC. The premium density is about $300, while the Arab average is $30. The insurance sector's contribution to GDP in Bahrain is 3%, while the regional average is about 1%."

The outlook for further growth of the takaful sector looks positive as penetration of insurance products remains low compared to other markets in the world. "When compared to developed countries such as the US and Japan, the premium per capita reaches $3500 and penetration ranges from 7.5% to 9%, compared to 1.78% for Bahrain," Bseisu told OBG.

The context for further growth is in the Kingdom's favour. Besides the strong regulator, Bahrain - as well as many neighbouring countries - has a young population. According to statistics from the International Monetary Fund, over a quarter of the population is younger than 15 years of age.
Commenting on Ernst & Young's report, sources from the central bank stated, "While the old generation has traditionally viewed insurance of any kind as unnecessary; the young generation is far more open to purchasing it, particularly from takaful firms."

Awareness and acceptance of insurance products - traditionally key challenges to the industry - are therefore likely to increase. This trend is to be encouraged by legislative changes, including the introduction of compulsory health insurance - already in place in countries such as Saudi Arabia and the UAE.

Despite much controversy in recent years, the move to make insurance necessary is now, slowly but surely, taking concrete shape. In one instance of the continued development of the sector, the Bahrain Insurance Association Medical Workshop was held at the close of 2008. During the event, the Ministry of Health presented key stakeholders - including the central bank, private hospitals and insurance companies - with a picture of how the currently proposed compulsory health insurance scheme will look. As a result of mandatory insurance, industry insiders foresee an increase in consumer awareness as well as easier introduction of customers to the wide range of products available.

The impact of the global financial turmoil will have an obvious say in whether the takaful sector continues to grow. Whereas optimists forecast growth in the corporate sector driven by the ambition to offset potential financial losses, pessimists predict a slowdown as a result of the unstable outlook of key drivers, including economic growth, increasing GDP per capita and rising demand for asset-based Sharia-compliant financing.

On February 8-9, the heads of major regional regulatory agencies and international industry leaders gathered in Manama to discuss the next phase of development for the regional insurance market during the Fifth Annual Middle East Insurance Forum.

Speaking at the forum, Abdul Rahman Mohammed Al Baker, executive director of Financial Institutions Supervision at the CBB, highlighted the importance of product customisation on the part of the private sector as a means to weather the financial turmoil.

"The lessons of the global financial crisis will necessitate a clear direction from company management and the need to adapt and revamp business strategies if companies wish to pursue growth opportunities in the region," he said.

Commenting on the continued inflow of new insurance players to the country, he said, "These new entrants have provided further evidence that there are ways to tackle the low level of insurance penetration in the region by offering products uniquely tailored to meet the local demand."

Although little can be ensured, the way forward seems to lie in product customisation, which would be a way to convince sceptics of the benefits of Sharia-compliant insurance products.

Source: Oxford Business Group
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