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Solidarity identifies underdeveloped niche insurance sectors

Interview - December 10, 2013
Ashraf Bseisu, Group Chief Executive of the Solidarity Group, affirms that Bahrain is the most advanced market in the Gulf region for insurance and financial services. Solidarity is already one of the few insurers in the market that offer D&O (directors and officers liability) cover, financial insurance, credit line insurance and professional liability with corporations, and Mr Bseisu says the company sees huge potential in Bahrain’s low take-up of personal insurance products, particularly home and contents insurance, among others.
His Majesty Sheikh Hamad bin Isa Al Khalifa, King of Bahrain, has a prosperous vision for the nation. The government is looking to the future with the goal of transforming the kingdom into a world-class competitive, sustainable, diversified and knowledge-driven economy. Education, infrastructure, foreign investment, youth employment and technology are leading the Vision 2030. What is the role of the financial sector and of Solidarity specifically within this Vision?

In the 1980s Bahrain used to be recognised as a banking sector and then it evolved into a financial hub. During the crisis, obviously, competition started rising like the DIFC, the QFC and the one coming up in Abu Dhabi. These people or these specific centres were trying to position themselves as centres of excellence, but I do not believe it is easy to become a financial centre. There are a lot of issues associated with being a financial hub. Bahrain has a very strong, robust, tried and tested regulatory system. Since the 80s, rating agencies expressed that Bahrain has one of the best regulators in the region. They have a very solid legal infrastructure and they really have a set of regulations governing the financial services sector (the Central Bank is the ultimate authority) that are world-class and probably amongst the best in the area, there is no doubt about that.

Given that background and backdrop, I think Bahrain is well poised to become or remain the financial hub. Yes, challenges do exist because they are no longer alone in the ocean. There are a few other people aggressively coming up who are investing in a very heavy manner. Bahrain does not have the financial resources of Qatar, Dubai or Abu Dhabi for that matter. However, they have an element that other countries from the region do not have: human resources. Bahrain prides itself with quite a strong level of indigenous talent in the financial services industry – there is no doubt about that.

On the Islamic side, to be more specific, Bahrain has a host of regulations, whether it is for Islamic banks or takaful. It probably has one of the few jurisdictions that has dedicated regulations governing Islamic insurance and Islamic banks. Yes, there are countries that have Islamic banks and Islamic insurance companies – without mentioning names – but they do not have regulations, it is jumbled. UAE has the same but here there are a few ratifications because they realised that these are different types of businesses and regulatory regimes different from one to another. So, yes – Bahrain is well positioned to establish itself and I think they have established themselves.

Solidarity for example is a group of companies operating out of six or seven countries globally of which Bahrain is the head office. Yes, we have companies in Bahrain and we have companies all over: we have a big presence in Jordan, Saudi Arabia, Malaysia and Luxembourg. However, we have chosen Bahrain for many reasons. It was the ideal choice for the group’s domicile and we still believe it is the right choice for the group to be domiciled here for many reasons. I think Bahrain definitely has or is poised and positioned to be the leader in Islamic finance and I think even post-crisis we have not seen many departures – as a matter of fact we have seen some new entrances. Islamic finance, I think, is here to stay. I think the issue around the financial crisis was that there were Islamic banks that were hit just like there were conventional banks. I do not think that Islamic finance will disappear. I think Islamic finance is here to stay and it has proven its resilience because it caters for a market segment – not necessarily Muslims – with an attractive product for debt, insurance or on the banking side. There was a statistic: I was in a conference a few years ago and there is a bank called the British-Islamic Bank (two or three years ago). They had just set up and one of the executives who was saying that they were shocked that the majority of the deposits that came into the bank were from non-Muslims in the UK. Contrary to what they thought, I think over 60% were non-Muslims.

Many financial leaders in the country agree that we need to use this platform to re-explain in very simple but concise and consistent words what Islamic finance is and what are the concepts behind it.

