Underwritten expansion: A new insurance law will address issues in the takaful segment

Strong competition in the local market from both takaful and conventional players has made recent years challenging for Kuwait’s sharia-compliant insurers. The performance of dedicated takaful providers in 2010 was mixed, with gains by players such as National Takaful and Ain Takaful (which grew their premiums by 17.4% and 58.7%, respectively) contrasted by muted performances from a number of companies adjusting to the new landscape, such as Wethaq Takaful and Gulf Takaful, whose premiums contracted by 8.32% and 11.4%.

UNFULFILLED POTENTIAL: In the years prior to the financial crisis, where takaful take-up was almost tripling in markets such as Bahrain, penetration rates remained static in Kuwait at around 0.1%. Third-party investor liability remains the sole mandatory line in the market. “None of the regulations we have anticipated over the years mandating more insurance lines have come through – including professional liability insurances such as for medical malpractice and professional indemnities,” Ibrahim Arqawi, the COO of Kuwait Qatar Insurance Company, said. “We will not achieve the sort of growth levels seen in developed markets without mandating more insurance lines, but changes such as these are difficult to get past the National Assembly.”

CHANGE ON THE WAY: Certainly, the regulatory advances that have helped the expansion of the takaful industry in neighbouring markets have yet to be seen in Kuwait. The Insurance Supervisory Authority of the Ministry of Commerce and Industry issues both conventional and takaful licences, and is responsible for the regulatory oversight of the entire insurance sector. The scope of its authority is defined by Law No. 24 of 1961 (On Insurance Companies and Agents), which also sets a minimum paid-up capital requirement of KD150,000 ($540,750) for local firms and KD225,000 ($811,125) for foreign operators, as well as outlining the parameters of the deposit of guarantee that insurers must lodge with local banks.

The regulatory lacuna of the 1961 legal framework has prompted the Ministry of Commerce and Industry to formulate new legislation. In January 2009 it revealed a draft insurance law which, when it has completed a lengthy process of parliamentary scrutiny, will replace the outdated current legislation.

The new insurance law is expected to raise the minimum capital requirement to $55m for local insurers, and will include a separate code for takaful providers which will address areas such as policyholders’ funds, qard hassan (a form of sharia-compliant, interest-free loan) and the creation of a sharia supervisory board. A sharia board with industry-wide oversight should formalise the sector and thereby heighten confidence in it, leading to more growth.

REFORM FROM WITHIN: While the sector looks to the government to spearhead the reform process, some characteristics of the local market suggest that a degree of change could come from within. One characteristic of the Kuwait insurance sector, seen in both conventional and sharia-compliant providers, is that the capital base of recent start-ups tends to be higher than their premium base. For example, Gulf Takaful, with a paid-up capital of around KD15m ($54.1m), currently writes around KD4m ($14.4m) worth of business, while new arrival Kuwait Qatar Insurance Company, with a paid-up capital of KD5m ($18m), writes about KD4m ($14.4m).

“You don’t see this in developed insurance sectors – capital is not being properly utilised. In effect, capital becomes a burden,” said Arqawi. While the more established companies such as Gulf Insurance Company, which writes around KD90m ($324.5m) worth of business against KD20m ($72.1m) in paid-up capital, do not exhibit that problem, its prevalence among smaller and younger operators reveals a market inefficiency.

While many see consolidation as the inevitable solution to this issue, there have been no indications that the long-awaited process get under way at any time in the near future. Kuwait’s takaful sector, with a small number of large players and a larger number of small players, might very well be in need of major restructuring, but for this to actually occur may yet take some time.