Executive Summary

Legal Basis

CI-A.2.1

This Sector Guide was first issued in April 2005 by the BMA together with the rest of Volume 3 (Insurance). Any material changes that have subsequently been made to this Module are annotated with the calendar date in which the change was made. Chapter UG-3 provides further details on Rulebook maintenance and version control.

CI-A.2.2

When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 3 was updated in January 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.

CI-A.2.3

A list of recent changes made to this Module is provided below:

CI-A.2.4

Guidance on the implementation and transition to Volume 3 (Insurance) is given in Module ES (Executive Summary).

CI-1.1.1

Captive insurers are companies established by industrial or commercial groups (who are themselves not insurance firms) primarily to insure the risks of their owning groups. Worldwide, there are over 4,000 captive insurance companies in existence.

CI-1.1.2

Like many regulatory authorities, Bahrain differentiates between captive insurers, and insurance firms whose business does not generally originate from within their owning group. This differentiation is on the basis that:

CI-1.1.3

The CBB's capital and solvency requirements are lower for captives than for other categories of insurer, though the CBB also monitors the 'risk gap' between policy liabilities and available assets. However, capital and solvency requirements for captives are increased where liability risks are included, due to the possibility of third party claimants. The CBB licenses insurance managers and there are specific differences in the governance, management and systems and controls requirements for captives to take account of this.

CI-1.2.1

The following table lists the Modules of the CBB Insurance Rulebook and indicates those that apply tocaptive insurance firms. The remaining Chapters of this guide will describe in more detail the principal requirements of each Module of the Regulations and Directives that apply to captive insurance firms.

HIGH LEVEL STANDARDS

BUSINESS STANDARDS

REPORTING REQUIREMENTS

ENFORCEMENT AND REDRESS

CI-2.1.1

An entity in Bahrain must be authorised if it wishes to conduct regulated insurance services, including effecting insurance contracts, the broking of insurance contracts, the offering of advice to third parties and the provision of insurance management services. Insurance firms must restrict their business to insurance under their memorandum and articles of association.

CI-2.1.2

An insurance firm's license will state the classes of insurance that the firm is authorised to conduct. In recognition that thepolicyholders of captive insurers are limited to their owners (or shareholders), captive insurers may be licensed to underwrite either general insurance business or long-term insurance business, or both. In the latter case, however, they are required to maintain separate funds for general and long term insurance business and to apply the appropriate capital requirements to each fund.

CI-2.1.3

For captive insurers, the legal status of an insurance firm must be:

CI-2.1.4

Subject to CBB approval, an insurance licensee that is a captive (re-) insurance company may maintain its Head Office or place of business at the offices of the insurance manager appointed to manage its affairs.

CI-2.1.5

A firm that is authorised as a captive insurance firm will have one of the following permissions granted by the CBB:

Category C1 — a Bahrain authorised insurer whose business is restricted to insuring only the insurance risks (other than liability risks) of its shareholder(s) or those of subsidiary or associated companies of its shareholder(s); or

Category C2 — A Bahrain authorised insurer whose business is restricted to insuring only the risks of its shareholder(s) or of subsidiary or associated companies of its shareholder(s), and whose business may include liability risks, subject to the CBB being satisfied that the activity, capital structure and management provide sufficient protection to potential third party claimants.

Some examples of business models that could qualify for captive licensing include:

CI-2.1.6

A captive insurance firm may be licensed to write either insurance and reinsurance business or may restrict its business to reinsurance only.

CI-2.1.7

A captive insurer may also be licensed either as a takaful firm (in which case it will appoint a Shari'a Supervisory Board and will operate in accordance with the principles of the Shari'a). For further details please refer to the Module TA (Takaful).

CI-2.2.1

There are 10 Principles of Business that apply to all insurance licensees including captive insurers.

CI-2.2.2

Non compliance with the Principles of Business can lead to enforcement action, which can include the calling into question of whether the firm or its management continue to meet the fitness and propriety criteria for approval.

CI-2.2.3

The Principles of Business are:

CI-2.3.1

In accordance with Principle of Business 10, insurance licensees must put in place effective management, systems and controls for their business. The High-Level Controls Module sets out the Directives that put this principle into practice.

CI-2.3.2

Some of these Rules govern the establishment, composition, functions and responsibilities of Boards of Directors. All incorporated insurance licensees must have a Board that is ultimately accountable and responsible for the management and performance of the firm. Captive insurers are subject to various provisions relating to corporate governance contained in Legislative Decree No. 21 of 2001, with respect to promulgating the Commercial Companies Law ("Commercial Companies Law 2001"). In case of conflict, the Commercial Companies Law shall prevail.

CI-2.3.3

Responsibility for the day-to-day management of a captive insurer is vested in the Chief Executive Officer, which is a controlled function. Captive insurers, unlike other insurance licensees, are not required to consider the need to operate Committees.

CI-2.3.4

The CBB expects, for Bahraini insurance licensees, for Bahrain to be the principal place of business and for Bahrain to be the centre of its governance and management. In the case of a captive insurance firm, this must include:

In order to satisfy the second and third of these requirements, it is expected that most captive insurance companies will outsource their day-to-day operations to a firm licensed by the CBB to manage captives (insurance manager) although captives may use their own staff and premises. The appointment of an insurance manager must be approved by the CBB and should be in accordance with the outsourcing requirements of the Rulebook (refer to the Risk Management Section of this guide).

CI-2.3.5

As part of their management structure, captive insurance firms should include an internal auditor.

CI-2.3.6

An insurance manager must nominate a Compliance Officer, who must also be designated as the Compliance Officer for the managed firms. A self-managed captive insurer must also appoint a Compliance Officer, although this role may be combined with other functions.

CI-2.3.7

Chapters HC-10 contains additional guidance applicable to all captive insurance firms in respect of financial statements certification, appointment, training and evaluation of the Board, remuneration of approved persons, management structure, corporate ethics, communication between the Board and shareholders and corporate governance disclosure.

