Ready for change: New laws and market activity are set to revitalise the sector

The insurance industry has grown substantially over the past decade. The expansion of Kuwait’s insurance industry over the course of the 12 years leading up to 2011 – the most recent year for which data was available at time of publication – reflects the country’s overall economic performance during the same period and, indeed, global macroeconomic trends, particularly in the wake of the 2007-08 international financial crisis.

SCALING UP: The number of insurance companies carrying out business in Kuwait has more than tripled since 2000. Further, from 1999 through 2005 gross written premiums (GWPs) increased at a compound annual growth rate (CAGR) of 17.05%, according to a report released in June 2012 by Capital Standards, a local ratings agency. Conversely, from 2006 through 2011 the sector posted a CAGR of 4.68%. The industry currently faces a number of challenges. While total GWPs and the number of firms have risen rapidly over the past decade, the sector remains quite small, even compared to other insurance markets in the Gulf. According to the Capital Standards report, in 2010 insurance penetration in Kuwait was 0.58%, the lowest in the GCC, and compared to a regional average of 1.3% and a global average of 6.9%. Additionally, the rapid increase in new players since 2000 has resulted in steadily decreasing profit margins for most firms, particularly in key segments such as compulsory motor coverage, which accounted for more than 30% of total GWPs in 2011. Other challenges include a general lack of diversification, both in terms of market segments covered and geographical reach, with most firms underwriting domestic risk almost exclusively; a shortage of well-trained insurance workers; and a lack of awareness about the value of insurance among the general population. “Privatisation will play a big role in terms of insurance penetration. If the privatisations of airlines, projects from the Ministry of Electricity and Water, the post office, and landlines are successful then more companies will insure their projects and purchase comprehensive insurance for their employees,” Tareq Al Sahhaf, the general manager of Gulf Insurance Group, told OBG.

HISTORY: Kuwait Insurance Company (KIC), which was founded in 1960, is the oldest insurer not only in Kuwait, but also in the Gulf region as a whole. The publicly listed firm has a history of covering major government projects, including much of the rebuilding that took place in the wake of the 1990-91 Gulf War. The development of the local insurance industry in the 1960s was also driven by the Gulf Insurance Group (GIG) and the Al Ahleia Insurance Company (AAIC), both of which were founded in 1962; Bahrain Kuwait Insurance Company (BKIC), which was founded in 1975; and Warba Insurance, which was founded in 1976. These five firms made up Kuwait’s entire insurance industry until 2000.

Encouraged by high growth rates and favourable entry requirements, the sector has grown from six companies in 1999 to 34 today. Despite steadily increasing competition through the first half of the 2000s, the industry as a whole posted solid growth in terms of GWPs during this period. Beginning in 2005, however, profits began to decline as competition intensified. While Kuwait was relatively well insulated from the global financial downturn, the prolonged economic malaise that has dampened growth in the EU and the US over the past five years has affected the local economy, as it has all GCC countries. In an effort to make up for shrinking underwriting profits, in the early and mid-2000s many firms adopted high-risk investment strategies, and were subsequently hit hard during the crisis.

New regulations – a handful of which came into effect in 2011 – are expected to resolve this situation in the coming years. “I am optimistic that corrective action will be taken, eliminating the concentration risk in insurers’ portfolios, as well as diversifying instruments rather than concentrating in the local equities market,” Hatem M Sabry Selim, the CFO and chief risk officer at Warba Insurance, told local press in 2012.

OVERSIGHT & REGULATION: The insurance sector is regulated by the Insurance Department at the Ministry of Commerce and Industry (MoCI). The department has a mandate to ensure that the industry acts in accordance with the country’s Insurance Law No. 24 of 1961, which was the first piece of insurance legislation in the GCC. While the law has been amended a number of times since it was passed over 50 years ago, it has attracted criticism in recent years for being outdated and unable to account for modern products and services. The IMF’s “2010 Financial System Stability Assessment” noted that the sector’s supervision framework does not make adequate use of risk analysis procedures that are widespread in mature insurance markets, and concluded that, “the regulatory regime for the insurance sector needs strengthening”.

