"Kuwait's insurance sector benefitting from state investment and regulatory changes "

Like much of Kuwait’s financial services industry, the insurance sector has posted solid expansion in recent years on the back of growth in a handful of key areas, including takaful (sharia-compliant insurance) and other non-life segments. In 2014 Kuwait’s insurance sector as a whole brought in an estimated KD303m ($1.04bn) in gross written premiums (GWPs), up 34% from 2011, according to data from the Middle East Insurance Review (MEIR), a Singapore-based firm. Statistics from Kuwait Financial Centre (Markaz) show that between 2006 and 2012 the industry posted a compound annual growth rate of 7.9%.

A Big Boost

The insurance sector has been a major beneficiary of a series of large-scale capital investments made by the government in recent years (see Economy chapter), and a raft of similar ongoing and new infrastructure projects bode well for future expansion. “We have seen 5-7% growth in the market in 2014 and good growth in the first part of 2015 as well,” Mohammed Rashed Al Alban, general counsel at Warba Insurance, a local underwriter, told OBG in February 2015. “Furthermore, I have to be optimistic about the future – the Kuwaiti insurance market has many options for growth.”

At the same time, local insurance providers face a number of pressing challenges if they are to improve market penetration. While coverage uptake has risen rapidly in recent years, by the end of 2013 insurance penetration – a measure of GWPs as a percentage of GDP – was estimated at 0.5%, according to Swiss Re, a Switzerland-based reinsurance company. This was the lowest among all six GCC member states. Encouraging citizens and expatriates alike to purchase private insurance is a key challenge in Kuwait, where the federal government provides free or heavily subsidised coverage in most areas.

In order to attract new customers, local underwriters have had to repeatedly slash their premiums, which has contributed to declining profits at many firms. Additionally, the sheer number of insurance providers currently active in Kuwait – there were 32 as of the end of 2013 – has given rise to intense competition on price, driving rates down even further. Despite these and other issues, however, many local players expect to see continued growth for the foreseeable future.

“Given what’s happening with oil prices, I expect to see some new pricing reforms in the economy as a whole,” said Al Alban. “This could potentially create new momentum in the uptake of private insurance for many years to come.”

Beginnings

Kuwait is home to one of the oldest insurance industries in the Gulf region. The Kuwait Insurance Company (KIC), one of the nation’s largest firms in terms of GWPs, was established in 1960, making it one year older than the modern state of Kuwait and the oldest underwriter in the GCC. In 1962 two other insurance firms opened for business in the country, namely Al Ahleia Insurance Company (AAIC) and the Gulf Insurance Group (GIG).

These three companies competed with each other – primarily for corporate contracts – until the mid-1970s, when two additional firms were established: the Bahrain Kuwait Insurance Company in 1975 and Warba Insurance a year later, in 1976. Together these five players made up Kuwait’s entire insurance industry until the late 1990s.

At the turn of the century, however, rising international oil prices, high rates of non-oil economic growth and relatively low regional barriers to entry contributed to an uptick in activity in Kuwait’s insurance industry. While some of the new players that came to the market during this period were set up by foreign underwriters, the majority were launched by optimistic local financial services firms and even family-owned conglomerates looking to engage in a potentially lucrative new line of business.

By the mid-2000s more than 30 insurance companies were up and running in the country. Steadily increasing price competition forced some firms to invest aggressively during this period. Like Kuwait’s investment companies, local insurers bought up large amounts of equities and property holdings, many of which were subsequently deemed to be high-risk. Consequently, a handful of Kuwait’s insurers suffered losses during the 2007-08 international economic downturn, though it is important to note that the sector as a whole performed relatively well during this period.

Oversight & Regulation

Introduced in 1961, Kuwait’s Insurance Law No. 24 was the first piece of formal insurance regulation in the GCC. The law is still in place today, though it has been amended a number of times since being enacted. The sector is overseen by the Insurance Department at the Ministry of Commerce and Industry (MoCI), which has a mandate to enforce Law No. 24 and ensure the long-term stability of the industry.