CI-2.4.1

Captive insurance firms must have an annual external audit. Firms must obtain prior written approval from the CBB before appointing or re-appointing their auditor.

CI-2.4.2

There are specific Rules and Guidance governing the duties and restrictions of external auditors.

CI-2.4.3

All insurance firms — including captives — who conduct long-term insurance business must appoint an actuary that must provide an annual actuarial evaluation and report.

CI-2.4.4

Insurance firms that undertake general insurance business only must consider the need for an annual actuarial evaluation and report, from an actuary, at least once every three-year period.

CI-2.4.4A

Insurance firms can appoint a Registered Actuary or Signing Actuary to meet the CBB requirements.

CI-2.4.5

The CBB maintains on its website a list of Registered Actuaries that can practise in the Kingdom of Bahrain. A Registered Actuary must be independent of the insurance firm for which he is providing an actuarial evaluation and report.

CI-2.4.6

A Signing Actuary is a Director or employee of the licensee concerned; he occupies a controlled function, and is subject to CBB approval as per Section AU-1.2

CI-2.5.1

Captive insurers are expected to maintain books and records sufficient to produce financial statements and show a record of the business undertaken. Where this function is carried out by an insurance manager, the captive insurer should ensure that the CBB has access to these records at any time and these should be sufficient to allow an audit of the insurer's business or an on-site examination of the captive insurer by the CBB.

CI-2.5.2

Where the clients of captive insurance firms are limited to related companies, captive insurers are exempted from the due diligence requirement for client records.

CI-2.5.3

As the business of captive insurers is limited to related parties, captive insurers do not require prior approval from the CBB for their corporate name and any trade names.

CI-2.5.4

Captive insurers do not require CBB pre-approval for the distribution of dividends to shareholders.

CI-2.5.5

Where a captive insurer transfers its portfolio to a third party, prior written approval from the CBB is required. Where all the policyholders affected by the transfer have given their consent in advance, then the disclosure requirements in Paragraph GR-4.2.1 do not apply. The CBB may waive some or all of the requirements in Section GR-4.2 where, in its opinion, they are not necessary in order to protect the interests of policyholders.

CI-2.5.6

Where the transferor is a Category C1 captive captive insurance firm, it is not subject to the publication requirements set out in Section GR-4.4.

CI-2.5.7

The management company of a captive insurance firm is not automatically a controller of the captive insurer.

CI-2.5.8

All requirements dealing with close links apply in full to captive insurance firms.

CI-2.5.9

Insurance firms are required to maintain statutory deposits as per Article 181 of the CBB Law. For captive insurers, the statutory deposit referred to in Article 181 is to be zero (nil).

CI-2.5.10

In accordance with the Bahrain Commercial Companies Law, captive insurance firms are required to set aside a proportion of their annual profits, being no less than 10 per cent as a compulsory reserve, until the total of such compulsory reserve equals 50 per cent of the paid-up capital.

CI-2.5.11

Captive insurance firms may, at the CBB's discretion, be exempted from the disclosure requirements that apply when an insurer suspends its business. However all other provisions of Chapter GR-8 apply.

CI-3.1.1

Principle 9 requires insurance licensees to hold adequate financial resources for the needs of the business. Module CA (Capital Adequacy) sets out in detail the minimum financial resources requirements for insurance licensees. In addition, it is the responsibility of Boards of insurance licensees to make their own assessment of the financial resources needed to meet their liabilities.

CI-3.1.2

The base requirement is for firms to maintain at all times capital available in excess of the higher of its required solvency margin and minimum fund.

CI-3.1.3

The minimum fund, that captive insurance firms must maintain (at all times) is:

Category C1 firm: — BD 75,000; and

Category C2 firm: — BD 300,000.

These minimum requirements for C1 firms are lower than the corresponding amounts for conventional insurance firms, in recognition of captives' risk exposure being to its owning group rather than third parties.

CI-3.1.4

For general insurance, the required solvency margin is calculated on the basis of the premiums written and claims incurred by the firm. A risk factor is applied, to reflect the differing risk profiles of different classes of insurance. For long-term insurance, the required solvency margin is calculated on the basis of the aggregate of the mathematical reserves calculation and the capital sum at risk calculation. Refer to Chapter CA-2 for the detailed rules governing the calculation of the required solvency margin.

CI-3.1.5

Captive insurers must maintain a capital available at all times in accordance with the rules in Chapter CA-1.

CI-3.1.6

The Valuation and Admissibility of Assets Regulations are contained in Chapter CA-4. Assets of an insurance firm may only be given value for regulatory purposes in accordance with the Valuation of Assets Regulations. Surplus (inadmissible) assets are valued at zero for the purposes of calculating the firm's capital available. Assets considered inadmissible include those that exceed permitted categories and counterparty limits and intangible assets (e.g. brand value).

CI-3.1.7

The Valuation of Liabilities Regulations are contained in Chapter CA-5. Liabilities must be valued in accordance with International Accounting Standards (to the extent available) or, until such standards come into effect, with Section CA-5.1.

CI-3.1.8

There are also Rules concerning the matching of assets and liabilities, to minimise the risk of maturity and/or currency mismatch in the portfolio.

CI-3.1.9

Captive insurers are exempted from the requirements to report on their group solvency position.

CI-3.2.1

Module BC (Business Conduct) comprises general rules (BC-1) and a Code of Practice (BC-2). These rules apply in full to captive insurers. However, it should be noted that BC is principles-based. Because a captive insurer is insuring the risks of its parent group, it would be acceptable for the level of sales documentation and written disclosure to be less than would be required for retail customers. The CBB considers this to be compatible and consistent with maintaining a professional insurer-insured relationship between the parties.

CI-3.2.2

The CBB expects the insurance manager to consider the requirements of the Code in relation to the service provided, on behalf of the captive, to its 'clients', namely insured members of the group. In most situations, for captives, the CBB would expect however that the requirements of the Code could be met by putting in place a simple protocol between the captive and the insured members of the group.