Concerns about the legislative framework over the past decade have centred primarily on capital requirements, which, until recently, were widely considered to be low by international standards. Up until 2011 insurance companies registered in Kuwait were required to maintain paid-up capital of KD150,000 ($535,740), which resulted in an undercapitalised sector that was unable to deal with major risks. Additionally, many firms came to rely primarily on reinsurance facilities for managing risk. At the same time, some foreign firms have argued that the regulatory regime is too restrictive in terms of insuring local assets and projects, which by law must be covered by an insurer registered in Kuwait.

MAKING AMENDS: The government has worked to overcome these issues. In 2011 the MoCI put forward several new amendments to the insurance law. Under ministerial decree 511, minimum capital requirements were raised across the board to KD10m ($35.7m) for composite insurers and KD15m ($53.57m) for reinsurers. Similarly, another 2011 amendment requires firms to increase deposit reserves from KD45,000 ($160,722) to KD500,000 ($1.79m) for life insurers and KD1m ($3.57m) for composite firms. Additional legislative amendments address financial disclosure requirements, investment restrictions and the brokerage segment.

In May 2012 the MoCI announced a plan to issue a draft law that would establish a new independent regulatory body to oversee the insurance sector. “It is necessary to reconsider the organisation of the insurance sector,” Anas Khalid Al Saleh, the minister of commerce and industry, said during the announcement of the plan. The creation of an independent regulator is expected to have a transformative affect on the sector. “The emergence of an external regulator will help stabilise prices and will force smaller companies to go out of business or to consolidate,” Nasser Sulaiman Al Omar, Gulf Takaful’s vice-chairman and managing director, told OBG. The ministry has yet to announce a timeline for the creation of the new authority.

BY THE NUMBERS: In 2011 Kuwait’s insurance industry pulled in KD223.56m ($798.5m) in GWPs, up from KD206.73m ($738.4m) in 2010, KD171.55m ($612.7m) in 2009 and KD180.62m ($645.1m) in 2008. From 1999 through 2011 the sector grew by a CAGR of 11.61%, according to Capital Standards. As mentioned previously, the majority of the market’s expansion took place in the first half of this 12-year period. In 2010 insurance penetration was at 0.58%, up slightly from 0.56% in 2009 and 0.46% in 2008, though down marginally from 0.6% in 2006. Similarly, Kuwait’s insurance density – a measure of GWPs on a per capita basis – was at KD57.71 ($206.12) in 2010, up from KD49.23 ($175.83) in 2009 and KD52.47 ($187.40) in 2008.

The industry has seen a drop in the number of policies written in recent years, from 1.49m in 2006 to 1.37m in 2010. The growth in GWPs over the same period points to a steady rise in the average value of GWPs over the past five years, which bodes well for future returns. At the same time, overall profitability has declined since 2006, as local insurers have taken on increased risk in order to realise higher GWP income in recent years. This has had a detrimental effect on the liability side. According to Capital Standards, the ratio of claims incurred to GWPs jumped substantially from 49.25% in 2006 to 76.22% in 2010.

MAJOR PLAYERS: As of 2012 Kuwait was home to 34 insurance companies, including 23 domestic firms and 11 foreign firms. The market is made up of 10 conventional insurers, 11 takaful(Islamic insurance) firms and Gross written premiums by segment, 2011 two reinsurers, while the foreign market includes 10 conventional firms and one takaful firm. According to a recent report released by the Mena Insurance Review, a UK-based publication, in 2011 Kuwait’s top five insurance firms – GIG, AAIC, KIC, Warba Insurance and MetLife American Life Insurance (ALICO) – accounted for around 60% of total GWPs. Other players in the top 10 include BKIC, the National Takaful Insurance Company, Enaya Insurance Company and First Takaful. The majority of the rest of the companies currently active in Kuwait were established within the past decade and are relatively small, accounting for 1-2% of the market in most cases. The 23 domestic firms control around 87% of the market altogether.

