Despite a number of hurdles, expansion is on the cards

The insurance sector in Kuwait has grown considerably over the past five years. According to statistics published by Capital Standards, a local ratings agency, in 2012 the industry brought in KD249.41m ($876.95m) in gross written premiums (GWPs), up more than 10% from the previous year.

From 2008 through 2012 the insurance sector as a whole posted a compound annual growth rate (CAGR) of 9.7%, according to data from Swiss Re. This expansion can be attributed primarily to new business activity in the takaful(sharia-compliant insurance) segment.

The non-life segment accounted for more than 66% of total GWPs in 2012. State-led construction projects, which are in turn largely financed by oil revenues, have been major contributors to the expansion of Kuwait’s insurance industry over the past decade.

According to the Dubai-based investment bank Alpen Capital, insurance penetration was at 0.6% in 2012, which was the lowest penetration rate in the GCC at the time. Despite the industry’s limited size, more than 30 companies are currently active in the sector, including local and regional players. Consequently most firms have seen declining profit margins in recent years as a result of steadily increasing price competition.

History

Established in 1960, the Kuwait Insurance Company (KIC) was both the first insurance provider in Kuwait and the first underwriter to set up shop in the Gulf region. Throughout the best part of the 1960s and 1970s, a handful of additional insurers opened for business in Kuwait, including the Gulf Insurance Group (GIG) and the Al Ahleia Insurance Company (AAIC), both set up in 1962; the Bahrain Kuwait Insurance Company, established in 1975; and Warba Insurance, created in 1976. For the next 25 years these five companies constituted the country’s entire insurance industry.

Beginning in the late 1990s, however, the sector saw an influx of new insurers. Attracted by regional and domestic economic growth and low barriers to entry, many local investment firms and other financial entities set up insurance firms of their own during this period, which led to rising competition across the sector over the next 15 years. During the first half of the 2000s revenues grew at most firms. In the lead-up to the 2007-08 global financial crisis, however, profit margins began to tighten as a result of rising competition. In order to compensate for declining underwriting revenues, a substantial number of firms adopted aggressive investment policies during this period, buying and holding real estate and other high-risk financial products. While Kuwait’s broader financial services sector was well-insulated against the downturn, many of these firms were hit hard in 2007-08.

Regulation & Oversight

Kuwait’s Insurance Law No. 24, which was passed in 1961, was the first piece of insurance legislation to be introduced in a GCC country. The law, which has been amended a number of times since then, serves as the sector’s legislative backbone, and is enforced by the Insurance Department at the Ministry of Commerce and Industry (MoCI), the sector regulator. In recent years, it has become apparent that Kuwait’s insurance framework needs to be bolstered.

“There is a real need to assign the supervisory responsibilities to an independent insurance authority, as proposed in the draft law,” Mohammed Rashed Al Alban, the general counsel at Warba Insurance, told OBG.

In late 2011 the government introduced a raft of new regulations aimed at strengthening the insurance sector. Chief amongst these were new laws that mandated both higher capital requirements and retention rates across the industry. Additionally, in mid-2012 the government announced that it was looking into setting up a new independent regulatory institution to replace the MoCI’s Insurance Department, although at the time of publication this had not yet been completed. Other recently introduced legislation has focused on increasing transparency across the industry and shoring up the sector’s investment side. While these recent legislative developments bode well for the future of Kuwait’s insurance market, implementation and enforcement are seen as hurdles to the development of the industry.

By The Numbers

In 2012 Kuwait’s insurance industry as a whole brought in approximately KD249.41m ($876.95m) in GWPs, up 10.38% from KD225.96m ($794.5m) in 2011, KD205.9m ($723.97m) in 2010 and KD171.4m ($602.66m) in 2009, according to data from Capital Standards. Non-life GWPs totalled some KD166.05m ($583.85m) in 2012, which was equal to 66.6% of total GWPs for the year.

Despite an average CAGR of nearly 6% since 2008, the non-life segment has accounted for a declining percentage of the overall insurance market over the past decade, primarily due to the rapid expansion of the life segment. In 2008 the non-life sector accounted for 76% of total GWPs, while the life segment made up the remaining 24%; by 2012, as previously mentioned, non-life GWPs represented 67%, while life GWPs had increased to account for 33% of the total.

According to a late 2013 report published by PwC, an international professional services firm, in 2012 Kuwait’s insurance industry brought in 4% of total GWPs in the Middle East and North Africa region, behind the UAE and Saudi Arabia, but ahead of Oman, Bahrain, Tunisia and Jordan, for example.

According to Alpen Capital, insurance penetration in Kuwait was 0.6% in 2012, up from 0.5% in 2011. Non-life coverage had 0.5% penetration, while life policies made up the remaining 0.1%. Insurance density, which is a measure of per capita spending on coverage, was at $256.30 in 2012, up from $222.50 in 2011 and $200.40 in 2010, according to Alpen Capital.

