MANAMA: Despite the robust growth, the insurance industry in developing countries accounted for around 7% of the world market, which was estimated at US$4.8 trillion in total revenue, according to a senior official at the CBB.
“Insurance penetration within the developing countries is also well below 2 percent of the Gross Domestic Products (GDP), compared to advanced economies such as the US at 7.3% and the European Union countries at around 10 percent of the GDP,” Abdul Rahman Al-Baker, Executive Director of Financial Institutions Supervision at the Central Bank of Bahrain, told the participants of the Conference.
Mr Al Baker in his opening remarks at the Association of Insurers and Reinsurers of Developing Countries (AIRDC) Conference being held in Manama said that AIRDC has established its reputation as the most influential gathering of the insurance industry leaders, supporting growth, excellence and innovation in insurance industry in developing countries.
The theme of this year conference is “Transforming the Insurance Industry in Developing Countries”. This theme is important and timely as the insurance industry in developing countries is undergoing transformation and there is a tremendous potential for the insurance market in these countries to grow and thrive.
As you are aware, the Developing Countries’ economies have expanded at a healthy rate over the last decade and have made a significant progress in a number of sectors such as petrochemicals, infrastructures and telecommunications. The insurance industry in these countries has also experienced steady growth on the back of this economic development, improved regulatory environment, and increased public awareness. For example, the GCC insurance industry has more than tripled between 2006-2015, with insurance premiums increasing to US$24 billion as of the end of 2015 compared to US$6.4 billion in 2006. This represents a compound annual growth rate of around 16 percent over the period, although the growth in each market varies. Such growth in insurance industry is due to several key demographic factors like the economic growth, population expansion, as well as increasing the life expectancy which have impacted the demand of insurance products in the Gulf region. In addition, Governments investment in infrastructure projects have also provided new underwriting opportunities for further growth of the industry. One of the major force behind the industry’s growth in recent years has been the implementation of compulsory health insurance schemes in various jurisdictions, as well as the outstanding demand for Takaful products which create strong growth avenues for insurance companies in the region.
Overall, the positive growth outlook in developing countries will continue to attract insurers, both domestic and foreign, to invest in their insurance markets, but this is likely to increase the competition and put even further pressure on the profitability in the sector. In Bahrain, the CBB is responsible for the licensing and supervision of the insurance entities in the Kingdom. These include insurance firms that are locally incorporated or branches of foreign companies, insurance brokers, consultants and captive mangers. They also include supplementary insurance services providers like actuaries, loss adjusters, and Third Party Administrators which should be fit and proper and have the relevant expertise to offer these activities. As of the end of August 2016, the licensed insurance entities in Bahrain reached 150.
The total gross premiums, as of the end of 2015, reached BD273 million compared to BD 95 million in 2005, an average growth of almost 20 percent per annum. Overall, the percentage of general insurance business represents almost 80% of the total premiums, while the life insurance represents the remaining balance, which is 20%. This outstanding growth was mainly due to the increase in the economic growth and the remarkable growth in Life insurance, Takaful and Medical Insurance in Bahrain during the past ten years.
One of the insurance classes that contributes positively to the insurance market in Bahrain is takaful, which shows an average growth in gross premiums of around 70 per annum during the past ten years.
Basically, the insurance sector in Bahrain is regulated and supervised as per the Central Bank of Bahrain and Financial Institutions Law of September 2006. The law contains a clear regulation governing insurance services in Bahrain. In addition, all insurance licensees are subject to Volume 3 insurance rulebook which contains rules and directives that are in line with the best standards set by the International Association of Insurance Supervisors (IAIS). The insurance rulebook contains regulatory requirements related to corporate governance that set up rules to ensure strong role for board and good high level control, as well as business conduct that ensures that the licensees deal with customers in a fair and open manner and address their needs. The rulebook also contains requirements related to risk management to ensure that insurance licensees have systems and controls sufficient to manage level of risk inherent in their business, as well as financial crime requirements to address measures related to combat Anti-money laundering in the insurance sector. It also outlines the reporting and public disclosure requirements. In order to ensure that the regulations are in line with the latest developments in the insurance market, the rulebook is updated on a quarterly basis.
As you may aware, the potential market for insurance in developing economies is estimated to be between 2 to 3 billion policies. There is significant demand for a range of insurance products, from health to life, agricultural and property insurance, to catastrophe cover. Therefore, insurance regulators in developing countries are required to take various steps to ensure that a stable insurance market continues to strive and prosper in these economies. As a regulator, it is important to have dynamic regulations that are updated to market changes and in line with the best practiced international standards. Perhaps, one of the most important equations that a regulator needs to address is the equation of how to maintain the balance between proper regulation and market developments. Basically, the CBB address this issue through their existing rulebook mechanism process that ensures to keep the regulation updated and in line with market developments.
One of the main regulatory priorities that a regulator should address is the protection of the policyholders. This objective should be clearly outlined in the Law as well as through the rules that are introduced by insurance regulator. By ensuring policyholders are protected, supervision helps to build trust, a necessary precondition for creating a properly-functioning insurance market. Policyholders generally are not able to judge how solvent their insurance provider is, and in particular cannot assess an insurer’s solvency over the span of a long-term insurance contract. Supervision thus plays a key role in assessing and monitoring insurers’ ability to meet obligations. Only when these conditions are met will people be willing to buy insurance protection (especially long-term contracts like life insurance). Then and only then can a sound insurance market develop. To protect policyholders, supervisors typically require insurers to hold capital commensurate with risks they take on. Supervisors also impose investment restrictions on the assets backing liabilities to policyholders, establish consumer protection standards, set rules for the competency and integrity of directors and managers (so-called ‘fit and proper’ requirements), mandate accounting standards and reporting, and – particularly important following the latest financial crisis – set up macro-prudential surveillance systems to provide early warnings if a potential new financial crisis is brewing.
In addition, insurance regulators should encourage new lines of insurance business like Takaful, Captives and Micro-insurance. For example, encouraging large corporate on setting up captives could provide their owners with specific financial and strategic benefits. Some of these benefits include lower insurance costs, greater coverage flexibility and improved price stability. The same applies to Micro-insurance which could provide specialized insurance products demanded by underserved low income people.
Regulatory bodies in developing countries should also prioritize other objectives to sustain growth in insurance markets. They should encourage the building of talent base and strive to enhance universities and private training centers to offer multiple insurance degrees and certificates to accommodate the needs of students and professionals and to target a wider range of individuals interested in pursuing insurance studies. This will guarantee the necessary supply of highly qualified talented personnel to meet the growing demands of the market and regulatory authorities in these countries.
Furthermore, Regulatory authorities should support public awareness in order to enhance the public knowledge on the basics of insurance and the importance of such financial services to the general public. Such awareness could be developed through awareness campaigns which involve holding of seminars, workshops and night classes to educate the young generation and the general public on the basics or certain product of insurance. As far as consumer education is concerned, the CBB in collaboration with the Bahrain Insurance Association (BIA) have been holding “Insurance Week” on a yearly basis, the purpose of which is to educate the public on the importance of insurance products and services. The “Insurance Week” has so far been successful in enhancing insurance awareness amongst people. This is expected to further increase the penetration rate of insurance in Bahrain.
Looking ahead, we expect further growth for insurance services driven by high economic and fiscal strength of developing countries, despite slower than expected oil price recovery.