Moving with the times: Government action could help the sector fulfil its potential

The insurance industry is going through a transition in the post-slowdown environment. In a business climate where investment returns are less favourable and more difficult to predict, there is a renewed focus on the fundamentals. “The market is still evolving to address economic realities that emerged after the global financial crisis,” Oommen John, the assistant general manager at Kuwait Insurance Company (KIC), told OBG. “To improve credit ratings and achieve financial stability, local firms are further diversifying their holdings, increasing cash reserves and prioritising customer service.”

UPSIDE: Firms that adapt to changing market conditions should benefit from a projected increase in insurance demand, driven by several factors. These include rapid population growth, rising per capita income levels and regulatory developments like the 2010 privatisation law, which may ultimately allow for transferring uninsured public assets to the private sector.

Insurers are also poised to benefit from the National Development Plan, an initiative that will bring over $100bn in investment on infrastructure projects. Government spending alone could produce a 10-20% growth in premium income over the next several years. Given that insuring against risk is not widespread, the sector has immense untapped potential.

According to Global Investment House, insurance penetration in Kuwait, measured as the total contribution of premium income to GDP, was only 0.48% in 2008. (Other investigating agencies put the number even lower for that year, at just under 0.3%.) These estimations are low relative to other GCC members, such as Saudi Arabia (1%) and the UAE (1.87%). In an even greater contrast, numbers from the World Bank and IMF note the average insurance penetration rate among high-income OECD countries was just over 6% in 2009.

HURDLES: The low penetration rate reflects a number of impediments to growth, one of which may be a belief that insurance is incompatible with Islam. To address this concern, several new companies have emerged offering takaful (Islamic insurance) and other sharia-compliant services. As of 2010 Kuwait had 11 licensed takaful operators, up from six in 2006. In addition, many conventional operators, such as Gulf Insurance and KIC, have opened dedicated takaful windows.

“Religious opposition to insurance is a challenge for market players,” John said. “Takaful, therefore, plays an important role in enhancing our industry’s reputation.”

Another challenge is the regulatory environment, which is based on laws passed in the 1960s. Some feel this legal framework is unable to account for the size and complexity of the modern insurance business.

There is no independent group to clarify legal ambiguities or assess operational risks. “Many in the industry are awaiting the establishment of a true supervisory authority,” Khaled Namy, the reinsurance director at Al Ahleia Insurance, told OBG. “Given the arrival of many new businesses, we need a powerful, dedicated regulator that can evaluate balance sheets, rationalise entry requirements and enforce professional standards.”

AWARENESS: Sector players must also contend with the lack of insurance awareness among the population.

While some are opposed to insurance for religious reasons, others are unaware of its advantages. “Penetration rates are low in Kuwait because of a lack of awareness,” Khaled Saoud Al Hasan, the managing director and CEO of Gulf Insurance Company, told OBG. “Moreover, Kuwaitis receive a lot of free services, which can create a mentality that is not as open to insurance products, as the need is not as clear.” What is more, many Kuwaitis are simply not interested in non-compulsory lines of insurance, such as personal liability, because they have become accustomed to a generous welfare state and the public provision of essential services.

Nonetheless, interest in insurance is steadily growing, and this is expected to continue in the coming years. “I have become more optimistic about insurance adoption among Kuwaitis,” Namy said. “Our citizens are becoming more connected to global society, and thus more interested in international business and legal practices. Going forward, the real issue is marketing and getting government, industry and religious authorities to work together to effectively promote insurance.”

FACTS & FIGURES: Government figures indicate the industry has grown at an annual rate of 9% over the past eight years. According to estimates from Business Monitor International (BMI), gross written premiums totalled KD228m ($822m) in 2010, with the non-life and life segments contributing KD175m ($631m) and KD53m ($191m), respectively. This was a major increase over the 2009 and 2008 gross premium estimates from BMI, which totalled KD185m ($667m) and KD180m ($649m), respectively. However, growth slowed in 2011, only increasing about 3% in the first half of the year.

The largest policy category in Kuwait is third-party liability insurance for motorists, a mandatory form of coverage accounting for roughly one-third of market premiums in 2008. Government-controlled prices in the motorist line range from KD18 ($65) for trucks to KD12.50 ($45) for basic sedans – price ceilings set decades ago the Kuwait Insurance Union now argues should increase. Other mandatory categories include marine and aviation insurance, respectively accounting for 13% and 11% of market premiums in 2008.

