Bahrain is a parliamentary democracy, with the king as a constitutional monarch and the prime minister as the premier. Due to its previous position, English common law and procedure has played a significant role in the development of law in Bahrain, which is also influenced by Islamic law. Most legislation is now based on Egyptian, therefore, civil law, models.
A new constitution was promulgated in February 2002 and elections are now held regularly. Bahrain is a member of a number of international organisations, including the World Trade Organisation and the Organisation of Arab Petroleum Exporting Countries (it is not a member of OPEC but follows its policies).
It is a member of the Gulf Cooperation Council. In its efforts to eliminate money laundering, the Central Bank of Bahrain (the central bank and banking regulator for Bahrain) has made it mandatory for banks to adhere to the Financial Action Task Force’s 40 recommendations and a law (Decree Law No. 4/2001) has been promulgated. In 1997 it also introduced a system of reporting “unusual or suspicious” deposits, whether in cash or by bank transfer, and in practice the “know your customer” system is universally adopted. It is a member of IAIS and has implemented provisions of Solvency II.
The insurance industry
Prior to the 1980s, branches of foreign companies largely carried out insurance in Bahrain, many of them British, such as Norwich Union and Lloyd’s of London. Subsequently, a number of local insurance companies have been formed, such as Al Ahlia Insurance, Bahrain Kuwait Insurance, and companies from other countries have become established, e.g., AXA and New India. Owing to the relatively small size — in global terms — of the local companies, much of the risk is reinsured on the international market. A major development is the rise of Islamic insurance and reinsurance, which has resulted in the establishment of a number of local takaful companies.
Domestic insurance laws and product-specific legislation
These are now contained in the Central Bank of Bahrain and Financial Institutions Law (Law No. 64/2006) whereby all types of financial institutions (banks, advisers, insurance companies and related activities, stock exchange, money dealers, etc.,) are covered by a single law. Previously, there were the Insurance Companies and Organisation Law (Decree Law No. 17/1987) and regulations made thereunder, and a short law which imposed an obligation for motorists to take out third-party insurance (Decree Law No. 3/1987, as amended). Such provisions of the earlier laws that are not inconsistent with the 2006 law remain in force.
Pursuant to that law the Central Bank has issued a rulebook of which Volume 3 deals with insurance. Volume 3 sets out general requirements of various types of insurance companies, including life insurance and general insurance. Volume 3 contains separate sector guides to which the general requirements do not apply. There are separate requirements for captive insurance, insurance intermediaries and managers and takaful/retakaful.
Regulation under the present regime
The basic rule is that no “financial activity”, including insurance, may be carried out in Bahrain except by an institution that holds a licence from the Central Bank.
Types of insurance companies
The main types of licensed institutions in the insurance industry may be summarised as follows:
Insurance firms, except for captive insurers and insurance firms that are in run-off and whose licence is restricted from entering into new contracts of insurance, must maintain a cash deposit with a retail bank that is licensed to do business in Bahrain, for the following amounts:
- BHD 50,000 ($132,500) for life insurance and/or savings and fund accumulation categories.
- BHD 75,000 ($199,000) for any insurance category of general insurance for all insurance categories.
- BHD 150,000 ($398,000) for firms that solely effect reinsurance contacts.
Captive insurers do not have to make a cash deposit. Locally incorporated insurers must apply 10 percent of basic profits annually to the statutory reserves until they reach 50 percent of the paid-up capital.
A captive insurer is an insurer owned by, and whose sole “customer” is, a non-insurance corporation. When an insurer is winding down its activities prior to closure it is said to be in “run-off”.
Licences may be granted to branches of foreign insurance companies, but the Central Bank of Bahrain may seek a letter of guarantee from the parent company in support of the application for a licence.
Insurance brokers must maintain a cash deposit with a retail bank licensed to do business in Bahrain for the following amounts:
- BHD 2,500 for life insurance and savings and fund accumulation categories; and
- BHD 5,000 for general insurance for all insurance categories.
These may be locally incorporated companies or branches of foreign companies. Local companies must maintain at all times the greater of:
A minimum net assets value of BHD 50,000 ($132,500).
4% of fiduciary liabilities.
4% of annual income from global insurance broking activities.
There are no such requirements for branches of foreign companies, however, financial statements of the parent company must be submitted to the Central Bank of Bahrain for review in order to assess the financial stability of the group on a global basis.
These must be locally incorporated companies. Such companies merely advise on insurance without acting as broker. Branches of foreign companies do not meet the legal status requirements of insurance consultants.
These may be locally incorporated or branches of foreign companies. Their role is very limited, although it may be combined with that of an insurance consultant. They have a purely administrative role otherwise, providing services to insurance companies.
Insurance exchange operators
Actuaries, managers and loss adjusters
These must all be registered with the Central Bank.
Distinction is made in the CBB law between long-term insurance and other types of insurance
“Long-term insurance” means life assurance and fund accumulation, i.e., endowment assurance. Long-term insurance companies, and companies that operate these types of companies, must keep separate accounts for long-term business, which must be stated in a separate balance sheet. Distribution of profits shall be limited to the account of the realised surplus that the company’s actuary determines.