CI-3.3.1

Principle 10 (CI-2.2.3) requires firms to have systems and controls that are appropriate for their business. Consequently, Module RM (Risk Management) contains Rules and Guidance on how, specifically, firms should monitor and manage risk. This Module applies to all licensees, and it is for firms to consider the scale and complexity of the procedures that are required, given the nature of their operations.

CI-3.3.2

The Module contains both:

In meeting these requirements for captive insurers, the CBB expects that insurance managers will put in place the systems and controls for on-going identification and monitoring of risks on behalf of the companies that they manage, and that these will be reported periodically to Boards. However, the overall responsibility for the management of risk ('the establishment and oversight of effective risk management systems'), and ensuring the adequacy of this reporting, lies with Boards.

CI-3.3.3

There are specific requirements for outsourcing. For a captive insurer, who outsources the day-to-day management (and perhaps other functions such as claims handling), it is a requirement that these should be governed by a written service agreement that meets the requirements of Chapter RM-7.

CI-3.3.4

The CBB has exempted captive insurance firms from the specific requirement to undertake stress and scenario testing to test the resilience of their financial resources to specific areas of significant risk. This does not in any way exempt the Board from its general requirement to ensure the effectiveness of its risk management systems (including, but not limited to, ensuring the appropriateness of its premium structure and carrying out any financial modelling considered necessary as part of its underwriting process). The CBB would consider it good practice, as part of this review of the Board, for the firm to carry out stress testing to evaluate the effect of the principal risks identified on the financial resources of the firm. The CBB would also expect an application for licensing to include such stress-testing of its financial projections with its application.

CI-3.4.1

The general law of Bahrain imposes obligations on individuals and firms in relation to the prevention and prohibition of the laundering of money. Module FC applies to all insurance licensees.

CI-3.4.2

In addition, Module FC contains specific Rules and Guidance for insurance licensees that require them to have effective money laundering controls and to report suspicious transactions to the relevant authorities.

CI-3.4.3

Chapter FC-1 outlines the requirements for customer due diligence. In the case of captive insurance firms it is expected that this identity will be apparent both from the ownership of the captive and the origin of insurance premiums from traceable bank accounts. In this case, no further verification will be needed as a matter of routine, although this does not exempt firms and individuals from reporting any transaction that they consider suspicious in nature.

CI-3.4.4

The reporting of suspicious transactions is the responsibility of the firm's Money Laundering Reporting Officer ('MLRO'). Captive insurance firms that are managed by an insurance manager are specifically exempted from appointing a MLRO, as the insurance manager must appoint one to perform these responsibilities for all firms under its management.

CI-3.4.5

The MLRO will prepare an annual report on compliance with the anti-money laundering and combating terrorism financing controls and procedures. The Boards of captive firms will need to include the consideration of this report as a standing item for Board meetings each year.

CI-3.4.6

Appendix FC-(iv) contained in Part B of the CBB Rulebook provides guidance material and examples of transactions that would be considered suspicious for the purposes of this Directive.

CI-4.1.1

Captive insurance firms are required to file an Insurance Firm Return to the CBB providing details of the financial condition of the firm and the business undertaken. They are exempted from quarterly and group financial reportings to the CBB.

CI-4.1.2

Details of the content of the Insurance Firm Return can be found in Section BR-1.1. The content of the Insurance Firm Return is identical to that required for conventional insurance firms, except that additional information is required for captive insurers (see CI-4.1.3). The Return must be:

CI-4.1.3

The insurance business written by captive insurance firms lacks the diversity of risk of conventional firms. Because of this lack of diversity, the CBB seeks additional information from captive firms about their overall risk exposure and the level of reinsurance protection available. This additional information is included for captive insurers as part of the Insurance Firm Return as:

CI-4.1.4

Captive insurance firms must disclose to the CBB material information about changes in their situation including (but not limited to):

CI-4.1.5

It is envisaged that, for captive firms, the information provided to the CBB through the Insurance Firm Return and periodic notification of changes of controller etc. will be adequate for their supervisory purposes, other than in exceptional circumstances. Captive insurance firms are reminded, however, that they are required to maintain an open relationship with the supervisor and that the CBB does have powers to visit the premises of firms or insurance managers (other than in exceptional circumstances, with reasonable notice), request information and commission a report on the firm's business.

CI-4.2.1

The Public Disclosure Module of the CBB Rulebook does not apply to captive insurers.

Executive Summary

Legal Basis

IM-A.2.1

This Sector Guide was first issued in April 2005 by the BMA together with the rest of Volume 3 (Insurance). Any material changes that have subsequently been made to this Module are annotated with the calendar date in which the change was made. Chapter UG-3 provides further details on Rulebook maintenance and version control.

IM-A.2.2

When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 3 was updated in January 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.

IM-A.2.3

A list of recent changes made to this module are detailed in the table below:

IM-A.2.4

Guidance on the implementation and transition to Volume 3 (Insurance) is given in Module ES (Executive Summary).

IM-1.1.1

The functions of insurance broker and insurance consultant were in existence under the former Bahraini insurance law. The function of insurance manager as a regulated activity has been introduced with Volume 3 of the Rulebook.

IM-1.1.2

The CBB has introduced a regulatory regime aimed at captive insurers — Module CI. In most cases, captive insurers sub-contract their day-to-day management to a professional management firm. The licensing of insurance managers will simplify the licensing requirements of captive insurers, as the parties with whom the captive insurer may sub-contract its management will have been considered in detail by the CBB's licensing requirements.

IM-1.1.3

In accordance with the CBB's definition, the activities of insurance managers are not limited to acting on behalf of captive insurers but may also relate to non-captive insurance firms, both conventional and takaful.

IM-1.2.1

The following table lists the Modules of the CBB Insurance Rulebook and indicates those that apply to insurance brokers, insurance consultants and insurance managers. The remaining chapters of this guide will describe in more detail the principal requirements of each Module of the Regulations and Directives that apply to insurance intermediaries and insurance managers.