Overall, domestic insurers have an 87% market share, with foreign operators accounting for remainder. The sector is led by four national firms that account for 70% of premiums: Gulf Insurance Company, KIC, Warba Insurance Company and Al Ahleia Insurance Company.

GULF INSURANCE: With a market share of 25%, Gulf Insurance holds the dominant industry position. The controlling stake in the firm is owned by Kuwait Projects Company (KIPCO), which has a 43% share, followed by Canada-based Fairfax Financial Holding with 41%. Fairfax acquired most of its stake in late 2010 after buying 39.2% of Gulf Insurance from KIPCO for $208.6m via a block sale on the Kuwait Stock Exchange.

Gulf Insurance offers both life and non-life services. The company also provides general and family takaful products, and has a new medical line covering expenses up to KD10,000 ($36,000) per individual per year. In addition, it has a strong international presence, with 50 branches across the Middle East and North Africa. In 2010 the company solidified its global network by increasing its stake in Jordan’s Arab Orient Insurance Company to 88.7%. In 2011 Gulf also acquired a 59.5% share in Egyptian Takaful Insurance Company.

Like many insurers, Gulf Insurance suffered investment losses during the global financial crisis of 2008. Nevertheless, the company’s core underwriting operations remained strong during the downturn. In 2008 Gulf Insurance wrote KD86.6m ($312m) in gross premiums, a 17% increase over 2007. In 2009 gross written premiums rose further to KD97m ($350m). Gross written premiums came out to KD103m ($371m) in the first nine months of 2011, a sizeable increase on the KD90.7m ($327m) recorded over the same period in 2010. In a reflection of the sector’s growing sophistication, Gulf Insurance has created a special investment unit charged with portfolio diversification. “As our group has expanded recently, we need a dedicated department for investment,” Hatem Selim, Gulf Insurance’s chief financial officer, told reporters. “Our strategy is to continue to diversify our portfolio further, eliminating the volatility of equities and trying to focus more on fixed-income instruments.”

Such measures have been welcomed by international ratings agencies. In 2011 Standard & Poor’s upgraded the company’s outlook from stable to positive, while maintaining its BBB+ credit rating. Also in 2011, AM Best Europe assigned Gulf Insurance a rating of A-.

KIC: The largest non-life provider in the country is KIC, which was established in 1960 as the first insurer on the Arabian peninsula. Like Gulf Insurance, KIC recently earned a vote of confidence from the international business community. In 2010 Moody’s assigned the company a stable outlook and a Baa1 financial strength rating, citing the firm’s strong diversification and capital position relative to other market players. Moreover, Moody’s noted KIC is well-placed to secure major contracts under the National Development Plan. “The stable rating outlook reflects KIC’s strong position in the Kuwaiti insurance market, which should enable it to take advantage of the government’s extensive economic stimulus packages to be implemented over the next four years,” KIC’s vice-president, Paul Oates, said when the Moody’s report was made public.

Motor insurance accounts for about 30% of KIC’s business, followed by general accident cover (19%), life (17%), engineering (13%) and marine aviation (12%). The company also specialises in oil, power, water and construction insurance, as well as offering a wide range of professional indemnity services. Over the years KIC has acquired several international clients, including firms like Siemens, Motorola, Hyundai and Mitsubishi.

After losing KD6.24m ($22.5m) in 2009, KIC rebounded, posting profits of KD3.9m ($14m) in 2010. Over this period, contributions to company assets from shareholders went from KD38.6m ($139m) to KD53.2m ($192m), a 38% increase. In 2010 earnings per share amounted to KD20.23 ($73), compared to a loss per share of KD32.15 ($116) recorded the previous year.

WARBA: Since opening in 1976 Warba Insurance has expanded into a wide range of areas, and has risen to global prominence by forming numerous international alliances, including partnerships with State Life Insurance Corporation of Pakistan, InterGlobal of the UK and Generali of Italy. In addition, the company caters to foreign clientele in Kuwait by offering micro-insurance policies, which offer basic life and disability coverage for annual premiums capped at KD10 ($36). These highly affordable offerings target members of the country’s low-income foreign worker community.