Insurance companies must set aside 10 % of the net profits annually in a statutory reserve, until this reaches 50 % of the paid up capital. The reserve may not be distributed. The Central Bank must approve all forms of policies that are issued in Bahrain and they may not be marketed abroad without the Central Bank’s approval. Insurance companies require the approval of the Central Bank for any disposal of more than 5% of their costs for more than 30 days.
A takaful business is one that is operated on Islamic lines, whereby the operator must organise and operate the business on the Al Wakala model.
A Bahrain company that applies for an insurance licence must be a:
Bahrain joint stock company; or
Bahrain branch of a foreign company authorised as an insurance (or reinsurance) company in its own jurisdiction. Apart from the company itself, the Central Bank must be satisfied as to the suitability of the company’s controllers (i.e., holding 10 %. A controller of Bahraini insurance licensee is a natural or legal person who, either alone or with his associates:
Holds 10 % or more of the issue and paid up front capital of the company) or having 10 % or more of voting power; or is able to exercise significant influence on the management, in the licensee or parent undertaking; or
Is able to exercise more than 10 %of the voting power over the licensee or the parent undertaking.
The Central Bank must also be satisfied with the directors and managers, and the “close links”, i.e., associated companies (parent, subsidiary, owner or controller of 20 percent or more of the voting powers).
Other significant factors which require approval are:
Adequate financial resources.
Acceptable systems and controls, including for the prevention of money laundering and financial crimes and ongoing risk monitoring;
Maintenance of books and records.
Licensing procedures require submission of the prescribed forms, cover letter, business plan, corporate documents, board resolutions etc. Conditional approval is given as phase one. After this, the applicant must complete phase two, which requires proof of the cash deposit, a guarantee from the applicant’s major shareholder and relevant ancillary details, such as address and contact details, auditor’s acceptance to the act, etc.
Enforcement and investigation
The Central Bank uses its own inspectors to undertake on-site examinations of licensees as an integral part of its regular supervisory efforts. In addition, it may commission special investigations of insurance licensees in order to help it assess their compliance with the legal requirements.
Investigators will normally be required to report on one or more of the following aspects of an insurance licensee’s business:
a) Accounting and other records, which must be retained for a minimum of 10 years;
b) Actuarial estimates;
c) Internal control systems;
d) Returns of information provided to the Central Bank;
e) Operations of certain departments; and/or
f) Other matters specified by the Central Bank.
In the event of non-compliance with the legal requirements, the level of financial penalty applied is determined by the nature of the contravention and the amount of additional supervisory attention and resources taken up by a licensee’s behaviour and by limits set in the Central Bank of Bahrain Law. Financial penalties also apply to persons referred to in paragraph (b) of Article (68 bis 1) of the CBB Law. Depending upon the nature of non-compliance, the fine can be multiplied by the number of violations. Other sanctions include cancellation or amendment of licence and criminal sanctions.
All insurance licensees must have appropriate customer complaints handling procedures and systems for effective handling of complaints made by customers. Customer complaints procedures must be documented appropriately and their customers must be informed of their availability.
All insurance licensees must appoint a customer complaints officer and publicise his or her contact details at all departments and branches. The customer complaints officer must be of a senior level at the insurance licensee and must be independent of the parties to the complaint to minimize any potential conflict of interest.
In the case of an overseas insurance licensee, a local complaints officer must be present and must report all complaints to the head office complaints unit.
In the event of insolvency or bankruptcy, the court fees and employees would have priority followed by secured creditors (with respect to the assets over which they have been granted a security). The remaining creditors will rank pari passu with regard to the remainder of the debtor’s assets.
Law No. 30 of 2018 promulgating the Personal Data Protection Law covers data protection in Bahrain.
The legislation imposes civil and criminal penalties for the misuse of a person’s personal data unless consent is granted by the person to whom the data relates.
The annual report of insurance firms must contain details of any shares in the firm held by its directors and chief executive or general manager. The following information relating to corporate governance must also be included in the firm’s annual report:
(a) Information about the board and board committees (if any). This must include details of board membership (including a summary of each board member’s professional experience, qualifications, date of appointment and other directorships held); details of the membership and mandates of any board committees; and the number of board and any board committee meetings held during the financial year in question;
(b) Information about the managerial structure. This must include a summary of the chief executive officer’s or general manager’s professional experience, qualifications and date of appointment; a summary of any management committees, their mandates and membership; and a summary of the senior management structure and reporting lines; and
(c) Information about the firm’s basic organisational structure. This must include a clear description of the lines of business and legal entity structures.
The board must establish a remuneration committee of at least three directors which must:
(a) Review the insurance licensee’s remuneration policies for the approved persons, which must be approved by the shareholders;
(b) Make recommendations regarding remuneration policies and amounts for approved persons to the whole board, taking account of total remuneration including salaries, fees, expenses and employee benefits; and
(c) Recommend board member remuneration based on their attendance and performance.
At present the following are number of the licensees:
• Bahrain insurance firms: 23.
• Foreign branches: 12.
• Offshore companies: 11.
• Offshore insurance brokers: 4.
• Offshore insurance consultants: 2.
• Onshore insurance brokers: 34.
• Insurance managers: 4.
• Insurance pools and syndicates: 2.
• Loss adjustors: 12.
• Insurance consultants: 3.
• Registered actuaries: 30.
This articles was published on Thomson Reuters Regulatory Intelligence in April 2020)