Long overdue law brings big changes to Kuwait’s insurance sector

A new insurance law was approved by the Kuwaiti Parliament in July 2019 to support the maturation and growth of the sector. While premium are likely to rise in the short term and a gradual consolidation of the sector is expected, a more viable, lower-risk environment is set to emerge in the coming years.

Modern Solutions

The insurance market in Kuwait was previously governed by a law dating back to 1961, thus the legislation has been widely regarded as needing modernisation. According to local media, in May 2019 Khaled Al Roudhan, minister of commerce and industry, and minister of state for services affairs, said that Kuwait needed a new insurance law, especially because the existing legislation was issued some 60 years ago and last amended in 1981. He highlighted that the law does not include supervisory tools and the new one would help tackle the “negative aspects” of the insurance sector. Indeed, in recent times numerous companies have entered the market by charging very low premium to gain a foothold. This has generated concerns that many of these firms may be unable to meet future claims on the policies they wrote due to undercharging for the risk involved.

The new insurance law has been circulating within government departments since at least 2012. The main obstacle to its passage was the question of who would take over the role of regulating the insurance sector, which was being overseen by the Ministry of Commerce and Industry. The idea of an independent regulator was floated but rejected by Parliament due to the extra cost involved. Both the Central Bank of Kuwait and the Capital Markets Authority turned down the role, mainly due to concerns about finding skilled staff to oversee the complex sector. In the end, the July law gave oversight responsibilities to a new unit within the Ministry of Commerce and Industry.

Rule Changes

Overall, the law is likely to increase the long-term stability of the sector. It is expected to achieve this by increasing the capital and reserves that companies need to hold, while also requiring them to bring in more qualified and experienced technical staff and risk functions. “The new insurance law should lead to better enforcement of claims payment and set minimum capital requirements, creating a more organised market,” Mohammad Al Beeshi, vice-president of Gulf Takaful, told OBG.

The impact of the new law can be broken down into six components – although executive orders from the Cabinet were still pending as of September 2019, so some details could change. First, technical reserves are expected to increase. This means companies need to hold more cash on hand to meet likely future payouts. Second, capital requirements need to be paid up front, and are higher for reinsurance and takaful (Islamic insurance) business. Third, solvency rules are tightened by requiring firms to hold a percentage of their premium income in reserve in case of bankruptcy. Fourth, investment rules are tightened regarding acceptable assets for insurance companies to acquire, including designated funds for investment in Kuwait. Many insurance companies will be forced to exit investments in the equity market and switch to fixed-income products, although the availability of these investments is another subject of attention (see Capital Markets chapter). Fifth, regular actuarial reports will be required, pushing up costs for firms. Sixth, takaful units are required to be separate companies with their own capital (see overview).

The result of these new rules is that premium rates are likely to rise to adequately cover risks, and many smaller firms that cannot afford the higher costs and reserve requirements will either exit the market or merge with other players. A gradual restructuring of the sector and flatter profit growth for the next few years are, therefore, likely outcomes of the law. However, the changes should also see insurance firms boost the confidence of individuals and businesses by being able to meet their long-term service obligations.