HIGH LEVEL STANDARDS

BUSINESS STANDARDS

REPORTING REQUIREMENTS

ENFORCEMENT AND REDRESS

IM-2.1.1

An entity in Bahrain must be authorised if it wishes to conduct regulated insurance services, including effecting insurance contracts, the broking of insurance contracts, the offering of advice to third parties and the provision of insurance management services.

IM-2.1.2

An insurance intermediary may be licensed for several types of business, including general insurance, unit linked long-term insurance, long-term insurance (other than unit-linked business), reinsurance and takaful products.

IM-2.1.3

The broking of insurance contracts refers to advising on insurance, acting as agent for another person in relation to the buying of insurance for that other person or making arrangements with a view to another person, whether as principal or agent, buying insurance. A person does not carry on the broking of insurance contracts if he falls under the definition of exempt introducer.

IM-2.1.4

The offering of insurance advice by insurance consultants refers to providing advice to a person in his capacity as agent for a policyholder or potential policyholder, on the merits of entering into a contract of insurance as principal or agent.

IM-2.1.5

The provision of insurance management services by insurance managers refers to the provision of management services or exercising the managerial functions on behalf of an insurance firm.

IM-2.1.6

Licensees who were carrying out activities that fall within the definition of the regulated activity of insurance broker prior to 1 April 2005 may be unincorporated entities or natural persons and may continue as such until 31 December 2006.

IM-2.1.7

New applicants for licensing as insurance brokers, after 1 April 2005 must be:

IM-2.1.8

For insurance consultants, the legal status must be:

IM-2.1.9

Insurance intermediaries applying for a license must do so in the form prescribed by the CBB and such application must include inter alia, details of proposed professional indemnity coverage.

IM-2.1.10

An insurance broker's business activity must be restricted by its Memorandum and Articles of Association to insurance broking.

IM-2.1.11

For insurance managers, the legal status must be:

IM-2.1.12

insurance intermediaries and insurance managers with their Registered Office in the Kingdom of Bahrain must maintain their Head Office in the Kingdom. Overseas insurance licensees must maintain a local management presence and premises in the Kingdom appropriate to the nature and scale of their activities.

IM-2.1.13

All persons wishing to undertake a controlled function in an insurance intermediary or insurance manager must be approved by the CBB prior to their appointment. (Approved Person).

IM-2.1.14

Insurance intermediaries and insurance managers seeking an approved person authorisation for an individual, must satisfy the CBB that the individual concerned is fit and proper to undertake the controlled function.

IM-2.2.1

There are 10 Principles of Business that apply to all insurance licensees including insurance intermediaries and insurance managers.

IM-2.2.2

Non compliance with the Principles of Business can lead to enforcement action, which can include the calling into question of whether the firm or its management continue to meet the fitness and propriety criteria for approval.

IM-2.2.3

The Principles of Business are:

IM-2.3.1

In accordance with Principle of Business 10, insurance intermediaries and insurance managers must put in place effective management, systems and controls for their business. The High-Level Controls Module sets out the Directives that put this principle into practice.

IM-2.3.2

Insurance brokers and insurance consultants operating as a Bahraini single person company are exempt from the requirements of Module HC.

IM-2.3.3

Some of these Rules govern the establishment, composition, functions and responsibilities of Boards of Directors. Except for Bahraini single person companies, all incorporated insurance intermediaries and insurance managers must have a Board, composed of a minimum of three Directors, which is ultimately accountable and responsible for the management and performance of the firm, in line with the Commercial Companies Law of 2001.

IM-2.3.4

Responsibility for the day-to-day management of an insurance intermediary and insurance manager is vested in the Chief Executive Officer, which is a controlled function. For insurance brokers, they should consider having in place an audit committee, but are not required to have in place Nominating and Remuneration Committees. Insurance consultants and insurance managers are not required to consider the need to operate Committees.

IM-2.3.5

The CBB expects, for Bahraini insurance licensees, for Bahrain to be the principal place of business and for Bahrain to be the centre of its governance and management.

IM-2.3.6

The CBB requires all insurance brokers to establish an internal audit function to monitor the adequacy of their systems and controls.

IM-2.3.7

Insurance intermediaries and insurance managers must nominate a Compliance Officer. In the case of insurance managers, they must also be designated as the Compliance Officer for the managed firms.

IM-2.3.8

Chapter HC-10 contains guidance applicable to insurance consultants and insurance managers in respect of financial statement certification, appointment, training and evaluation of the Board, remuneration of approved persons, management structure, corporate ethics, communication between the Board and shareholders and corporate governance disclosure.

IM-2.4.1

Insurance intermediaries and insurance managers must have an annual external audit. Firms must obtain prior written approval from the CBB before appointing or re-appointing their auditor.

IM-2.4.2

There are specific Rules and Guidance governing the duties and restrictions of external auditors.

IM-2.5.1

Insurance intermediaries and insurance managers are expected to maintain books and records sufficient to produce financial statements and show a record of the business undertaken.

IM-2.5.2

Where an insurance manager maintains the books and records of a captive insurer or another insurance firm, these records must be sufficient to allow an audit or an on-site examination by the CBB of the captive insurer or insurance firm.

IM-2.5.3

An insurance broker must maintain separate client accounts separate from those used for its own funds.

IM-2.5.4

Insurance intermediaries and insurance managers require prior approval from the CBB for their corporate name and any trade names.

IM-2.5.5

Bahraini insurance intermediaries and Bahraini insurance managers require CBB pre-approval for the distribution of dividends to shareholders.

IM-2.5.6

All requirements dealing with controllers apply in full to insurance intermediaries and insurance managers.

IM-2.5.7

Requirements dealing with close links apply in full to insurance intermediaries and insurance managers. Annual reporting requirements of close links apply only to insurance firms and insurance brokers.

IM-2.5.8

Insurance brokers are required to maintain a statutory cash deposit with a retail bank licensed to do business in Bahrain.

