In 2017 and early 2018 Kuwait’s insurance sector enjoyed growth on the strength of steadily rising premium, regulatory tweaks and forays by individual underwriters into a number of new market segments. Nonetheless, according to many stakeholders, the obsolescence of the country’s insurance law – which dates back to 1961, when Kuwait declared independence – remains a major hurdle to the sector’s future growth. While stop-gap improvements have been made on the legal front in fits and starts, the likelihood of measurable change seemed to grow markedly in April 2018, when Abdullah Al Awais, the assistant undersecretary at the Ministry of Commerce and Industry (MoCI), announced to local media that “The ministry is currently working on studying and evaluating a number of options, including a draft law regulating the insurance market”.
Various iterations of a new insurance law have been circulating among government bodies since at least 2012. The central amendment proposed by these drafts is the establishment of an independent body charged with oversight and enforcement responsibilities, which many local insurers believe is needed to ensure the sector’s stability profitability over the long-term. In the meantime, local insurance providers remain subject to a slue of pressures, including low barriers to competitors’ market entry, price undercutting from these rivals, and weak consumer demand across different segments.
Indeed, despite discernible growth in 2016, the industry’s gross written premium (GWP) was equivalent to just 1% of GDP, well below the average penetration rates of 1.9% among GCC members, 3.2% in emerging markets and 6.3% globally, owing to various challenging market dynamics. Even so, local operators remain optimistic about the sector’s potential, provided that reforms – particularly the inauguration of an autonomous oversight body – move from draft to bill to law in the years to come.
Origins in Independence
While Kuwait appears to lag behind many of its GCC neighbours in terms of insurance market development, its firms have been major providers of underwriting services in the Gulf since the industry’s emergence in the region in the 1960s and 1970s. The Kuwait Insurance Company (KIC), which was founded by Amiri decree in 1960 as the first such firm, is widely understood to have pioneered a range of now-standard local practices.
Shortly thereafter, the promulgation of Law No. 24 of 1961 provided the nascent sector with a scaffold of growth-supportive rules and regulations. The bill, which has been amended numerous times since its introduction, applies to every company providing coverage in Kuwait, regardless of domestic or foreign registration status. Local insurers must also abide by the terms of the Civil Code, laid down in Decree Law No. 67 of 1980, which covers the general principles of insurance contracting, including the rights and responsibilities of contracted parties.
Three Eras of Growth
In the decade and a half following the passage of the 1961 law a handful of new underwriters were established, including a quintet of businesses that today control more than half of the domestic market share. Four Kuwaiti firms – KIC; Bahrain Kuwait Insurance Company (BKIC), founded in 1972; Al Ahleia Insurance Company (AAIC), incorporated in 1962; and Warba Insurance Company (WIC), launched in 1976 – along with the Gulf Insurance Group (GIG), which was established in 1962 and operates across the region, together constituted the entire insurance market, until the economic boom of the late 1990s and early 2000s saw the establishment of a raft of new underwriters.
The oil-fuelled speculation of the mid-1970s and the 1977 crash of the Kuwait Stock Exchange (KSE) decimated much of the country’s financial infrastructure and threatened even its most prominent underwriters with dissolution (see Capital Markets chapter). Led by the Kuwait Investment Authority, which ranks today as the world’s oldest and fourth-largest sovereign wealth fund, the state bailed out several critically illiquid businesses. This intervention ushered in a new era of commercial investment by state-owned institutions, with OECD data showing that, even as late as 1993, the KIA owned more than 80% of GIG, nearly 60% of Warba, 20% of AAIC and almost 10% of KIC.
While the 1990-91 Gulf War severely disrupted the insurance market, the conflict emphasised the importance of insuring assets, particularly against political risk. By the mid-1990s, the state-led recovery effort had generated considerable growth in the local economy. Brokered by new found stability, local insurers enjoyed new and generous streams of inward investment, prompting the KIA to sell of most of its stakes in local policy writers, leaving the industry largely under private control.
At the same time, in line with exponential growth in the local economy, a cohort of new underwriting firms gained footing in the market by exploiting several advantageous conditions, including the low cost of local credit, relatively low capital requirements and the KSE’s high rates of return. By 2015 Kuwait was home to 23 domestic and 10 foreign insurance companies, many of which were mainly engaged in managing active investment portfolios, despite purporting underwriting to be their core business.
