The two firms that constitute Kuwait’s reinsurance industry are looking forward to increased activity, driven by strong demand for reinsurance capacity in local and regional markets alike. Indeed, in an effort to diversify their revenue sources, both Kuwait Reinsurance (Kuwait Re) and Al Fajer Re-takaful (Al Fajer Re) have worked to expand their operations in recent years, particularly in Asia and Africa. Meanwhile, the local insurance market is also expected to continue to provide a substantial percentage of reinsurance income for the foreseeable future. Indeed, according to a late 2012 report released by the Qatar Financial Centre Authority (QFCA), in recent years around 47% of gross written premiums (GWPs) paid to Kuwaiti insurance companies have been ceded to the reinsurance industry. This figure, which is in line with regional cession rates, bodes well for the segment’s future.

CHALLENGES: At the same time, the local and regional reinsurance segments face a number of pressing challenges. Like the insurance market as a whole in Kuwait, the country’s reinsurance sector has seen slow growth in recent years, particularly in terms of underwriting profits, which have suffered as a result of rising geopolitical risks in the region and a handful of major natural catastrophes in East Asia in 2011. Indeed, both Kuwait Re and Al Fajer Re have found it difficult to bring in underwriting profits in recent years. At the same time, local players have seen declining investment income, which traditionally accounts for a substantial percentage of most GCC-based reinsurers’ annual results. Reinsurers are usually required to have a high rating. Indeed, investment returns throughout the region have tapered off in recent years as a result of falling interest rates and low investment yields in the wake of the 2008-09 international financial crisis.

Despite these issues, Kuwait’s reinsurance sector is well positioned to post solid growth for the foreseeable future. The country’s primary insurance industry is expected to benefit substantially from a handful of initiatives. The government’s National Development Plan (NDP), for example, will likely result in a major boost in insurance demand. The KD30bn ($107.15bn) initiative, which was launched in 2010, includes a variety of large-scale infrastructure development projects, all of which will require insurance of various sorts. Taking into account the country’s high insurance cession rate, the NDP represents a major opportunity for reinsurers as well. Kuwait’s large youth population and the country’s low insurance penetration rate – just 0.58% in 2010, according to recent data from Capital Standards, a local ratings agency – also point towards considerable potential uptake in the long term.

INTEGRAL SUPPORT: Primary insurers in Kuwait are heavily reliant on the reinsurance industry, especially marine and aviation insurers. Due to the historically low capitalisation requirements for insurance firms, many have not been able to afford to cover for much more than relatively basic risk. Consequently, it is standard practice among local insurers to cede a substantial percentage of GWPs to the reinsurance industry, thereby retaining less risk than most of their international peers. For example, in 2011 the Kuwait Insurance Company (KIC), one of the top-five primary insurers in the country in terms of GWPs, ceded KD11.9m ($42.5m), over 45% of total premiums worth KD26.2m ($93.58m).

This is in line with cession rates in the insurance sector throughout the region. Kuwait-based insurers’ reliance on reinsurance is considered a liability for the primary market, as it can expose the sector to significant counterparty risks, which could, in turn, result in decreased profitability. This is not only an issue in Kuwait; between 2005 and 2011 insurance firms in the GCC ceded around 40% of premiums to reinsurance firms.

While reinsurance cession is considered effective for short-term risk management for smaller firms, most companies in the region aim to improve their risk management capacity. “To retain more original business, GCC insurers need to strengthen their risk management skills,” said Marc Mapoux, a senior underwriter at Bermuda-based AXIS Capital, in the 2012 QFCA report.

As of early 2013, however, the reinsurance industry in Kuwait and throughout the region stands to continue to benefit substantially from the region’s high cession rates. Between 2006 and 2010, according to the report, GWPs at GCC-based insurance firms increased around five times as fast as the global average.

