US embassy cable - 04MANAMA269

UNCLAS SECTION 01 OF 03 MANAMA 000269 
 
SIPDIS 
 
DEPT FOR NEA/ARP AND EB/TPP/BTA 
DEPT PASS USTR:JBUNTIN AND CBLISS 
USDOC FOR 4520/MAC/ITA/ONE:CLOUSTAUNAU 
TREASURY FOR LAILEE MOGHTADER 
CAIRO FOR STEVE BONDY 
 
E.O. 12958: N/A 
TAGS: ETRD, EINV, EFIN, BA 
SUBJECT: INSURANCE - BAHRAIN'S NEXT FINANCIAL SECTOR GROWTH 
MARKET 
 
 
SUMMARY 
 
1. Bahrain has targeted insurance as its next financial 
growth market.  It is revamping the regulatory regime to 
facilitate more competition and faster growth.  Bahraini 
sources relate that based on market penetration (two percent 
of GDP), Bahrain is the Arab World's largest and most 
sophisticated insurance market.  The insurance market enjoyed 
double digit growth in 2002.  Although desiring sector 
expansion, Bahrain is cautious about opening its local market 
to international competition.  The American Life Insurance 
Company is Bahrain's fifth largest local insurer, and one of 
two American insurance companies licensed in Bahrain. 
Islamic insurance and health insurance could be new products 
that expand customer base, but it will require a major 
marketing/awareness campaign to educate potential insurance 
consumers.  If Bahrain opens its market more fully, it could 
set an example for how the region as a whole could grow the 
insurance business.  Seizing that potential could drive 
foreign firms to do more advertizing, helping Bahrain expand 
its insurance market.   END SUMMARY. 
 
BAHRAIN'S NEXT FINANCIAL FRONTIER 
 
2. Over the past year, BMA Governor Shaikh Ahmed bin Muhammad 
Al-Khalifa and his staff have repeatedly stated in public and 
in private meetings that the insurance sector is Bahrain's 
next financial frontier.  Shaikh Ahmed and other industry 
figures excited about the insurance industry's prospects in 
Bahrain and the region frequently cite a statistic that 
insurance market penetration in Bahrain is about two percent 
of GDP (USD 8.9 billion).  In more economies, they say, 
market penetration ranges between eight and thirteen percent. 
 Anwar al-Sadah, the BMA Executive Director charged with 
expanding Bahrain's insurance industry, and Samir al-Wazzan, 
President of the Bahrain Insurance Association, told POL/ECON 
Chief that although the insurance industry has barely 
scratched the market's potential within Bahrain, the country 
has the highest market penetration in the Arab World.  They, 
along with AIG's local representative, commented that 
Bahrain's more cosmopolitan and better-educated population is 
more receptive to insurance as an important component of 
family financial management.  This, they thought, makes 
Bahrain the best location for developing a regional insurance 
hub. 
 
3. Double digit growth for the sector provides another solid 
reason for optimism. According to the BMA's official 
statistics, 2002 gross premiums underwritten by both local 
(including the 10 foreign companies licensed to operate in 
the local market) and offshore insurance companies exceeded 
USD one billion, a 13 percent increase over 2001.  Bahrain's 
84 Offshore companies held 73 percent of the premium and 
contributed over 80 percent of this growth.  The offshore 
sector alone has grown nearly 50 percent in the past two 
years. 
 
OFFSHORE INVESTMENT WELCOME, BUT BMA RELUCTANT TO OPEN LOCAL 
MARKET 
 
4. According to al-Sadah, the BMA recognizes that it needs to 
open its domestic market, as well as promote offshore 
investment, to expand the sector.  However, the BMA wants to 
proceed carefully and selectively.  In the early 90's, 
Bahrain closed its domestic insurance market to foreign 
companies not already licensed here.  Bahrain's national 
companies have become accustomed to this protection and would 
need time to adjust to increased competition.  This, he said, 
explained Bahrain's not including insurance in the GATS 
market opening offers the GOB sent last year to the WTO. 
 
5. In two conversations with P/E Chief, Bahrain Insurance 
Agency President al-Wazzan has indicated the industry would 
not welcome market opening at this time.  He visibly blanched 
at the thought of AIG entering the market with its full line 
of products, claiming it would "bury every local firm in the 
market."  Al-Wazzan received skeptically P/E Chief's news 
that Jordanian service companies had benefited from the 
competition fostered by its FTA with U.S.  However, he seemed 
receptive to P/E Chief's suggestion of exploring Jordan's 
post-FTA experience, welcoming the idea of inviting the 
President of Jordan's insurance association to Bahrain to 
address the industry on this topic. 
 