I agree, and you are right. There is a lot of demand, even in Europe and the US. Tapping that demand is a big challenge because you are in these massive markets, Europe or the US, where you are going against well entrenched people with a huge capacity and market share and penetration power. So, the potential is there, the demand is there, but it is really exploiting because insurance or Islamic finance is about numbers, you need numbers – at the end of the day, somebody needs to make money. Yes, there is the social and the CSR aspect but the bottom line is somewhere along the line you need to make money for the shareholders or for the people who participate. I think there is demand and yes, I think the stigma of Islam and what Islamists do does not help, specifically in Europe or the US. I believe there is an issue there because people cannot connect that this is a product vis-a-vis to what the media may say about certain people who act in the name of religion but I think over time that hopefully will change. What we have seen from the trend and the statistics is that Islamic finance grows at a faster pace. In takaful, they are conventional, so there is a lot of ground to cover and it is grossly under-penetrated.
So, coming back to Bahrain, I consider that this kingdom is well positioned because it has everything to host and provide with a successful regulatory system and the legal and business infrastructure alongside with the human resources.

We always present Bahrain as a platform for companies to expand in the region and given the size of the market, it is just like the example of Solidarity. The strength is obviously in the local workforce and the local know-how. What are the cultural features of Bahrain that serve as a hub for all companies who want to come and invest in Bahrain?

Bahrain has always been historically a very diversified culture, extremely tolerant and open. It is open in the sense that Bahrainis have always been known to be hospitable, very kind, and basically it is a very diverse society. If you meet expatriates you will notice that they prefer living here than anywhere else. This is one of the features of Bahrain. The standard of living here, in comparison with the rest of the region, on a cost-value basis is probably one of the best, and it is investor-friendly. Again, for those who come to live here with their families, the infrastructure is there – schools, expatriate clubs, etc. – it is more diverse, tolerant and more absorbing than many of the other countries around. I know a lot of friends and colleagues who lived in Dubai, Saudi, Kuwait and Abu Dhabi. However, at the end of the day, they will come back here. I know a guy who went to Dubai for seven years and decided to come back here. Dubai is Dubai, but it is another big city. Here, you have the cultural nuance, which Dubai does not have, plus you have the modernity that people look for. Everything is there so it is a good mix.

In line with this, we have spoken about the cultural adaptation that people have had in the last 30 years with your peers at the Central Bank. We have seen that Bahrainis have started to consume insurance products not so much for corporations, as it is a late penetration, but for personal use 20-30 years ago and it is something that we have started seeing Saudis, Emiratis and Kuwaitis implementing now. So, in this regard, there is an advantage of being ahead of the game.

Absolutely. Bahrain is the most advanced insurance market in this part of the world; I would like to say financial services as well. The penetration rate here is the highest in the area, no doubt; it is still below the global average but it is two or two-and-a-half times the Arab average. The Arab average is 1% penetration, which is 1% contribution to GDP of the total that the insurance industry contributes to the GDP. I believe we hit 2.6% here in Bahrain last year. Emerging markets are 6-7%; if you look at any advanced economy, such as in the US, UK and Japan, you are in the 8-10% range.

We have to fill the gap between 2.6% and 10%, so we still have this 7.4% where there is a potential for growth. Bahraini youth will mature in a couple of years and will own a house, car and have a family, and have professional liability in their corporations. What is the next step to educate them to actually purchase products that will relate to insurance?

I think awareness is two-fold because we have been working with the Central Bank. I was the chairman of the insurance association here so we had some initiatives. There is no doubt that any time you want to do a project or undertaking of this size, it has to involve a number of sides. One is the industry, two is the regulator and three are stakeholders. Why do you have such high penetration rates in certain parts of the world? There are many reasons. One predominant reason is just the education system and the savings ethics. Basically, Singapore and South Korea have the highest savings rates in the world because, as they grow up, they are programmed to save and, of course, the tax regime helps. We have a company in Malaysia and the best products that we sell there are life, which include savings. So, there has to be a cultural awareness and that cannot come from the industry alone – it has to be multi-faceted. There has to be incentives and regulations. In the UK, you know every single household has to be insured – every single building or dwelling must have public liability insurance and they just have to stick up a certificate; this is the same in Canada and the US.

Therefore, that helps as a catalyst. Every main building has to have a certain level of insurance, that is just part of doing anything – building, conducting business, etc. In this part of the world, or in Bahrain, we are getting there but it is still not well insured. This is what I mean – the industry can raise awareness and you can help, but it also has to be matched by some kind of an initiative from the Government – medical malpractice is a big thing. I think these things will happen and you get there through a concerted effort in order to raise the level of awareness and put certain things in place that will help provide the catalyst to this increased demand.

In terms of personal insurance, what subsector is being the pioneer and catalyst for all the others? Is it life insurance that is having more impact or car insurance?