BIG LEAGUES: GIG, the largest insurer in Kuwait, has led the sector in terms of GWPs since 2004. The firm underwrites conventional and sharia-compliant non-life risk and conventional life risk. GIG is owned by KIPCO, a Kuwait-based financial conglomerate, which holds around 44% of the firm, and Fairfax Financial Holdings, a Canadian company that controls around 41%. The remaining 15% is publicly listed on the Kuwait Stock Exchange (KSE). In recent years GIG has controlled around 25% of GWPs in Kuwait. In 2012 the company brought in KD145.4m ($519.31m) in premiums, up 9% from the previous year. GIG owns controlling shares in insurance companies in Lebanon, Jordan, Iraq, Egypt and Bahrain. The firm has also invested in insurance companies in Syria, Saudi Arabia, the UAE and Oman. In late 2012, GIG announced that it was looking into expanding into both Turkey and Algeria.

AAIC, the second-largest insurer in Kuwait in terms of premium income, brought in GWPs valued at KD32.3m ($115.36m) in 2011, the most recent year for which data was available at time of publication. Around 75% of the firm is publicly listed on the KSE, with the remainder held by a handful of local investors. The company provides both non-life and life-conventional products. Like GIG, AAIC has worked to diversify its revenues over the years, primarily by investing in a variety of other insurance companies throughout the region. The firm currently holds stakes in firms in Lebanon, Jordan and Saudi Arabia, among other countries.

The majority of KIC – around 77% – is publicly listed on the KSE, with the remainder held by local investors and firms. The company, which provides both conventional and sharia-compliant life and non-life products, is considered one of the largest non-life underwriters in the country. In 2011 KIC saw KD26.2m ($93.58m) in GWPs. Warba Insurance, meanwhile, was responsible for KD25.6m ($91.43m) of GWPs in the same period. Just under 29% of Warba Insurance is listed on the KSE, with the remainder owned by a variety of local companies and individual investors. The firm underwrites conventional life and non-life risk. Finally, MetLife ALICO, a US-based global insurer, offers life coverage.

MAJOR SEGMENTS: In 2011 nearly 33% of total GWPs came from life and health underwriting, followed by motor coverage, with around 30%; fire, property and casualty policies, with around 10%; and marine and aviation policies, with just under 9%. A handful of other smaller product lines – including engineering, financial and travel insurance, among others – accounted for the remaining 18% of premiums.

The motor segment has been the market leader in terms of growth of GWPs in recent years, posting a CAGR of 7.49% for the 2006-11 timeframe, according to Capital Standards. In the same period the fire, property and casualty segment posted a CAGR of 5.06%, the marine and aviation segment posted a CAGR of 4.74%, and the life and health segment posted a CAGR of 3.97%.

NON-LIFE: The non-life sector is very competitive. As such, profit margins are particularly low in personal lines, as with third-party liability (TPL) motor products, which generally account for more than a quarter of total premiums. That said, TPL motor coverage – which is mandatory for all drivers in the country – is the largest non-life product line in the market. Most firms also offer comprehensive motor coverage, which accounts for less than 10% of total GWPs.

With this in mind, many insurers have worked to boost their commercial non-life business in recent years. Indeed, fire, marine, aviation, engineering and project-based underwriting will likely account for a steadily increasing percentage of GWPs over the next decade, supported in large part by the numerous major infrastructure projects expected to be carried out under the auspices of Kuwait’s KD30bn ($107.15bn) National Development Plan (NDP), which was launched in February 2010. “Since the economic crisis the whole sector has been struggling,” said Mohamed Sherief A Raouf, the deputy CEO of technical services at the Gulf Takaful Insurance Company, a local sharia-compliant firm. “Now everyone is waiting for the NDP to start.”

HEALTH & LIFE: Kuwaiti citizens receive free health care at the country’s large network of public hospitals and clinics. Expatriates, who make up nearly half of the population, must purchase a health insurance plan from one of a handful of international brokers in order to obtain a residency permit. The plans, which allow foreign residents to access the country’s public health system for a relatively small fee – KD1-10 ($3.57-35.72), depending on the procedure and facility – are heavily subsidised by the government. This system is increasingly considered to be a major financial burden for the state. With the goal of alleviating this, in 2010 the government announced that it would establish a new private company to provide health assurance and care for privately employed expatriates. The new entity, known as the Kuwait Health Assurance Company (KHAC), is already in the bidding stage. The Kuwait Investment Authority – the state’s sovereign wealth fund – developed the project in conjunction with the Ministry of Health. The government hopes to attract a private investor to purchase a controlling 26% share of the firm, with 24% held by the state and the remaining 50% set to be listed on the KSE in one of the largest initial public offerings in Kuwait’s history. In early July 2013 KIPCO announced that it would bid for a stake in KHAC.