IM-2.5.9

Insurance brokers and insurance consultants must maintain professional indemnity coverage in line with the requirements outlined in Chapter GR-10.

IM-3.1.1

Principle 9 requires insurance licensees to hold adequate financial resources for the needs of the business. The Capital Adequacy Module sets out in detail the minimum financial resources requirements for insurance licensees. In addition, it is the responsibility of Boards of insurance licensees to make their own assessment of the financial resources needed to meet their liabilities.

IM-3.1.2

Bahraini insurance brokers must maintain in their insurance brokerage business at all times the greater of:

There are no minimum capital and net asset requirements for overseas insurance brokers. However, for overseas insurance brokers, financial statements of the parent company must be submitted to the CBB for review, in order to assess the financial stability of the group on a global basis.

IM-3.1.3

Insurance consultants and insurance managers must possess financial resources commensurate with the scale and nature of their insurance consultancy or management activities. There are no minimum capital and net assets requirements applicable to insurance consultants and insurance managers. However, Principle 9 does apply and the CBB may suspend or revoke the license of any insurance consultant or insurance manager whom it reasonably considers does not possess financial resources commensurate with the scale and nature of its insurance consultancy or management activities.

IM-3.2.1

The Business Conduct Module comprises general rules (BC-1) and a Code of Practice (BC-2). These rules apply in full to insurance intermediaries. However, it should be noted that Module BC is principles-based.

IM-3.2.2

The CBB expects the insurance manager to consider the requirements of the Code in relation to the service provided, on behalf of the captive or insurance firm, to its 'clients', namely insured members of the group.

IM-3.2.3

Other than a client who is an unincorporated entity with a turnover exceeding BD 1 million per year, an insurance intermediary must draw the client's attention to the status of the insurance firm — whether or not the insurance firm is locally licensed (as a Bahraini insurance firm or overseas insurance firm) and, if not, the reasons for recommending or choosing that insurance firm. In respect of these clients, this advice must be delivered in writing.

IM-3.2.4

Insurance intermediaries acting on behalf of customers in arranging their insurance must, on request, disclose the amount of commission payable to them from the insurance premium, and any other remuneration received for arranging the insurance contract.

IM-3.2.5

Licensees must avoid conflicts of interest, or if conflicts are unavoidable, must explain the position fully and manage the situation so as to avoid prejudice to any party.

IM-3.2.6

Licensees must have appropriate customer complaints handling procedures and systems for effective handling of complaints.

IM-3.2A.1

The Client Money Module outlines the requirements that insurance brokers have to meet with regards to holding client money for which they are responsible.

IM-3.2A.2

Where an insurance broker receives payment from a client, it must maintain one or more premiums/contributions account and held client money separate from its own money.

IM-3.2A.3

Insurance brokers must ensure that they maintain proper records, sufficient to show and explain their transactions and commitments in respect of their client money.

IM-3.2A.4

Unremitted insurance premiums held in the client money account and uncollected premiums from insureds must be recorded as fiduciary assets on the balance sheet of the insurance broker.

IM-3.2A.5

Insurance brokers must pay to insurance firms premiums/contributions received no later than 15 calendar days from the date of the receipt of such amounts.

IM-3.2A.6

For brokerage activities, insurance brokers are prohibited from collecting additional charges (other than the quoted premiums/contributions) from clients.

IM-3.2A.7

Brokerage charged by insurance brokers cannot exceed 15% of the premiums/contributions quoted by insurance firms for motor and medical classes of business of direct general insurance business.

IM-3.3.1

Principle 10 (IM-2.2.3) requires firms to have systems and controls that are adequate for their business. Consequently, the Risk Management Module of the CBB Rulebook contains Rules and Guidance on how, specifically, insurance licensees should monitor and manage risk. This Module applies in full to insurance brokers, except for the Sections dealing with market risk (RM-4.1) and insurance technical risk (RM-5.1). This Module does not apply to insurance consultants and insurance managers.

IM-3.3.2

The Module contains both:

IM-3.3.3

While the business of insurance managers is not subject to this Module, clients of insurance managers that are insurance firms, such as captive insurers, are subject to the requirements of this Module. The insurance manager, in fulfilling its obligations to its clients, therefore needs to manage the affairs of its clients in accordance with the requirements of the Rulebook, including this Module.

IM-3.4.1

The general law of Bahrain imposes obligations on individuals and firms in relation to the prevention and prohibition of the laundering of money. All insurance licensees are subject to the statutory requirements of this Law.

IM-3.4.2

Chapters FC-1 to FC-9 applies to insurance firms and insurance brokers. Where captive insurers are managed by an insurance manager, these Chapters are also to be applied to the insurance manager. This Module must be applied when dealing with new clients and when renewing policies or other insurance arrangements.

IM-3.4.3

Chapter FC-10 dealing with insurance fraud, applied to all insurance licensees.

IM-3.4.4

Chapter FC-1 outlines the requirements for customer due diligence. In the case of captive insurance firms it is expected that this identity will be apparent both from the ownership of the captive and the origin of insurance premiums from traceable bank accounts. In this case, no further verification will be needed as a matter of routine, although this does not exempt firms and individuals from reporting any transaction that they consider suspicious in nature.

IM-3.4.5

The reporting of suspicious transactions is the responsibility of the firm's Money Laundering Reporting Officer ('MLRO'). Captive insurance firms that are managed by an insurance manager are specifically exempted from appointing a MLRO, as the insurance manager must appoint one to perform these responsibilities for all firms under its management.

IM-3.4.6

The MLRO will prepare an annual report on compliance with the anti-money laundering and combating terrorism financing controls and procedures. The Boards of captive firms will need to include the consideration of this report as a standing item for Board meetings each year.

IM-3.4.7

Appendix FC-(iv), contained in Part B of the CBB Rulebook, provides guidance material and examples of transactions that would be considered suspicious for the purposes of this Directive.