No, it is mainly car and medical. In Bahrain, just like in most countries in the world, a minimum third-party insurance is required in regards to cars. You cannot have a car without insurance – it is the law. Medical is the second because most of the companies provide medical insurance – it is just a standard benefit. They provide medical insurance for their staff, so there are a lot of numbers there. There is a law that we were working on here, which is to provide compulsory medical insurance to expatriates because now, as per Bahrain's regulations, expatriates are covered under the Government health system for free. So, there was talk about regulation that may take place and if it does that it will provide a big catalyst like it has done in Saudi Arabia. Saudi Arabia did not have anything and all of a sudden they have the CCHI which obliges everyone to have medical insurance and in the year one or two, they wrote 5 billion Riyal just in one year. Because of the catalyst, they forced people to have this in place. They are doing very well, and it is huge and massive. There you have 13 million people – the population base is massive and so is the consumption base.

In terms of corporate insurance, what is the potential, since it is an area that is growing now? At a professional liability forum we attended recently they were talking about raising awareness in the private sector, not so much in the big companies but in small and medium enterprises. There is something that they need to achieve. It is not just for the benefit of the employees but also for their own benefit.

The number of SMEs, just like most economies, far outstripped the number of corporations, the large corporations. Most corporations have it embedded in part of their system that they have insurance, they have public liability, they ensure their assets, and this just comes without saying. It is not necessarily the same for family houses and/or small or medium-sized enterprises.

On the corporate side, is a big area of potential penetration – there is no doubt. There is a huge under-insurance there, on many respects, whether they are public liability, professional liability, just insuring their buildings or ensuring their stock. You find a lot of them do not. It is only when something happens that the warehouse goes up but then they say okay, this happened. That is a big area without doubt.

Another area on the personal side is that very few houses in Bahrain are ensured – very few. Unless you have a mortgage and a bank to protect itself; they ask you to get afire insurance, just like when you take a mortgage they take a life policy. Bahrainis do not have this culture of insuring their house and I think this is a huge area of potential where I think people need to do it, just because it is peanuts – 1/1000th of the cost, maximum. If your house is worth 100,000 BD, it is 100 maximum. So, it is not much, but people are not aware of that. They think that if their car is 300 or 400 Dinars to ensure, their house must be in the thousands. You tell them no, your car is actually more expensive because it is a different risk.

What we try to do at Solidarity is that we try to also penetrate niche areas. Under professional liability, we are one of the few in the market that do D&O (directors and officers liability), financial insurance, credit line insurance with corporations. We are probably one of the bigger ones in the market because we believe two things: that this is an under-developed area and this is a needed area.

At the end of the day, you cannot just compete on medical and motor; the point is targeting niche markets and opening doors that eventually increase and enhance the landscape, and that is what we look at in Solidarity. This also part of social responsibility because we believe insurance has, in this part of the world of course – to an extent less in Bahrain – a bad reputation. It is either haram for those who do not understand it well, and the rest just do not care because they do not understand how it works, or they do not see the need – which is not the case in the West or even the Far East. You will find the Far East is very advanced. It is just culture and I think you are right about this issue of awareness; it has to be coupled as it is a big undertaking.

I think it is a supply and demand thing. From the Government it has to do with implementing the proper framework for a legal recognition of the importance of insurance, and from the people the understanding that it is something so basic. For a foreign investor who has to put in place a business plan to enter Bahrain, is Solidarity a place to search for in terms of insuring their professional liability here?

Yes. Our subsidiary here provides everything. Professional liability, financial insurance, credit, D&O, we do all of that – we do all kinds of insurance. We have quite a number of large banks that we insure, industrial undertakings, investment houses, specifically on the niche-specialised areas. Many of the banks and financial institutions are with us – Islamic and non-Islamic even.

So, even if an institution is non-Islamic, like a British bank or a British financial institution, they can get the proper insurance?

That is right.

With regard to both personal and corporate insurance, what do you see in the next five years in terms of the new trends that can emerge within the insurance sector?

I think within the short term, you will see a compulsory medical insurance law; I hope so – we have been working on it for a long time. It is basically what Saudi, UAE, and even Qatar have right now. As a matter of fact, Bahrain came up with the idea but they implemented it before Bahrain – certain things take time. If this law goes through – and it should do because there is this issue of having a social welfare state, which is okay until a certain extent – this is the 21st century and nothing is for free any more. [We are] providing for expatriates where basically anybody can come and get open-heart surgery; literally in Bahrain, if you fly in and you are sick we will carry out open-heart surgery at the cost of the Government. That, to an extent, has to change. The Government pays a lot of money a year to subsidise this and there is no reason for it. If I am an employer, I provide this. You have to provide certain services to citizens in return for certain things that they have to do, but if everything is free for everybody it is not sustainable.