According to the international ratings firm A.M. Best, since at least 2011 the government has been discussing replacing Law No. 24 and setting up an independent regulator for the sector. A new draft insurance law, in circulation since 2012, includes a provision for the new insurance authority and would mandate updating the country’s insurance law in line with international best practice. “The new law was originally expected to come into effect on January 1, 2015, but in late 2014 it was postponed by 18 months,” Al Alban told OBG.

Keeping Up with Change

 The most recent amendments to Law No. 24, which were put in place in 2011, resulted in a number of important changes, including a compulsory increase in capital holding requirements for all firms operating in the sector. Additional legislation enacted the same year introduced a requirement that insurance firms retain more risk than has been standard in the industry thus far. Many local companies currently pass on a considerable percentage of their risk (and consequently premiums) to reinsurers elsewhere in the Middle East or further afield. In response to this situation, since 2011 the MoCI has worked to encourage local underwriters to shore up their risk assessment capacity, which has the potential to lead to higher rates of premium retention throughout the industry.

A new companies law, introduced in 2012, was rolled out to facilitate more foreign investment into Kuwait and with an eye towards encouraging local entrepreneurs to set up new firms. As such, it streamlined the business registration process, which had previously been particularly time consuming and expensive. Now registering a new company in Kuwait takes place at a special department established at the MoCI specifically for this purpose. The law has the potential to result in increased competition in the insurance industry (among others), though given the high degree of price competition already in place this has yet to play out.

Most recently, in April 2015 the MoCI issued new rules for foreign insurers operating in Kuwait. Foreign players make up around one-third of the market, though these companies generated just 11% of total GWPs in 2014, according to MEIR data. Under the new legislation, non-Kuwaiti insurance firms have been exempted from a previous requirement that they establish a local stockholding company with capital of KD5m ($17.23m) for non-life and life companies and KD15m ($51.7m) for reinsurance firms. Instead, foreign insurance businesses must prove on an annual basis that they are registered and licensed in their country of origin, submit annual financial information to the Insurance Department at the MoCI, publish annual profit and loss reports in local newspapers (in both Arabic and English), and report top-level personnel and other changes to the ministry and relevant authorities.

By the Numbers

Data on Kuwait’s insurance sector is somewhat hard to come by and this remains a key challenge for the industry moving forward. However, based on estimates compiled by a handful of firms and media organisations, the country has seen considerable premium growth in recent years. As previously mentioned, in 2014 the industry brought in GWPs worth KD303m ($1.04bn), up 9.3% from KD277m ($954.3m) in 2013, KD253m ($871.6m) in 2012 and KD226m ($778.6m) in 2011, according to data from MEIR and Swiss Re. The majority of this growth has taken place among domestic firms, which accounted for 1.5m, or 92%, of the 1.63m new policies issued in Kuwait in 2014, and KD270m ($930.2m), or 89%, of total GWPs over the course of the year, according to MEIR. Similarly, local firms paid out compensation of KD157.8m ($543.65m) in 2014, which was equal to around 88% of a total KD179.3m ($617.7m) in claims paid out by the whole industry in the same period. This latter figure is up 15.4% from the previous year, which points to steadily increasing growth in domestic underwriting.

Increasing Market Reach 

With insurance penetration at 0.5% at the end of 2013, Kuwait has one of the lowest penetration rates not only in the GCC region, but also throughout the Middle East. Around three-fourths of total GWPs derived from non-life business lines, including motor, marine, aviation and construction coverage, while the remainder stemmed from the medical and life segments.

In terms of insurance density, which is a measure of GWPs on a per capita basis, Swiss Re ranked Kuwait 51st in the world in 2013, just above Panama and below Lebanon. The nation’s insurance density was $323 per inhabitant at the end of 2013. Non-life business accounted for $261 of this total, while life product lines made up the remaining $62.

Major Players

Kuwait’s insurance market is heavily concentrated with a handful of key players. As of the end of 2013, the top five insurers reportedly brought in nearly two-thirds of total GWPs. As of early 2014 Kuwait’s leading insurance companies included GIG, AAIC, KIC, Warba Insurance and MetLife American Life Insurance (ALICO). These five companies control around 60% of total revenues, with the remaining 40% of the market divided relatively evenly among other players. The remaining 20-plus firms generally control only a small percentage of the market, at 1-2% on average. Many of Kuwait’s domestic insurance firms are part of family-owned conglomerates and, as such, are opposed to mergers or acquisitions, though the market is widely expected to see some action in this area in the coming years.