Under the terms of the KHAC bid, the strategic investor would be required to build a network of new hospitals and clinics within four to five years to provide primary and secondary care to expatriates covered under KHAC. Thus, in much the same way a health maintenance organisation, the firm acts as both an insurer and care provider. Kuwaitis will be able to access the new health care facilities for a fee. Provided the new system is successful, KHAC could introduce managed care plans for nationals as well. KHAC is expected to have a long-term positive impact on the quality of medical care and on the government’s health care expenditure. It will also likely serve as a catalyst for increased development in the insurance industry (see Health chapter).

The life insurance segment is quite small in Kuwait. As in many other Islamic countries, life underwriters have found it difficult to overcome the widespread belief among the general population that life products are un-Islamic (see Islamic Financial Services chapter). As the population becomes more familiar with insurance, life insurance providers expect to see steadily increasing uptake, especially among young Kuwaitis.

TAKAFUL: Kuwait, like most of its neighbours in the Gulf, has seen an influx of sharia-compliant insurance firms in recent years. Takaful differs from convention-Gross written premiums, 2006-11 al insurance in that it requires the underwriter to hold separate profit and loss accounts and to distribute part of its operations revenues among policyholders, in line with Islamic law. Takaful companies are widely considered to be more stable than their conventional counterparts, as they are not allowed to leverage earnings or invest in the complex financial instruments that were popular in the years leading up to the financial downturn (see Islamic Financial Services chapter).

As of early 2012 there were 11 takaful companies in Kuwait. According to Capital Standards, at the end of 2011 the segment accounted for 16.91% of total GWPs, up from 16.5% in 2010, 15.41% in 2007 and 14.5% in 2006. In 2011 some 52.67% of takaful GWPs came from the motor segment, while 19.45% came from life and health underwriting, 8.49% from marine and aviation lines, and 6.64% from fire coverage. Major sharia-compliant providers in Kuwait include First Takaful, Gulf Takaful, National Takaful, Wethaq Takaful and Takaful International, among others. Kuwait is also home to one of only a handful of re-takaful firms in the world, Al Fajer Re-takaful (see analysis). “Takaful insurance firms have so far helped to boost volumes and educate people as to the benefits of insurance,” Anwar Jawad Bukhamseen, the chairman of Warba Insurance, told OBG.

REINSURANCE: Kuwait is home to two reinsurance companies, Kuwait Reinsurance, which was founded in 1972, and Al Fajer Re, which was established in 2008. A substantial percentage of local insurance risk is also ceded to a variety of global reinsurance firms; due to the small size of most domestic insurers, reinsurance is very popular in the local market, with around 47% of total GWPs ceded to reinsurers in recent years, according to a report released by the Qatar Financial Centre Authority. While this bodes well for the local segment, it is considered to be a liability for the market as a whole, as it has a negative impact on profitability and growth projections. The most-ceded risks in Kuwait include energy, engineering, marine, aviation and property, according to Capital Standards (see analysis).

OUTLOOK: Despite challenges, most agree that there is substantial potential for growth in Kuwait’s insurance industry. As of 2012 some 60% of Kuwait’s total population was below the age of 25, and this younger generation is considered more amenable to insurance than their parents. As such, many expect to see an increase in life insurance take-up, particularly as younger Kuwaitis start families of their own. Foreign residents are also considered a major source of insurance demand. “The growing expatriate community will be a major growth driver in the insurance sector,” Bukhamseen told OBG.

Other recent events also bode well for expansion. In late 2011 the government introduced a new law raising minimum capital requirements for local insurance companies, expected to have a positive impact on the sector as a whole. “The insurance sector is a mirror for development in Kuwait,” Bukhamseen told OBG. “The more implementation of NDP and oil sector developments, the more insurance penetration we can achieve.” Still, government projects are usually given to the top four firms, which can constrain the smaller players.