What are the major cultural aspects that need to change in order for people to understand “risks” and the benefits of insurance? People tend to feel safe because the social contract in the Gulf is different from anywhere else; people’s contribution is minimal in comparison to all of the state benefits they receive in return.

You are right and that comes back to the point of cultural awareness, because this is all well when you have a generation growing up with the impression that the Government provides a job if one does not have a job, a house if one does not have a house, so that filters into “why should I buy insurance? Why do I need savings? Why do I need to do professional liability? It is a bi-product of an overall way of perception, so that has to change. It is obviously a long-term process, but this is what Vision 2030 is all about – sustainable growth and sustainable development. I think if you [consider] 2030, it is very clear that there is an obligation from each part of the chain that everybody has to do something to get there. It is not that one side does something and the other side receives and you get to 2030. It is a combined effort and I think that is the beauty of this vision. Hopefully, it will put itself in place but everybody needs to know what his or her role is in this overall matrix. No longer can the Government do everything.

The Prime Minister of Kuwait said recently that it is the end of the “sweet era”.

Yes, they criticised him. They had a massive blast at him, especially in the social media, but he is right. He said it is the end of the “good years”. Basically, what he is saying is that we cannot continue. Kuwait is a pure welfare state. Every few years, they write off debt, not even Government but from banks also. If for example it is the 40th anniversary of their independence, they will wipe out everybody's debt. For example, last year they gave every Kuwaiti 1000 KD, which is 3000 Dollars. It is not sustainable; you cannot keep on doing this.

This goes in line with the strategy of Governor of the Central Bank that it clearly does not want companies in the takaful or the Islamic finance or any sector to come to Bahrain, make a 20% profit in one year, and then run. The sector is projecting a stable 5-10% growth. Is this a positive approach?

Yes, I would agree. Bahrain in one year grew 38%, I think in 2007 maybe. But, this is not sustainable growth. These are spikes in a cycle. No economy or industry in the world can sustain it. Fine, you can have a good year or two years, but as you said 5-10% – even 10% is a bit high – it has to correlate and exceed inflation, whatever the effect of inflation is, but you cannot just grow 50%, it is not healthy because you overheat and something happens, it has to happen. That is basically the “bubble theory”. You are growing, you create a bubble and something happens and you have negative growth for a few years to compensate for the overheating. Bahrain is poised due to the regulator and the way the system is. Even during the crisis, the banks did not have really an open [policy], unlike some of the other regional countries, on real estate, on investments, leveraging. The Governor took a very firm stand against excessive leveraging; he emphasised that it must be based on certain things like LTD ratios of banks, under rank assets.

To an extent, it did work. We did not have that many issues in Bahrain, which other countries did, but that underpins a longer-term vision – that you are not just there to create the short-term buck and for a company to make money in five years then leave – it is a cycle of investing Bahrain, recruiting Bahrainis, because at the end of the day it is about the economic development catering for the population.

50% or more of Bahrain's population is under the age of 21 or 25 definitely; 60% is below 26. So, that is a huge influx on the workforce over the next five years. I think over the next 10 years, even less, there will be 100,000 Bahrainis coming into the job market – that is a huge number, and Bahrain is small. In the right sector, economic growth is not where I’d inflate balance sheets and look good because, ultimately, the companies look good but what about the people? You have to find them jobs. It is real economic growth, infrastructure, industry and creating employment. That is the key, especially for Bahrain. That is the key of economic development; it is not just to make certain people look good and make money. Sure, they can make money but at the end of the day it has to filter down the chain as well.

That is why we pride ourselves in Bahrain. Almost 80% of our staff in our Bahrain operation is Bahraini. 100% of our staff in our Jordanian operation are Jordanian. 100% of our staff in our Malaysian operation are Malaysian. Saudi is a bit less but we are getting there. Basically, part of our CSR and our core objective is really to take in and develop local talents. We bring in expatriates with expertise and we have a diverse culture here, maybe about 10 nationalities; eventually your local employees are longer-term. An expatriate will stay here maybe five to 10 years; some of them stay longer but the cycle is that they finally go back or move. The longer-term commitment is basically the locals that you train.