In 2014 GIG brought in KD12m ($41.3m) in profits, up 17.6% from the previous year and bringing the company’s total assets to KD347.2m ($1.2bn), making it the single largest insurer in Kuwait by a considerable degree. In the same period, GIG issued GWPs worth KD173.6m ($598.1m), up 11% (or KD16.6m, $57.2m) from the previous year. The firm has been Kuwait’s largest underwriter since the early 2000s and today is among the largest in the Middle East. Launched in 1962, GIG is owned by KIPCO, a leading local financial services firm, which holds 44%, and Fairfax Financial Holdings, a Canadian company that has a 41% stake. The remaining 15% of GIG is listed on the Kuwait Stock Exchange (KSE), where it is the largest listed insurance company by overall capitalisation (see Capital Markets chapter). The company deals in non-life and life lines, as well as both Islamic and conventional products.

Branching Out

GIG earns a majority of revenues from its Kuwaiti operations. It owns and operates a number of domestic companies, including the Gulf Insurance and Reinsurance Company, which was recently restructured from a life model to operate as a composite firm. Additionally, GIG is active in a range of other markets in the region. It owns controlling shares in leading insurance companies in Bahrain (the Bahrain Kuwait Insurance Company), Jordan (the Arab Orient Insurance Company) and Egypt (the Al Misr Insurance Group). In 2014 the firm boosted its stake in a handful of foreign firms, including Arab Orient to 90.2%, Syrian Kuwaiti Insurance Company to 54.3%, and the Egyptian Takaful Property and Liability Company to 25%. Additionally, in 2014 it established a new underwriter in Algeria, the Algerian Gulf Life Insurance Company, with capital of $12.7m and a stake of 42.5%. The firm is expected to begin operations before end-2015. “We are in the process of entering Algeria to explore their insurance market both in life and non-life,” Khalid Saoud Al Hassan, GIG’s group CEO, said to local media in December 2014. “Currently we have 10 subsidiaries and four affiliate companies, and a strong presence in Kuwait and neighbouring countries.”

Big Name

AAIC, which was also established in 1962, overtook KIC in 2014 to become the second-largest insurance company in Kuwait by the end of the year. The firm reported total assets of KD163.3m ($562.6m) by the end of 2014, up from KD159.3m ($548.8m) at the end of 2013, despite net profits declining over the same period, from KD9.5m ($32.7m) in 2013 to KD8.5m ($29.3m) in 2014. AAIC offers a range of insurance and reinsurance lines, including motor, life, medical, marine, aviation, fire and a variety of specialised non-life policies. Around 25% of the firm is held by local corporate and private investors, while the rest is listed on the KSE.

KIC was the third-largest insurer by assets in the country as of the end of 2014, reporting total GWPs of KD35.6m ($122.65m), up from KD33.9m ($116.8m) in 2013 and KD33.3m ($114.7m) in 2012, according to the company’s annual financial report. The company had total assets of KD162.1m ($558.5m) as of the end of 2014, up from KD134.8m ($464.4m) at the end of the previous year.

According to international credit ratings agency Moody’s, which affirmed KIC’s insurance financial strength rating of “Baa1” with a stable outlook in May 2014, the company is the largest non-life underwriter in Kuwait in terms of direct premium revenues. KIC covers a wide range of non-life business lines, including fire, accident, engineering, liabilities, marine, aviation, motor, professional indemnity, medical malpractice and various financial institution risk classes. The company also has a small but growing life and medical insurance business. The rating reflects the firm’s diversification and capitalisation.

Key Segments

A large percentage of revenues at most of the leading insurance companies in Kuwait comes from business underwriting, including construction activity and the country’s sizeable financial services sector (see Banking chapter). While recent data organised by product line was unavailable at time of publication, according to a mid-2013 report published by Capital Standards, a local ratings agency, at the end of 2012 the medical individual and group life segments (taken together) were the largest GWP earners, with 33.4% of total premiums, while the motor segment was the second-largest, with 32%. Other key contributing segments at the time included fire coverage (9.7% of total GWPs) and marine and aviation insurance (7.5%).

