Rasheed Mohammed Al Maraj: Regulatory insights - successfully
supporting the next phase of development for the regional insurance
markets
Keynote speech by HE Rasheed Mohammed Al Maraj, Governor of the Central Bank of
Bahrain, at the 7th Annual Middle East Insurance Forum (MEIF), Manama, 7 February 2011.
* * *
Distinguished Guests,
Ladies and Gentlemen:
On behalf of the Central Bank of Bahrain, it gives me great pleasure to welcome you to the
seventh Middle East Insurance Forum. Over the years this event has become established as
the leading event in the region for the insurance industry to meet and exchange views on
current market and economic developments. I would like to thank the organisers, sponsors
and speakers for supporting this important gathering and congratulate the organisers on
having put together such a strong speaker list over the next two days.
My theme today is "Successfully Supporting the Next Phase of Development for the Regional
Insurance Market". This theme is certainly very timely as the regional insurance industry has
now reached the point where it is ready - in the title of this Forum - to translate potential into
growth. Although I will briefly discuss the CBB's role as a regulator, my main focus will be on
the way in which the industry needs to change and develop to capture the growth
opportunities that undoubtedly exist. I will discuss three issues in particular: the need to
provide customers with high service standards; the need to obtain greater economies of
scale in the industry; and the need for owners and investors to adjust to a new environment
in which returns are likely to be lower than they were in the past.
Let me first say a few words about the CBB's role as a regulator. As I am sure many of you
know, we have introduced a comprehensive set of requirements for Insurers, both
conventional and Islamic, as part of Volume 3 of the CBB Rulebook that has been
progressively introduced since 2005.
Over the year ahead the process of refining and modifying these requirements will continue.
One of the most important recent developments was the introduction of the revised module
HC on corporate governance. The changes we have made are to reflect the provisions of the
Kingdom of Bahrain's Code on Corporate Governance which was introduced last year. At the
same time, one of the lessons of the global financial crisis has been to put corporate
governance arrangements under the spotlight. Several of the firms that failed during the
crisis appear to have suffered from serious shortcomings in their corporate governance.
Regulators will have to consider ways of strengthening the effectiveness of boards of
directors in overseeing the operations of the firms they run. This applies especially to
ensuring high standards of risk management. We may also make changes to our framework
with respect to the regulation of insurance brokers in the near future.
In addition, we continue to monitor new recommendations originating from the international
standard setting bodies, including the Islamic Financial Services Board and the International
Association of Insurance Supervisors. We are currently considering how to implement the
standards that the IFSB issued last year on corporate governance and on solvency
standards for Takaful companies. Both of these standards could have a significant impact on
Takaful firms.
We also continue to play a role in the work of the IAIS in developing international standards
and in this regard the CBB's role has been enhanced by being selected as a member of the
IAIS Executive Committee for a two-year term. The CBB's selection is recognition of our
efforts among the 17 Middle East and North Africa regulators to ensure the development and
enforcement of high standards of insurance supervision and regulation. As a member of the
IAIS Executive Committee the CBB will aim to represent the interests of all regulators in the
MENA region. Our new role will allow us to shape major new regulatory initiatives and also to
alert the industry to upcoming changes in regulation.
While the CBB as a regulator can lay the groundwork of rules for the industry to follow, the
industry's development and future growth potential is primarily a matter for its shareholders
and managers. This is not to say that we, as a regulator, are not keen to see the industry to
grow and prosper. Far from it. The development of the insurance industry is a major
component of the Kingdom of Bahrain's Vision 2030 strategy that outlines the competitive,
dynamic and diversified economy we aim to develop for a post-oil era. In our latest national
economic strategy we have identified insurance and asset management as two sectors of the
financial industry that have enormous potential for future growth. However, my point is that
while regulators can provide the conditions for industry development, whether these
opportunities are seized is a matter for shareholders and the managers of insurance firms.
There are three specific topics that I think are worth emphasizing as we look to the industry's
future growth and development.