In May 2010 Warba bolstered its reputation for service innovation by forming a technology partnership with Microsoft Kuwait. Under the alliance, Warba will begin using a variety of Microsoft IT solutions to improve customer service and streamline business operations. In 2010 Warba Insurance recorded net profits of KD2.58m ($9.3m), up 54.3% on the previous year. Also in 2010 shareholders’ equity increased by 19.1% to KD47.8m ($172m), and gross premiums rose by 28.4% to KD25.7m ($93m). In the first half of 2011 net profits were KD1.37m ($5m), while shareholder equity was reported as KD46.3m ($167m).

REINSURANCE: The country’s main reinsurer is Kuwait Reinsurance. Since opening in 1972, Kuwait Reinsurance has geographically diversified operations, having established a branch in Malaysia in 2006 to target East Asian customers. The largest shareholder is US-based Transatlantic Insurance, which bought a 40% stake in the company in 2000 for $30m.

In 2010 Kuwait Reinsurance received a financial strength rating of A- (Excellent) from AM Best. The agency cited measures taken to strengthen capitalisation and reduce risk by shifting from equities to liquid financial instruments. In 2010 earned gross written premiums were $112m, up from $83m in 2009. The company’s profitability also surged during this period, from KD914,000 ($3.3m) to KD2m ($7.2m), an increase of 117%. Profits fell to KD61,000 ($793m) for the first nine months of 2011, due to a significant increase in the number of claims the reinsurer needed to pay out.

TAKAFUL: Kuwait has a high concentration of takaful companies, which comply with sharia law by allowing shareholders and policyholders to divide both profits and liabilities within a community pooling system. According to estimates from Standard & Poor’s, takaful operators in Kuwait accounted for 14% of gross premiums in 2008, a share that may reach up to 50% by 2050, as part of a worldwide growth trend.

OPERATORS: The leading takaful operator in Kuwait is First Takaful Insurance Company, which opened in 2000 as the industry’s first Islamic provider. In 2009 First Takaful had a 23% share of the local takaful market and a BBB- credit rating from Standard & Poor’s. By June 2011, however, the company’s rating had been changed to BB- due to weakening profitability and capitalisation.

Gulf Takaful, which holds the third position in the takaful market with a 15% share of premiums, received a more positive assessment in 2011 from the ratings agencies. In mid-June Gulf Takaful was assigned a Ba1 financial strength rating by Moody’s. In its assessment, Moody’s cited the company’s strong product diversification, broad shareholder base and experienced management team. Nonetheless, Gulf Takaful recorded a net loss of KD700,000 ($2.52m) in 2010, improving on a net loss of KD2.4m ($8.65m) in 2009. For the first nine months of 2011, the firm recorded a net loss of KD169,000 ($609,000), a sign of further improvements.

LEGAL ENVIRONMENT: The sector is regulated under the 1961 National Insurance Law, enforced by the Ministry of Commerce and Industry. Critics argue this legal framework needs to be revised and updated, as barriers to business entry are too low.

Currently, new firms offering life or non-life policies must have capital reserves meeting or exceeding KD5m ($18m), or KD10m ($36m) if they plan to offer both services. For reinsurers, the capital reserve requirement is KD15m ($54m). These criteria have supported rapid growth over the past decade. Given the small population, a large proportion of whom are foreign labourers with limited disposable income, this market could be seen as overcrowded. Business growth has made it more challenging for the industry to present a united front when it comes to lobbying for reform.

Others say that the regulatory environment is too restrictive. Under the insurance law, local assets and construction projects can only be insured by firms licensed in Kuwait. “The government protects Kuwaiti companies,” Sami Bekhazi, the general manager of the Fenchurch Faris office in Kuwait, said in early 2011. “If you embark on an infrastructure project, it has to be insured with a state company. It is not a free market.”

OUTLOOK: Going forward, insurance firms will continue to refine their strategies to cope with evolving economic conditions, attract customers and ensure their global ratings. Insurers should benefit from substantial government support under the auspices of the National Development Plan.

With a wealthy and expanding population, as well as low insurance penetration, the market has strong potential. For this to be realised, however, legal changes may be required. Introducing more compulsory coverage lines and partnerships with industry promoting awareness amongst the public would also help support growth.