Coming of Age

Middle East Insurance Forum

The 12th annual Middle East Insurance Forum held this month in Bahrain gives an interesting opportunity to assess the state of insurance in the Gulf region today.

Not only does the Middle East Insurance Forum consistently gather highly relevant players and regulators in a common context, but this year it came at a time of macroeconomic pressures and larger questions about the fundamental strengths and weaknesses of the insurance sector and the broader market. Although the fall in global commodities prices has caused short-term pain across the emerging world, it is also a time rife with opportunity for reform and re-examination of fundamentals.

A consistent topic at the forum was regulation. The GCC, the coalition of Gulf nations that has been highly successful in establishing regional economic and political stability for the common good, has highly variable insurance regulations. Some Gulf insurance markets are regulated by central banks, others by specific insurance regulators, and Qatar and Dubai have specific regulations governing the insurance business conducted in the financial hubs of the DFIC and the QFC. Separate regulations for conventional and Takaful insurance in most nations, along with varying solvency ratios, make consolidation a challenge.
That said, the GCC may be moving toward more standardized regulations. When asked about the momentum for more standardization among GCC regulators in an interview with TBY, Abdul Rahman M. Al-Baker, Executive Director of Financial Institutions Supervision of the Central Bank of Bahrain, said; “Today, we believe in opening more of the financial markets in terms of commercial activity. We in Bahrain are pro-GCC passporting for products… With this, there would be a greater possibility for a joint venture between companies and more consolidation for business.”

Passporting, as practiced in other markets, allows firms authorized to do business by one market’s regulators access to neighboring markets. Enacting such reforms in the GCC would have a profound impact on a market that has more than tripled between 2006 and 2014, but in which the largest and best-capitalized firms take the lion’s share of profits and penetration is still very low, even when compared to other emerging markets. Besides regulatory barriers to consolidation, many firms have resisted due to cultural issues and stock market prices that create valuation gaps.

Regulators would hope for increased penetration from passporting and other efforts; however, there are other, non-regulatory barriers to that goal. The fall in oil prices is of great importance in the Gulf region, and there are worries that an extended period of low commodity prices will erode the capital of smaller insurers, causing lapses in underwriting standards and a corresponding fall in creditworthiness across the industry. Players and regulators continuously made the point that competition for the existing but relatively small market would accelerate this trend and be counterproductive for the industry. Many advocated greater efforts by the industry to deepen penetration, especially in personal lines.

When asked by TBY the reasons for low penetration, Dr. Jarmo T. Kotilaine, Chief Economist at the Economic Development Board of Bahrain, said; “Part of changing the insurance landscape is also enhancing governance within the sector, encouraging creativity and more pro-activity on the part of these companies… Perhaps more actively encouraging partnerships and alliances, particularly with foreign providers, might help… For various reasons, the industry landscape that has existed for many years has encouraged or allowed complacency.”
That era of relative complacency may soon come to an end as regulations promote consolidation and competition and low oil prices make competition much tougher. Rewards certainly await those most adept at adapting to this new environment, but the urgency with which regulators will act is perhaps the most pressing question for insurers.