The first of these is the need for the industry to ensure that it can meet high standards of
customer service. The CBB has played its role in encouraging better customer service by
mandating all insurance representatives (agents) to comply with training requirements
focused on their areas of expertise and mandated by the internationally renowned Chartered
Insurance Institute (CII).
At the same time, however, customer service is primarily the responsibility of the firms
themselves. The regional insurance market is becoming highly competitive as we see more
entrants, both established international firms and local companies, offering a growing range
of services, including medical and life coverage. Although insurance penetration rates in the
region are still relatively low, in the long run not all the firms currently competing in the market
will be able to build viable franchises. Those that do will be the ones that can offer their
customers the best standards of service.
This will not mean simply competing on price, particularly if it means cutting premiums to
levels that are simply not viable in the long run. Good customer service has many different
dimensions. It includes, for example, ensuring that at the point of sale the firm's
representative is well trained, knowledgeable about the products, and places the customer's
interests first. It involves devoting resources to the development of new products that can
meet customer needs. It also involves ensuring that policy-holders receive quality and
reliable service when presenting their claims. The firms that will emerge strongest from the
current highly competitive environment will be those that are capable of providing the best
customer experience in all its dimensions.
My second issue concerns the need for economies of scale in the industry. In many of the
MENA countries locally-incorporated insurance firms remain relatively small and are
therefore unable to compete with large internationally active firms that have the benefits of
scale. These benefits range from the ability to construct large diversified investment
portfolios to efficiencies in IT for claims handling and processing. Over the long run, there is
a need for locally-incorporated insurance firms to achieve greater scale economies if they are
going to be able to compete on level terms with their international competitors.
Firms will only be able to achieve economies of scale if they become larger. Inevitably, this
means that there will need to be some industry consolidation. To-date, however, the
shareholders of locally-incorporated firms have been reluctant to enter into mergers, perhaps
because they fear that this will lead to a dilution of their control. However, if the industry's
growth opportunities are to be realized, shareholders will need to take a broader perspective
and to recognize that future profit growth will require firms that are larger than those that
currently exist. In this respect, I think it is particularly important that a session of this Forum is
devoted to the subject of merger and acquisition activity in the insurance industry.
My third issue is closely related to the second. One reason why shareholders have been
slow to grasp the need for industry consolidation has been the expectation that the returns
on capital that they were able to achieve during the boom years will swiftly return. During the
boom years all sections of the financial industry were able to achieve returns on equity that
were quite exceptional. However, we need to recognise that the global financial crisis was
not just a temporary interruption, and that we will soon return to the period of strong profits
and quick and easy returns.
As we gain more perspective on the global financial crisis it is becoming increasingly clear
that the boom years immediately before the crisis were the exception rather than the rule.
Shareholders and investors in all financial firms, including in the insurance industry, will need
to adjust to a world in which the returns on their investments will be lower than they came to
expect in the boom times. In the insurance industry, with its many competing firms, this
adjustment is particularly important.
We are currently living through a period of adjustment. Once shareholders and investors
recognise that they will need to accept lower returns on their investments than during the
boom years, the process of industry consolidation is likely to begin. Improved returns on
investment will require greater efficiency, better standards of customer service, and new
product innovation, all of which are more likely to be delivered by larger more diversified
insurance firms.
Let me conclude by returning to the title of this keynote address. Successfully supporting the
next phase of development for the regional insurance markets is a process that must be led
by the industry itself, particularly by its shareholders and managers. The next phase of the
development of the insurance markets is likely to require the consolidation of firms, the
development of new product offerings, the expansion of insurance firms in the region, and
high standards of customer service that only the private sector can deliver. While we as the
regulator can work to ensure a sound and stable insurance market and the protection of
policy-holders, ultimately it is for you in the industry to take advantage of the growth
opportunities that the Middle East and North Africa region can offer.
As the regulator, the CBB will continue to provide a strong framework of rules based on
international best practice and will apply them in a transparent and fair way. We will continue
to consult with the industry and to ensure that we are responsive to your needs. Ultimately,
however, the future of the industry is in the hands of the industry itself.
Thank you for your attention.