The motor segment has been a major source of revenue for Kuwaiti insurers for many years. Thirdparty liability motor insurance is compulsory, and Kuwait, like many other countries in the Gulf region, is a nation of automobile owners and enthusiasts. Given these factors, since the early 2000s motor policies have seen a steady decline in price and, subsequently, profit margins, as new insurance companies entered the market. Today low prices as a result of continued price competition are widely considered to be a key challenge in the industry.

A number of other niche insurance product lines have the potential to expand. The government’s renewal of the long-term Kuwait Development Plan in February 2015 is widely expected to lead to new opportunities in the construction and commercial engineering segments, for example (see Economy chapter). Similarly, the country is currently considerably undersupplied in terms of housing, which is expected to be a key issue as the population continues to expand in the coming years (see Real Estate chapter). This has positive implications for mortgage- and credit-related insurance products.

“There is no practical way to shorten the waiting time for housing right now,” Al Alban of Warba Insurance told OBG. “As a lender, either a bank or the government, you want to protect your loan, so you might require borrowers to buy insurance.”

Takaful

The takaful segment has been active in Kuwait since the early 1990s, making it one of the oldest sharia-compliant industries in the region. In 2012, the most recent year for which data was available at time of publication, the country’s 11 Islamic insurance companies brought in premiums that were equal to around 18.7% of total GWPs, according to data from the MoCI.

Sharia-compliant insurance products are based on the notion of mutuality and shared responsibility, whereby excess profits and liabilities are distributed among policyholders. Takaful firms tend to have higher operating costs, as they must employ extra staff to manage the complex risk-sharing arrangements that underpin most transactions, as well as retain the expertise of sharia scholars. In Kuwait, unlike some other countries in the Gulf, the takaful segment does not have its own set of regulations by which it must abide, a fact that many local players cite as a disadvantage given their operating costs (see Islamic Financial Services chapter).

“Takaful insurance is still an emerging business in Kuwait and it will take some years to develop this type of business in this small market,” said Al Hassan, GIG’s group CEO. “However, the increasing need for takaful in both life and casualty insurance – in addition to the new Islamic finance market – means there is potential for growth.”

Reinsurance

While various local insurance firms also provide small-scale reinsurance services of various sorts, just one firm – Kuwait Reinsurance (Kuwait Re) – operates solely as a reinsurer. In September 2013 Al Fajer Retakaful, a domestic Islamic reinsurance firm, transferred its entire portfolio to a wholly owned subsidiary in the UAE, Emirates Retakaful, effectively ceasing operations in Kuwait. Kuwait Re officially became the only reinsurer in the country in December of the same year when Emirates Retakaful was incorporated with $120m of share capital and licensed by the Dubai Financial Services Authority.

Kuwait Re has benefitted from Al Fajer’s exit, not to mention from steadily rising demand for reinsurance throughout the region in recent years. As of the end of 2013 the firm’s risk portfolio was spread across more than 90 countries worldwide, according to A.M. Best, including countries throughout the Middle East and North Africa, Asia, and Central and Eastern Europe. In 2013, the most recent year for which data was available, the firm reported pre-tax profits of $6.8m, down from $9.8m in 2012.

Furthermore, in August 2015 AAIC offered to increase its shareholding in the company from around 30% to 92%, a move which was subsequently approved by the majority of Kuwait Re’s shareholders. The acquisition, which will be funded by a mix of loans and internal funds, follows AAIC’s move to raise its stake above the 30% threshold, which prompted a Capital Markets Authority rule that required it to make an offer for the remaining shares.

Outlook

Kuwait’s insurance industry currently faces various challenges to future growth. One key issue is the lack of a comprehensive source of upto-date insurance statistics. While the new legislation introduced by the MoCI since 2011 seeks to address this issue by requiring companies to improve transparency and reporting standards, implementation has so far been somewhat piecemeal.

However, given Kuwait’s long-term plans for economic development on the back of new transport infrastructure projects, a number of areas show promise for insurance expansion going forward, such as housing, among others. While life coverage accounted for less than 20% of total premiums on a per capita basis in 2013, according to data from Swiss Re, increasing awareness about the value of insurance among the population points to continued growth in this area in particular. Taking these and other ongoing developments into account, for many local players the future holds much potential.