IM-4.1.1

Insurance consultants and insurance managers must submit to the CBB the audited financial statements for each financial year. They are exempted from quarterly reporting and from group financial reporting to the CBB.

IM-4.1.1A

Insurance brokers must prepare and submit to the CBB an Insurance Broker Return (Form IBR) for each financial year, within 2 months of the insurance broker's financial year end.

IM-4.1.2

Details of the content of the Insurance Broker Return (Form IBR) can be found in BR-1.2A.6. The Return must be:

IM-4.1.2A

Insurance brokers must submit to the CBB within 3 months from the financial year-end, a report as to the quality of the insurance broker's procedures dealing with the insurance broker's fiduciary assets/liabilities and compliance with Module CL (Client Assets)

IM-4.1.3

Insurance intermediaries and insurance managers must disclose to the CBB material information about changes in their situation including (but not limited to):

IM-4.1.4

Insurance intermediaries and insurance managers are required to maintain an open relationship with the supervisor and must permit representatives of the CBB, or persons appointed for the purpose by the CBB to have access, with or without notice, during reasonable business hours to any of their business premises in relation to the discharge of the CBB's functions under the relevant law. The CBB does have powers to request information and commission a report on the firm's business.

IM-4.2.1

The Public Disclosure Module of the CBB Rulebook does not apply to insurance brokers, insurance consultants and insurance managers.

IM-5.1.1

The Enforcement Module of the CBB Rulebook applies in full to all insurance licensees.

Executive Summary

Legal Basis

TA-A.2.1

This Sector Guide was first issued in April 2005 by the BMA together with the rest of Volume 3 (Insurance). Any material changes that have subsequently been made to this Module are annotated with the calendar date in which the change was made. Chapter UG-3 provides further details on Rulebook maintenance and version control.

TA-A.2.2

When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 3 was updated in January 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.

TA-A.2.3

A list of recent changes made to this Module is provided below:

TA-A.2.3 [Deleted]

TA-A.2.4

Guidance on the implementation and transition to Volume 3 (Insurance) is given in Module ES (Executive Summary).

TA-1.1.1

It is generally accepted by Muslim Jurists that the operation of conventional insurance does not conform to the rules and requirements of Shari'a. Takaful firms (that is, those insurance firms that choose to apply Shari'a to govern their operations and products) provide products and services corresponding to those offered by a conventional insurer to an insured (policyholder) but in a legitimate co-operative manner consistent with Islamic principles. Accordingly, takaful contracts are designed so as to be free of any gharar (uncertainty that would render them non-compliant with Shari'a), riba (interest) and other prohibitions.

TA-1.1.2

The concept of takaful involves the payment of contributions that are wholly or partially donated to form an insurance portfolio. The pooled resources are then used to pay indemnity when the insured risk occurs. The pooling of donations and assisting those in need through indemnity payments does not contradict Shari'a but is in line with the principles of compensation and shared responsibilities among the community.

TA-1.1.3

Takaful has been undertaken using a number of different operational models or combinations thereof. The two most common bases of operating a takaful fund are as follows:

TA-1.1.4

The al mudaraba model, as the name suggests, is a profit sharing model whereby investors provide capital and contributions (investment funds/premiums) are received from the takaful participants. The contract specifies how the profit (surplus) from the operations is to be shared according to the principle of al mudaraba. Generally the sharing arrangements allow the operator to share in both the underwriting results from the operations as well as any favourable investment performance on the invested contributions.

TA-1.1.5

The al wakala model operates somewhat differently. The takaful participants pay contributions to the takaful fund. However these contributions include the payment of fees and charges due to the operator together with a donation to the community (takaful) fund. All risks are borne by the fund and the annual operating surplus belongs exclusively to the participants. The takaful operator does not share directly in either the risk borne by the fund or any surplus/deficit of the fund. Instead, the operator receives a set fee for managing the operations on the participants' behalf. It should however be noted that the operator's remuneration may (depending on the terms of the contract) include a performance fee, charged against any surplus, as an incentive to effectively manage the takaful fund. Under the al wakala model the operator can only make a profit by ensuring expenses of managing the operations are less than the fees. Those costs and charges that can be charged to the takaful fund must be provided at the lowest possible cost level that the operator can negotiate.

TA-1.1.6

In Bahrain, the current practice is to adopt the al wakala model for underwriting activities and the al mudaraba for the investment activities of takaful. This approach appears to be that favoured by the 'Accounting and Auditing Organisation For Islamic Financial Institutions' ('AAOIFI'). The CBB Rules have been designed to be in line with AAOIFI standards and have been adapted to correspond to current industry practice.

TA-1.1.7

Each licensed takaful firm is required to have a Shari'a Supervisory Board, whose duty is to direct, review and supervise the activities of the company in order to ensure that they are in compliance with Islamic Shari'a rules and principles.

TA-1.1.8

The CBB does not propose to establish Rules as to what constitutes a takaful product; this is a matter for each firm's Shari'a Supervisory Board. However, the CBB has an obligation to ensure that consumers of takaful products are afforded the same level of protection as that afforded to the purchasers of conventional insurance products. In addition, the CBB has an obligation to ensure that the operations of takaful firms do not represent a threat to the stability of Bahrain's financial services industry or wider economy.

TA-1.2.1

The table below lists the Modules of the CBB Insurance Rulebook and indicates those that apply to takaful and retakaful firms. The remaining chapters of this guide describe, in more detail, the principal requirements of each Module of the Regulations and Directives that apply to takaful and retakaful firms.

HIGH LEVEL STANDARDS

BUSINESS STANDARDS

REPORTING REQUIREMENTS

ENFORCEMENT AND REDRESS

TA-2.1.1

An entity in Bahrain must be authorised if it wishes to conduct regulated insurance services, including effecting insurance contracts, the broking of insurance contracts, the offering of advice to third parties and the provision of insurance management services. Insurance firms must restrict their business to insurance under their memorandum and articles of association.