NEW PRODUCTS NEEDED TO ATTRACT CUSTOMERS 
6. The major products in the local market are life, fire, 
auto, and marine insurance.  Together, they account for 84 
percent of gross premiums.  Market penetration will also need 
new products, according to al-Sadah, al-Wazzan, and Takaful 
International's Ahmed Janahi.  Like Islamic banking, they 
agreed, Takaful, or Islamic insurance, could attract devout 
Muslims to buy insurance.  Al-Wazzan, who was CEO of Bahrain 
Kuwait Insurance Company, put his own reputation and career 
behind this view, becoming General Manager of the 
newly-formed Solidarity Islamic Insurance and Re-insurance 
Company.  Al-Wazzan proudly told P/E Chief from his new 
office that Solidarity is the world's largest Islamic 
insurance company in terms of paid-in capital, USD 150 
million. 
 
7. At a more practical level, Takaful International CEO 
Janahi seems to be proving this point.  His company enjoyed 
100 percent growth from 2001 to 2002, with fire and life 
insurance leading the way.  Janahi told P/E Chief that he had 
to change the name of "life" insurance to "family" insurance 
to convince devout Muslims to buy policies.  According to 
Islam, he said, people cannot insure a life, only God can do 
that.  However, he said Muslims readily accept the concept of 
insuring a family's financial future against the unexpected 
death or disability of the primary breadwinner. 
 
8. Besides Takaful, industry reps believe health insurance 
could take off if the government requires private health 
insurance for all resident third country nationals working in 
the country (about 250,000 people).  The press has reported 
occasionally that the cabinet is reviewing the idea.  Private 
health care professionals in the country are hoping to see 
this law proposed.  According to two hospital general 
managers, the country has seen significant levels of 
investment in the health services sector but little growth in 
demand, mainly because the government remains the primary 
service provider in the country.  Our hospital administrator 
contacts consistently argue that a private health insurance 
requirement for third country nationals is absolutely 
necessary for the private health care business to grow. 
 
BMA MOVES TO STREAMLINE REGULATORY REGIME 
 
9. The BMA took over regulation of the insurance sector after 
the GOB enacted in May 2002 legislation consolidating 
regulation of the financial sector.  The BMA's al-Sadah told 
P/E Chief that the agency moved quickly to revamp the 
insurance industry's regulatory structure, hiring 
PricewaterhouseCoopers (PWC) London to draft a new law and 
regulations.  Al-Sadah stated that these regulations, 
developed over the next two years, will comply with 
international standards such as those specified in the core 
principles of the International Association of Insurance 
Supervisors.  According to introductory language from the 
first of the new regulations, which the BMA released in 
mid-April for public comment, the BMA hopes to align these 
regulations with those governing banks and the stock exchange 
to create a liberal and consistent regulatory framework that 
maximizes economic potential. 
 
10. The BMA reported that in 2002, it had licensed 156 
insurance companies and brokers to operate in Bahrain. 
Twenty of these companies are "national" insurance companies 
licensed to operate in the local market.  Eighty-four are 
offshore firms.  The balance are insurance brokers, 
syndicates, consultants, representative offices, loss 
adjusters, and actuaries. 
 
11. Based on the BMA's annual report, the American Life 
Insurance Company (ALICO, an AIG affiliate) is the only U.S. 
insurance company licensed to work in Bahrain's local market. 
 In terms of 2002 gross premiums ALICO ranks fifth in the 
domestic market with a nine percent market share.  It ranks 
second in the life insurance market (after Zurich 
International Life, ltd.) with a 46 percent market share. 
The BMA's report lists the Arabian American Insurance Co. as 
an offshore licensee. 
 
COMMENT 
 
12. Based on our conversations with the BMA and industry 
reps, it looks like the insurance sector has potential for 
growth for both offshore and local businesses.  The 
government's willingness to allow offshore investment while 
limiting competition in the local market is consistent with 
its practice in the banking sector.  However, the Bahraini 
public does not yet understand the concept of insurance very 
well.  At the same time, the GOB's leadership hopes that 
Bahrain's local market can set a positive example for the 
region that Bahrain can exploit before other regional 
competitors get into the game.  The BMA is trying to raise 
public awareness in Bahrain about the advantages of owning 
insurance policies, but its resources probably cannot support 
a mass market advertizing campaign.  On the other hand, 
private companies competing for business are usually willing 
to deploy significant resources to market their products and 
educate the public simultaneously.  This suggests that 
Bahrain should be thinking about more aggressively opening 
its local market to foreign competition. 
 
FORD