With more than 20 years of experience in the sector and six years of experience in this company, what is your own Vision 2030 for Solidarity?

As far as people are concerned, I am a firm believer that an institution's most valuable asset is its people. At the end of the day, it is the people who make or break it; and it is a combination of people because it is like a chessboard. You have the pawn, then the king or the queen, but everyone has a role to play. We invest heavily, unlike some other companies unfortunately who take a very limited view, like spending on training, which is an expense but we look at it as an investment. We spend handsomely to train our people, we try to do our best. We have internal programs and we keep on developing them, such as our mentoring programs and talent pools. Because in any staff population you have an exceptional 20% and normal 80%; it is how to take this 20% and push them up, and how to improve this 80% – this is natural, it is people. They come in different shapes and forms and you cater for all of them. There are some people with high potential; it is just a fact of life – that is usually the 80-20 rule.

So, we try to push these guys up and because they are hungry, we try to cater for them as well; if you do not satisfy their ability they leave. We train somebody who goes into the market and then becomes a valuable element. We do not have a problem with that – of course we do not like people leaving but if we are feeding good talent to the market then why not? This is part of our social responsibility. When we were younger, the stigma was “this guy's CV, he moved 10 companies in five years, it looks bad” – I do not think that is the case any more, because it has changed. Some people look at that negatively; I do not look at that negatively. At the end of the day, I look at “has this guy moved this way or that way?”
Today it is hard to keep young people confined. Before, you had nothing – there was no social media, barely any TV, one channel. Now, you have got the world open to you so you cannot control these younger generations because they are exposed to everything, you cannot say “walk like this” because they cannot walk like this. This is a challenge, really. It is a challenge between a bit of the older mentality and the younger and you have to give them space to operate.

Your leadership experiences in many fields come from so many different fields. How are you able to channel everything into the position that you have now to conduct the company in your own way?

It is a learning process, I can tell you. There is no right formula, you learn as you go because the world is so dynamic and changing day-to-day that you have to adjust yourself. In general, things have changed. It is very dynamic and very fluid. What works across the street may not work here necessarily. Management styles change, unlike before. Before, you had some management gurus, Bill Gates or whatever. Now it has changed because the world is becoming open, it is more integrated. It is very different. No matter how much you try to keep up, it is really difficult. I sometimes have the privilege of attending Davos, I attend every couple of years, and it is a wake-up call to me because they do a mix – they bring the “who's who” then they bring the young leaders, the 1% of the 20% – you see them there. You see these young 20-25 year olds and you are shocked. So, you understand that basically it is a lot of energy and how to harness. You have three year-olds who can operate computers better than you and me. I have a friend whose son cannot speak but can operate a tablet device better than him. I think the brain is infinite in ability and that is where all these things are happening. This is a bit philosophical.
You still have people, the crisis way or the Ford way; this is why you find big companies which all of a sudden disappear, and this is why you find companies which did not exist. No longer do you have to sit in a desk for 24 hours, you can do work in many ways and forms these ways. You do not have to actually be between four walls to be productive – it obviously depends on the job.

As long as you learn every day and as long as you enjoy it, it is the perfect recipe.

Exactly. That is my “two cents”. Coming back to Bahrain, it is poised and there is immense potential. I would say, not because I am from here, but Bahrain is the best, ideal place to host and to be an Islamic financial services hub. With all respect to our neighbours and their initiatives, Bahrain has led in that field and they have a head start, and they should capitalise on it and I think they will.

I do not see anything that prevents Bahrain from really becoming even Shari'a advisors. Bahrain probably has one of the higher percentages in the region of Shari'a scholars. That is a big area where we have a problem, because there are just a handful and there are so many companies, so you find these guys and one of them is on 60-70 boards. It is just that there are not that many and that is a big area of development going forward. And I know there are initiatives in Bahrain; the AAOIFI (Auditing and Accounting Organisation for Islamic Financial Institutions) is in Bahrain, which is basically the Islamic accounting board, like the IAS (International Accounting Standards board) but for Islamic finance.

AAOIFI is part of the overall initiative because they are the ones who update; it is basically the Islamic account standard that is the most widely adopted around. It is quite a sizeable undertaking and most Islamic banks and insurance companies actually follow AAOIFI standards plus what is not there, IAS, but the predominant standard is AAOIFI.