TA-2.1.2

An insurance firm's license will state the classes of insurance that the firm is authorised to conduct. An insurance firm, except for captive insurers, cannot undertake both general insurance and long-term insurance business. Insurance firms must operate on either conventional insurance principles or on takaful principles; they cannot combine the two.

TA-2.1.3

All persons wishing to undertake a controlled function in an insurance licensee must be approved by the CBB prior to their appointment. Membership of a Shari'a Supervisory Board is a controlled function and requires CBB approval.

TA-2.1.4

A captive insurer may also be licensed either as a takaful firm in which case it will appoint a Shari'a Supervisory Board and will operate in accordance with the principles of the Shari'a.

TA-2.2.1

There are 10 Principles of Business that apply to all insurance licensees including takaful and retakaful firms.

TA-2.2.2

Non compliance with the Principles of Business can lead to enforcement action, which can include the calling into question of whether the firm or its management continue to meet the fitness and propriety criteria for approval.

TA-2.2.3

The Principles of Business are:

TA-2.3.1

In accordance with Principle of Business 10, insurance licensees must put in place effective management, systems and controls for their business. The High-Level Controls Module sets out the Directives that put this principle into practice and apply to all takaful and retakaful firms.

TA-2.3.2

Some of these Rules govern the establishment, composition, functions and responsibilities of Boards of Directors. All incorporated insurance licensees must have a Board, composed of a minimum of five Directors, which is ultimately accountable and responsible for the management and performance of the firm.

TA-2.3.3

In addition to a Board of Directors, takaful and retakaful firms must also have in place a Shari'a Supervisory Board.

TA-2.3.4

The CBB expects, for Bahraini insurance licensees, for Bahrain to be the principal place of business and for Bahrain to be the centre of its governance and management. This must include:

TA-2.3.5

The CBB requires Bahraini insurance licensees to establish an internal audit function to monitor the adequacy of their systems and controls.

TA-2.3.6

All insurance licensees must designate an employee, of appropriate standing and resident in Bahrain, as Compliance Officer. The duties of the Compliance Officer include:

TA-2.3.7

The Board must establish a remuneration committee of at least three directors which must:

TA-2.3.8

An insurance licensee's Board must establish and disseminate to all employees and appointed representatives of the licensee a corporate code of conduct.

TA-2.3.9

The Board must oversee the process of disclosure to all stakeholders. The Board must ensure that the licensee's communications are fair, transparent, comprehensive and timely.

TA-2.3.10

The Board must assess, document and provide a written certification to the CBB each year detailing whether the internal corporate governance processes that it has implemented have successfully achieved their objectives, and consequently whether the Board has fulfilled its responsibilities for directing and monitoring the overall conduct of the licensee's affairs.

TA-2.4.1

All insurance firms must have an annual external audit. Firms must obtain prior written approval from the CBB before appointing or re-appointing their auditor.

TA-2.4.2

There are specific Rules and Guidance governing the duties and restrictions of external auditors.

TA-2.4.3

All insurance firms that conduct long-term insurance business (family takaful)must appoint an actuary that must provide an annual financial condition report (FCR).

TA-2.4.4

Insurance firms that undertake general takaful business must commission an actuarial opinion from an actuary, every two years.

TA-2.4.4A

Insurance firms can appoint a Registered Actuary or Signing Actuary to meet the CBB requirements.

TA-2.4.5

The CBB maintains on its website a list of Registered Actuaries that can practise in the Kingdom of Bahrain. A Registered Actuary must be independent of the insurance firm for which he is providing an actuarial evaluation and report.

TA-2.4.6

A Signing Actuary is a Director or employee of the licensee concerned; he occupies a controlled function, and is subject to CBB approval as per Section AU-1.2.

TA-2.5.1

All insurance licensees are expected to maintain books and records sufficient to produce financial statements and show a record of the business undertaken.

TA-2.5.2

All insurance licensees must keep customer and transaction records in accordance with the requirement outlined in Section GR-1.2. Insurance licensees must also keep other records as required per Section GR-1.3.

TA-2.5.3

Insurance licensees, other than captive insurers, must seek prior approval from the CBB for their corporate name and any trade names, and those of their subsidiaries located in Bahrain.

TA-2.5.4

All Bahraini insurance licensees require CBB pre-approval for the distribution of dividends to shareholders.

TA-2.5.5

An insurance firm must seek prior written approval from the CBB before executing a business transfer.

TA-2.5.6

Insurance licensees must obtain prior approval from the CBB for any of the following changes to its controllers (as defined in Section GR-5.2):

TA-2.5.7

All requirements dealing with close links apply in full to all insurance firms.

TA-2.5.8

Insurance firms are required to maintain statutory deposits as per Article 181 of the CBB Law.

TA-2.5.9

In accordance with the Bahrain Commercial Companies Law, insurance licensees are required to set aside a proportion of their annual profits, being no less than 10 per cent as a compulsory reserve until the total of such compulsory reserve, equals 50 per cent of the paid-up capital.

TA-2.5.10

An insurance firm wishing to suspend its operations and liquidate its business must notify the CBB in writing, setting out whether it proposes to affect a transfer of its portfolio or go into run-off.

TA-3.1.1

Principle 9 requires insurance licensees to hold adequate financial resources for the needs of the business. Module CA (Capital Adequacy) sets out in detail the minimum financial resources requirements for insurance licensees. In addition, it is the responsibility of Boards of insurance licensees to make their own assessment of the financial resources needed to meet their liabilities.

TA-3.1.2

The base requirement is for firms to maintain at all times capital available in excess of the higher of its required solvency margin and minimum fund.

TA-3.1.3

The takaful firm is subject to capital available and solvency requirements. Should the Takaful firm not meet the solvency requirements, it must inject capital.

TA-3.1.4

The minimum fund that must be maintained by the each takaful fund at all times, is:

These minimum requirements are equivalent to those amounts for conventional insurance firms.