KUWAIT RE: Kuwait Re was founded in February 1972. In December 2000 Transatlantic Reinsurance, a US-based reinsurer with operations around the world, became the dominant shareholder when it acquired 40% of the firm. Other major shareholders include a handful of Kuwait-based primary insurers, namely Al Ahleia Insurance Company, with 30%; KIC, with 5.1%, and Warba Insurance; and other local firms, including Kuwait Investment Company, a government-controlled financial services firm, with 10%, and Al Ahli Bank of Kuwait, a private local bank. Since June 2004 around 15% of Kuwait Re has been listed on the Kuwait Stock Exchange. In July 2012 AM Best Europe, the EU arm of a US-based credit ratings agency, assigned the company a financial strength rating of A-, which, according to the ratings agency, reflected “the company’s good level of risk-adjusted capitalisation and good track history of generating profits.” Kuwait Re’s risk portfolio is geographically diversified, with major holdings in the Middle East, Africa and East Asia, in particular.

In 2011 Kuwait Re brought in KD29.1m ($103.93m) in GWPs, up slightly from KD27.4m ($95.86m) in 2010. Of the 2011 total, some KD1.3m ($4.64m) – or around 5% – in premiums were ceded to other reinsurers as part of retrocession agreements, a common industry tool that enables reinsurers to share especially large risks with each other. Kuwait’s two reinsurers have historically boasted high retention rates compared to other players in the Middle East. According to data from AM Best, Kuwait Re retained more than 90% of incoming premiums over the course of the period 2008-11. Kuwait Re’s major business lines include conventional fire, general accident, and marine and aviation. The company also underwrites a negligible amount of life insurance risk. In recent years the fire segment has provided the majority of Kuwait Re’s income. In 2011 the company brought in KD18.3m ($65.36m) in fire GWPs, KD5.96m ($21.29m) in marine and aviation premiums and KD4.84m ($17.29m) in general accident premiums, compared to 2010 figures of KD17.7m ($63.22m) in fire GWPs, KD5.3m ($18.93m) in marine and aviation premiums, and KD4.4m ($15.72m) in general accident premiums.

In recent years Kuwait Re has experienced volatility in terms of technical income, primarily as a result of inward risk taken on as part of a handful of retrocession agreements that exposed the firm to claims in East Asia. The company has worked to mitigate these losses by improving its risk management profile and reducing the amount of retrocession-related risk in its portfolio. According to AM Best, as of early 2012 these actions had already resulted in an uptick in technical performance. Regardless, Kuwait Re’s investment performance in recent years has more than offset the company’s technical losses. Indeed, the firm’s total assets jumped from KD83.4m ($297.87m) at the end of 2010 to KD87.5m ($312.52m) at the end of 2011.

AL FAJER RE: Al Fajer Re, which was founded in January 2008, is one of only a handful of re-takaful companies in the world. A controlling share (51%) of the firm is owned by the Dubai Group, a subsidiary of Dubai Holding, a private company that is owned by Sheikh Mohammed bin Rashid Al Maktoum, the ruler of Dubai. Other major shareholders include Global Investment House, a leading Kuwait-based financial services firm, which owns 20% of Al Fajer Re directly and another 21% through a subsidiary, the Twenty Fourth Project Management Company; and Al Manar Financing & Leasing, another local financial services firm, which owns 2%. In mid-July 2012 AM Best assigned the firm a financial strength rating of B++, citing Al Fajer Re’s “good level of risk-adjusted capitalisation”. The financial year ending on March 31, 2012 marked the company’s first year of underwriting profits since it was founded, according to AM Best. While Al Fajer targets takaful risk in particular, it also takes on conventional risk, largely in order to maintain a balanced portfolio.

As a re-takaful company, Al Fajer Re is well positioned to take advantage of the rapidly expanding global takaful market in the coming years. Indeed, Kuwait’s takaful segment posted a compound annual growth rate (CAGR) of 7.71% in terms of GWPs between 2006 and 2010, according to Capital Standards, compared to a CAGR of just over 4% among conventional insurers in the same period. Like Kuwait Re, Al Fajer Re has posted retention rates in excess of 90% since it was founded. The company has also worked to improve its risk management practices of late. As part of this effort, in early 2013 Al Fajer Re slightly reduced its underwriting activities in East Asia, which has become an increasingly competitive insurance region in recent years, and has incurred major losses due to flooding and other natural catastrophes. The company plans to remain active in Malaysia, Indonesia, China, South Korea and the Philippines, among other countries in the region.