Major Players

As of mid-2013 Kuwait was home to 35 insurance companies, up from 21 firms at the end of 2011. This jump can be largely attributed to the higher demand for takaful products – both in Kuwait and across the Gulf region – that triggered existing players to establish takaful windows to tap the demand. As of mid-2014, 11 of Kuwait’s domestic insurers operated according to sharia principles, while the rest were conventional underwriters.

Domestic firms dominate the industry, with 24 of the nation’s insurers based locally, while the remaining 11 were based abroad. The great majority of the domestic firms are relatively small-scale operations. According to data released by Alpen Capital, as of mid-2012 the five largest firms – namely GIG, KIC, AAIC, Warba Insurance and MetLife American Life Insurance – controlled around 60% of total GWPs. “Most of the small companies have been having trouble in recent years,” Yousef Abboushi, the manager of the fire and general accident department at KIC, told OBG. “The majority of these small firms only control 1-2% of the market. With this in mind, there is theoretically potential for mergers and acquisitions in the segment, but many of these firms are controlled by family-owned conglomerates, which generally prefer to remain independent.”

A substantial percentage of the revenue from premiums at many of the larger firms comes from project underwriting, and, consequently, is closely related to infrastructure and other construction work undertaken by the government and private sector entities. With this in mind, the insurance sector is set to benefit from the government’s National Development Programme (NDP), which was launched in 2010 and is currently in the early stages of implementation.

As of the end of 2013, GIG generated by far the highest revenues of any insurance operator in Kuwait, bringing in some KD157m ($552.03m) in GWPs over the course of the year, up from KD145.4m ($511.24m) in 2012, KD133.9m ($470.81m) in 2011 and KD119.8m ($421.23m) in 2010.

The company, which was established in 1962, has been the market leader in Kuwait since the early 2000s. It is owned by KIPCO (44%), a major local financial services company, and the Canadian firm Fairfax Financial Holdings (41%), with the remainder being traded on the Kuwait Stock Exchange (KSE). GIG oversees both conventional and sharia-compliant non-life lines of coverage, as well as conventional life insurance coverage. While the majority of the company’s revenues are derived from business carried out in Kuwait, GIG also has subsidiaries in Egypt, Jordan, Bahrain, Iraq and Lebanon, in addition to affiliates in the UAE and Saudi Arabia. In mid-2012 the firm carried out a branding update, bringing all of its operations under the GIG brand in an effort to raise its regional profile.

In 2013 KIC remained the second-largest underwriter in Kuwait, bringing in GWPs of about KD33.9m ($119.2m), up from roughly KD33.3m ($117.09m) in 2012, according to the company’s annual financial statement. As the first insurance company in the GCC, KIC played a key role in the wake of the 1990-91 Gulf War, underwriting a considerable number of the government’s rebuilding projects, for example. Since then KIC has been a major provider of commercial services, primarily in the non-life segment. The company is expected to benefit considerably from the numerous infrastructure and other construction initiatives undertaken by the government under the umbrella of the NDP.

AAIC, meanwhile, accumulated KD30.23m ($106.29m) in GWPs during 2013, a drop of 8% from KD32.88m ($115.61m) in 2012. The company underwrites a range of non-life and life lines, including marine and aviation insurance (which contributed 26.1% of 2013 GWPs), life and health insurance (27.2%), accident coverage that includes motor insurance (31.7%) and fire coverage (15.0%). Just over 75% of the AAIC is held publicly on the KSE, while the remaining 25% of the firm is controlled by several local corporate and private investors.

Leading Segments

According to Capital Standards, in 2012 the medical, individual and group life segments together were the largest source of revenues across the industry, bringing in just over 33.4% of total GWPs. The second-largest contributor was the motor segment, which accounted for around 32% of total premiums, followed by the fire segment (9.7%), the marine and aviation segment (7.5%), and the health segment (2%). The remaining 15% of GWPs came from a handful of smaller segments, including various financial and engineering policies, among other lines.

The motor segment, which has been the single largest non-life contributor to Kuwait’s insurance sector in recent years, has been driving growth in the industry. The segment brought in KD79.35m ($279m) in GWPs in 2012, which was equal to around 32% of total premiums, up from 30% in 2011 and 27% in 2010. As in many other markets around the world, third-party liability (TPL) motor coverage is mandatory in Kuwait. Consequently, the motor segment in general is quite competitive on price, with many smaller firms offering TPL policies at very low rates, particularly in personal lines. “The tariff for auto liability insurance was set by the Ministry of Interior some forty years ago,” Warba Insurance’s Al Alban told OBG. “However, the rate is now incommensurate with the needs of the industry and a revision would be justified.” As a result, profit margins on motor lines are low. Regardless, in recent years TPL policies have accounted for a quarter of total GWPs, while comprehensive motor lines make up another 5-10%. With car ownership rates on the rise, largely due to the country’s growing population, these figures are expected to continue to grow for the foreseeable future.