TA-3.1.5

For each general participants' fund, the required solvency margin is calculated on the basis of the premiums written and claims incurred by the fund. A risk factor is applied, to reflect the differing risk profiles of different classes of insurance. Refer to Chapter CA-2 for the detailed rules governing the calculation of the required solvency margin.

TA-3.1.6

For each family participants' fund, the required solvency margin is calculated on the basis of the aggregate of the mathematical reserves calculation and the capital sum at risk calculation.

TA-3.1.7

The Valuation and Admissibility of Asset Regulations are contained in Chapter CA-4. Assets of an insurance firm may only be given value for regulatory purposes in accordance with the Valuation of Assets Regulations. Surplus (inadmissible) assets are valued at zero for the purposes of calculating the firm's capital available. Assets considered inadmissible include those that exceed permitted categories and counterparty limits and intangible assets (e.g. brand value).

TA-3.1.8

The Valuation of Liability Regulations are contained in Chapter CA-5. Liabilities must be valued in accordance with International Accounting Standards (to the extent available) or, until such standards come into effect, with Section CA-5.1.

TA-3.1.9

There are also Rules concerning the matching of assets and liabilities, to minimise the risk of maturity and/or currency mismatch in the portfolio.

TA-3.1.10

The CBB may require a takaful firm to provide:

TA-3.1.11

All takaful firms licensed in Bahrain must organise and operate their business according to the al wakala model. Specifically, in exchange for the provision of management services to takaful fund(s), the shareholders of the takaful firm will receive a specific consideration (wakala fee). For the insurance assets invested on behalf of takaful funds, the takaful operator will use the al mudaraba model, and will receive a set percentage of the profits generated from the investment portfolio.

TA-3.1.12

The wakala fee charged in respect of a takaful contract must be directly proportional to the costs associated with establishing and maintaining that contract.

TA-3.1.13

Takaful firms must maintain separate books of account in respect of each kind of business and for each fund.

TA-3.1.13A

Where a participants' fund(s) has a cash deficit which results in its inability to meet its day to day expenses and obligations, a Qard Hassan must be extended immediately to the shareholder fund.

TA-3.1.14

Takaful firms by definition are co-operative in nature and as such participants (policyholders) are entitled to a return of any surplus of the takaful funds operated by a takaful insurer. Takaful firms must establish a policy for the distribution of surplus but may only distribute a surplus if the firm meets its required solvency margin requirements both prior to and after the distribution.

TA-3.2.1

The Business Conduct Module comprises general rules (BC-1) and a Code of Practice (BC-2). These rules apply in full to all insurance licensees with special provisions applicable to takaful firms.

TA-3.2.2

The use of the terms 'takaful', 'retakaful', 'general takaful' and 'family takaful' may only be used to describe the products of insurance firms that are Islamic financial institutions within the meaning of the CBB Rulebook.

TA-3.2.3

An insurance firm may only offer takaful products if it is licensed to do so. An insurance intermediary may offer both conventional insurance and takaful products but must provide clear information to enable consumers to make informed choices.

TA-3.2.4

Takaful firms must provide participants and shareholders with clear information about the performance of their business. This information must, as a minimum, comply with relevant AAOIFI standards, in particular Standard 13 (Disclosure of Bases for Determining and Allocating Surplus or Deficit in Islamic Insurance Companies) and Standard 12 (General Presentation and Disclosure in the Financial Statements of Islamic Insurance Companies).

TA-3.3.1

Principle 10 (TA-2.2.3) requires firms to have systems and controls that are appropriate for their business. Consequently, the Risk Management Module of the CBB Rulebook contains Rules and Guidance on how, specifically, firms should monitor and manage risk. This Module applies to all licensees, and it is for firms to consider the scale and complexity of the procedures that are required, given the nature of their operations. All those sections dealing with Bahraini insurance firms and overseas insurance firms are applicable to takaful firms.

TA-3.3.2

The Module contains both:

TA-3.4.1

The general law of Bahrain imposes obligations on individuals and firms in relation to the prevention and prohibition of the laundering of money. Module FC applies to all insurance licensees.

TA-3.4.2

In addition, Module FC contains specific Rules and Guidance for insurance licensees that require them to have effective money laundering controls and to report suspicious transactions to the relevant authorities.

TA-3.4.3

Chapter FC-1 outlines the requirements for customer due diligence.

TA-3.4.4

The reporting of suspicious transactions is the responsibility of the firm's Money Laundering Reporting Officer ('MLRO'). All takaful firms must appoint an MLRO.

TA-3.4.5

The MLRO will prepare an annual report on compliance with the anti-money laundering and combating terrorism financing controls and procedures. The Boards of takaful firms will need to include the consideration of this report as a standing item for Board meetings each year.

TA-3.4.6

Appendix FC-(iv), contained in Part B of the CBB Rulebook provides guidance material and examples of transactions that would be considered suspicious for the purposes of this Directive.

TA-4.1.1

Takaful firms are required to file annual, quarterly and group insurance returns to the CBB providing details of the financial condition of the firm and the business undertaken.

TA-4.1.2

Details of the content of the Insurance Firm Return can be found in Section BR-1.1. The content of the Insurance Firm Return is identical to that required for conventional insurance firms, except for the calculation of the solvency margin as outlined in Chapter CA-8. The Return must be:

TA-4.1.3

Takaful firms must disclose to the CBB material information about changes in their situation including (but not limited to):

TA-4.1.4

An insurance licensee must permit representatives of the CBB, or persons appointed for the purpose by the CBB to have access, with or without notice, during reasonable business hours to any of its business premises in relation to the discharge of the CBB's functions under the relevant law.

TA-4.2.1

Takaful and Retakaful firms are subject to the same Public Disclosure requirements imposed in Module PD to insurance firms and overseas insurance firms.

TA-4.2.2

Takaful and Retakaful firms must disclose to participants the calculation and amount of wakala fee and mudaraba share of profits paid by the takaful fund to the takaful operator.

TA-5.1.1

The Enforcement Module of the CBB Rulebook applies in full to all insurance licensees.