This influx of new entrants in the late 1990s and early 2000s is at the heart of many of the challenges currently facing local underwriters. The ease of credit access and the appeal of earning revenues on the capital market contributed to a race to the bottom on premium pricing, as rival firms sought to undermine their competitors on price. This has made it a challenge for some firms to turn a profit on their core underwriting business, as investment returns have become central components of many operating budgets. Some of the crowding that is driving down premium revenues and dampening growth can be attributed to an excess of foreign firms. Under one of the lasting provisions encoded in the 1961 insurance law, investors are allowed, irrespective of their geographic registrations, to own 100% of a Kuwaiti company’s equity, which has served to expose local firms to pressure from foreign capital. As Anwar F Al Sabej, CEO of Warba Insurance, told OBG, “The difficulty is seeking to balance the top and bottom lines while constantly investing in improving internal processes, in addition to raising insurance awareness in the country and the region”. A lack of reliable technical revenues has stymied innovations in design and marketing, meaning that some firms, including a few of the foremost providers, are stuck at their business volumes. Moreover, despite the multiplication of service providers, the sector is still heavily weighted at the top end, where a few large, carefully managed underwriters have remained in charge of a significant percentage of the overall market. As of 2016, the five largest players – namely KIA, GIG, AAIC, Warba and BKIC – together accounted for nearly three fifths of total sector GWP.
Growth is further encumbered by the knock-on effects of three cultural idiosyncrasies that may be, at best, indirectly addressed by way of legal amendments. First, many local insurers are family-owned businesses, which has negative impacts on their management generally and the potential for mergers and acquisitions more narrowly. Second, as the rate of penetration suggests, insurance in all of its varieties is yet to catch on across much of Kuwait, across categories of individuals, households, small and medium-sized enterprises, and corporations. This is a function, at least in part, of the depth and breadth of the social safety net supplied by the state, which provides a bevy of services to citizens at heavily or entirely subsidised prices, including free medical treatment in hospitals and clinics. Given this public dispersal of risk and the generosity of the resources at their disposal in the event of emergencies, many Kuwaitis – individuals and businesses alike – do not feel the compelled to privately shoulder the burden of hedging against risk. “Kuwaitis have access to interest-free loans, so many people do not feel the need to acquire home insurance,” Joseph Bejjani, the general manager of AIG in Kuwait, told OBG in September 2017. “Additionally, life insurance presents a range of religious challenges to locals, and so many do not feel the need to buy it.”
Oversight & Regulation
Cultural issues aside, the lack of a dedicated oversight authority is the primary hurdle to future development, according to most local players. “The insurance sector is non-controlled, and there is no regulator,” said Youssef Ghali, the CEO of the National Takaful Insurance Company (NTIC), in October 2017. “The MoCI sets the protocol for regulations, but the ministry has no audit power, which means that each company is effectively unregulated”. This situation has led to year-on-year deterioration of reserves and, as a result, market stability, as increasing numbers of firms cut premium rates to attract new business.
While questions about the specifics of reform are still pending, the MoCI and other public offices have enacted in recent years a handful of important updates to update the extant insurance law, in lieu of a complete overhaul. For instance, in 2011, ministerial resolution No. 511 established new minimum capital requirements for underwriters: composite, life and non-life insurance firms are required to maintain reserves of KD5m ($16.6m), while reinsurance groups must keep at least KD15m ($49.7m) on hand. Meanwhile, Law No. 113 of 2015 established the Kuwait Direct Investment Promotion Authority (KDIPA) as a means to facilitate inward investment. A modifier, the Council of Ministers Decision No. 75 of 2015, forbid the issuance of licences in listed sectors, including hydrocarbon extraction, fertiliser manufacture and public defence. As of mid-2018, insurance remains exempt, allowing foreign insurance providers to utilise the KDIPA as a one-stop shop for establishing licensed branches, opening representative offices, and managing Kuwaiti entities in which they may own up to 100% of the equity.
Finally, in November 2017, the Ministry of Health and the Health Assurance Hospitals Company, a public-private venture set up to handle primary and secondary care for expatriates living in Kuwait, announced that the annual health insurance fee charged to foreign residents living in the country will increase by more than two-fold, from KD50 ($431) to KD130 ($165.77), as one among several measures intended to reduce the size of the foreign workforce.
Despite the downward pressure exerted by competition on premium prices, data from Alpen Capital estimates that GWP has increased considerably in recent years, from $820m in 2011 to $1.12bn in 2016. While year-over-year growth during the period was uneven – premium intake surged in 2014, dipped in 2015 and ticked up again in 2016 – the compound annual growth rate (CAGR) was strong, at 6.4%. Moreover, though that figure lagged considerably behind the GCC-wide CAGR of 12.1%, Alpen expects local premium CAGR to increase by 9% over the period 2016-21, on the strength of demographic growth, higher disposable income and boosted infrastructure spending.
In 2016, 83.9% of GWP was derived from nonlife segments, predominantly motor and health insurance, owing in part to coverage mandates for both services. The largest portion of the market was comprised by third-party liability (TPL) policies for motor vehicles, which are required for all automobiles on the road. As is the case throughout the region, price competition has been intense, with some underwriters selling policies at a loss in their efforts to preserve market share.