At the same time, as of early 2014 many local underwriters were in the process of boosting capacity in an effort to take advantage of an expected jump in a handful of commercial non-life lines over the course of the coming decade. The commercial engineering, construction and related segments are expected to expand markedly as a result of work carried out under the government-led NDP, which is a major component of Vision 2035, Kuwait’s long-term economic development blueprint. Many elements of the plan have been delayed since it was announced in early 2010. As of early 2014, however, a number of NDP-related initiatives were under way, including a major oil-related power initiative, a new power plant, and other utility and infrastructure developments (see Construction chapter). This bodes well for the ongoing expansion of the non-life segment. Other non-life lines that are expected to grow in the coming years include marine insurance, fire coverage and unemployment lines (see analysis).

Medical & Life Insurance

The life insurance segment includes medical, individual and group life policies, which together brought in KD83.35m ($293.07m) in GWPs in 2012, up from KD71.47m ($251.3m) in 2011, KD62.78m ($220.74m) in 2010 and KD44.9m ($157.83m) in 2009. Although nationals receive free medical care via the public health care system, expatriates – who make up more than half of Kuwait’s total population – can only hold private medical insurance while they live and work in the country. These private plans, which give policyholders access to the public health care system at state-subsidised prices, are sold and managed by a number of international brokers.

In an effort to reduce government spending on health care, the state passed legislation in 2010 aimed at forming a new public-private entity that will provide medical coverage and care at its own network of hospitals and clinics. The Kuwait Health Assurance Company (KHAC), which was launched in 2011, is in the early implementation phase. Around half of the firm will eventually be floated in an initial public offering on the KSE, while the rest will be owned by government entities (specifically the Kuwait Investment Authority and the Ministry of Health, which will control 24%) and a private sector partner (26%). In July 2013 the Arabi Group, a local investment group, announced that it had been successful in its bid for the private ownership stake in the company. The KHAC will initially provide both insurance and care for privately employed expatriates under the health maintenance organisation model that is used in the US. Eventually the firm might be expanded to include nationals and public sector employees.

Since 2009 the life underwriting business has posted annual growth of 18.5% on average, largely on the back of expansion in the takaful segment. Indeed, family takaful – a sharia-compliant life insurance substitute – has proven to be popular in Kuwait, as elsewhere in the Gulf, though it remains quite small overall. Conventional life insurance, meanwhile, represents a very small percentage of GWPs in Kuwait. This can be primarily attributed to the fact that life insurance is still considered to be non-sharia compliant by much of the population (see Islamic Financial Services chapter).

Takaful

Sharia-compliant coverage has proven to be popular in Kuwait and across the GCC since it was introduced on a widespread basis in the late 1990s. Under the takaful model, coverage is provided on the basis of shared responsibility, wherein losses and liabilities are distributed equally among policyholders. As of mid-2014 the country was home to 11 takaful providers, the oldest of which was established only in 2000.

According to data from the MoCI, the takaful segment brought in KD47.4m ($166.66m) in GWPs in 2012, up from 4.3% from the previous year. This figure was equal to around 19% of total GWPs.

According to local takaful operators, the segment is currently at a disadvantage compared to the conventional market, owing to a variety of reasons. The 2007-08 financial downturn hit Kuwait’s takaful firms particularly hard, due largely to the fact that the segment had only been operating for a few years at that point, and, consequently, had not yet had time to build up a strong financial buffer. Moreover, the lack of a dedicated legal framework for the takaful industry is considered to be a significant hurdle to the segment’s continued expansion; however, this may be changing with a new insurance law that is expected to include a separate code for takaful. “The Kuwait Insurance Federation has completed a review of the draft new insurance law and submitted its observations and comments to the MoCI,” Warba Insurance’s Al Alban told OBG. “If the law is objectively implemented it should reflect positively on the performance of the entire insurance sector.”

Outlook

Kuwait’s insurance industry faces a number of challenges. Perhaps most importantly, a considerable percentage of the country’s population remains largely unaware of the value of insurance. Other challenges include the high number of firms active in the market and the resulting intense levels of price competition. “There are several insurance companies competing within a small market share, which leads to big pressure on competition and large rate drops,” Khalid Saoud Al Hassan, the CEO of GIG, told OBG. Despite these issues, many local players are optimistic about the future. GWPs as a whole have continued to grow over the past decade, even as competition has remained tough, and the NDP is likely to provide new revenues.