Recently, some insurers have begun reducing motor TPL’s share in their portfolios, in favour of more profitable segments like marine and other non-TPL motor policies. Provider interest in health services, however, is trending the opposite way, as higher fees assessed to expatriate health plans, coupled with expatriates’ legal obligation to obtain insurance coverage, could significantly increase the segment’s density, or GWP per capita.
In 2016 the life segment accounted for 16.4% of GWP. While life policies have long had a low market share and a slow growth vis-à-vis other policies, its year-over-year gains are more stable than those of the non-life segment. The development of sharia-compliant, family programmes may provide the means to significantly deepen the market penetration of life insurance in the country, as these schema comply fully with those principles of sharia that pertain to interest, gambling and uncertainty.
At the time of publication, 23 local players and 10 foreign insurers were active in Kuwait, with five of these firms – KIA, KRC, AAIC, Warba and GIG – accounting for 56% of overall GWP in 2016. Foremost among those players is GIG, which, according to local media reports, turned net profits of KD10.3m ($34.2m) in 2017, down roughly 14% from KD12m ($39.8m) in 2016. This decline came despite a 43% increase in GWP over the same period, from KD213.2 ($706.8m) in 2016 to KD304.8m ($1bn) at the end of 2017. The total volume of the company’s assets, meanwhile, jumped by nearly 32%, equal to around KD118.2m ($391.9m), to reach KD494.1m ($1.6bn) at the end of 2017. This rapid asset growth, as well as the disparity between shrinking profits and a growing premium base, can be attributed in part to GIG’s acquisition of AIG Sigorta AS, a Turkey-based non-life insurance company. GIG paid $47.8m for the Turkish firm, which, in turn, pulled in GWPs of $86.8m in 2016, according to Alpen Capital. By comparison, AAIC took in GWP of $202.3m, KIC earned GWP of $120.9m, Warba earned GWP of $115.2m, and KRC brought in GWP of $111.6m.
Room for Growth
Takaful (Islamic insurance) is a relatively new product in Kuwait, with the establishment of First Takaful in 2000 marking the inaugural foray into a burgeoning global market for such services. Interest in supplying such services surged in the latter half of that decade, evinced by the clutch of launches of new firms offering exclusively takaful products, as well as new products from older companies looking to diversify their holdings. Some among them have posted significant revenue growth: First Takaful brought in KD1.2m ($4m) in 2017, up 11.6% from KD1.08m ($3.6m) in 2016, providing some evidence of a local appetite for these culturally tailored insurance vehicles. This subsector growth, though, has not yet been accompanied by a shift in the legal terrain. Neither the Insurance law of 1961 nor its amendments provides for any nationwide, sharia-compliant regulatory framework, and service across the takaful market remains uneven. That said, the MoCI’s reforming committee has already taken the establishment of such a framework and the standardisation it would confer into consideration in the draft of the new insurance law.
Two ICT innovations may help to further develop the insurance market. According to some local players, there is considerable potential for the development of policies covering cybercrime and digital identity theft. Joseph Bejjani, AIG-Kuwait’s general manager, told OBG, “Cyber insurance, which is an important growth segment globally, has also grown rapidly in Kuwait.” In 2018, meanwhile, on the strength of recent investment in e-government services, the state’s Central Agency for Information Technology announced the launch of a website meant to streamline registration, renewal and other services related to the provision of health care.
In 2016 Kuwait claimed the lowest rate of insurance density among GCC states, at $263.9, compared with $487.34 across the region. Given its relatively small size, it might come as no surprise that Kuwait’s insurers cede a considerable amount of insured risks – and so premium revenues – to the reinsurance industry. In 2016, for instance, the cession rate – or the portion of insurer obligations transferred to a reinsurer – for non-life policies in Kuwait was at around 44%, according to data published by Qatar Financial Centre, compared to a MENA-wide average of 29%. The fact that capital requirements for reinsurers are three greater than those imposed on other underwriters has narrowed the market relative to the insurance market as a whole, and the dividends of this risk transfer accrue to a few large firms, such as Gulf Insurance and Reinsurance Company – the local subsidiary of GIG – and Kuwait Re. The latter, which is the country’s oldest reinsurer and a current subsidiary of AAIC, undertook a major portfolio realignment in 2017, resulting in a 57% jump in net profits that year.
The future of Kuwait’s insurance market largely depends on the decisions of the MoCI’s deliberating committee, which, at the time of publication, was still amending the draft law that will potentially replace the insurance law of 1961. Critically, that proposal includes provisions to establish a new regulatory body, reportedly to be called the Insurance Supervisory Authority, and to raise minimum capital requirements by at least 100%. Taken together, these various updates have the potential to lead to a round of mergers and acquisitions across the industry, as smaller, less competitive firms often find the stricter operating requirements difficult to abide by. Consolidation could certainly mitigate the worst dampening effects of ongoing price competition, and more stable growth in premium revenue should solidify providers’ financial foundations and facilitate future investments in innovative services with high growth potential, such as takaful.
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