The Kuwait insurance industry entered 2017 after a challenging period which saw premium growth maintained but profitability declining year-on-year. High levels of competition and low oil prices make a reversal of this trend in the short term a daunting prospect. However, a number of developments in the pipeline – including a new legislative framework and the introduction of mandatory health coverage for expatriates – have the potential to provide a timely boost to Kuwait’s insurers.
Early Development
Kuwait’s insurance market is small compared to the markets of its neighbours, yet the industry has, over its history, played an important role in the development of the wider insurance sector in the Gulf region. When the Kuwait Insurance Company (KIC) was established in 1960 it became the first national underwriter in the GCC, cementing the country’s place as a pioneering early adopter of the insurance concept.
The formation of the modern state of Kuwait in 1961, and the rapid economic growth which followed in the 1970s, saw the emergence of firms such as Al Ahleia Insurance Company (AAIC), Gulf Insurance Group (GIG), Bahrain Kuwait Insurance Company and Warba Insurance – names which continue to feature prominently in the market today. The government’s role in the early growth of the modern insurance sector was limited, but this changed in 1977 when the boom which drove the expansion of Kuwait’s fledgling stock market came to an end. A number of Kuwait’s listed insurance companies faced capital losses sufficiently severe to make continued underwriting untenable, a scenario which prompted the state to intervene. The government bought up large volumes of shares in listed companies, including those operating in the insurance sector, and retained a considerable stake in the industry over the following decades. As recently as 1993, the Kuwait Investment Authority (KIA), the state’s investment arm, owned approximately 82% of GIG, almost 56% of Warba, 20% of AAIC and 8% of KIC, according to OECD data.
Transition
The 1990-91 Gulf War highlighted the importance of insuring assets against political risk, however, and as the country began to enjoy its economic recovery in the mid-1990s the industry once again became a focus of private sector interest. The KIA divested itself of many of its insurance interests, and elsewhere private conglomerates acquired controlling stakes in some of the leading domestic operations – such as the 1996 purchase by Kuwait Projects Company of an 82% stake in GIG.
Loose regulation (particularly with regard to capital requirements), the availability of cheap credit from local banks and a thriving stock market all helped to drive the sector’s growth over the decade. By the early 2000s more than 30 insurers were competing for business in the increasingly crowded market, up from just five in the mid-1990s. Price competition reached new levels during this period, with many companies taking advantage of the light-touch regulatory framework to undercut their rivals on premiums. This trend saw the prioritisation of income from investment over technical results – a common phenomenon in a region where smaller insurers have acted more like investment houses than traditional insurance companies. This neglect of the core underwriting business in order to focus on investment activity remains a central industry concern today, and one which observers hope will be addressed by new legislation.
The Modern Market
The low barriers to entry of the Kuwaiti insurance market, which include not only modest capital requirements but also the ability of foreign investors to own 100% of a company’s equity, have helped to make it one of the most fragmented in the region. At the close of 2015 a total of 33 insurers were licensed to operate in the nation, 10 of which were foreign underwriters, according to international ratings agency Moody’s. Although fragmented, the market displays a high degree of concentration at the top end, with the biggest five insurers accounting for over 60% of gross written premiums (GWPs), a phenomenon that only serves to increase the competition among the smaller players. The market is also characterised by a relatively large number of captive insurers, which are wholly owned and controlled by the businesses they are insuring. Companies operating in the motor and retail sectors have been particularly successful in utilising their captive insurance arms to offer their customers risk coverage. Customers purchasing items from Kuwait’s Alghanim, for example, have the option of taking out insurance on them from Alghanim-owned Enaya Insurance.
Saturated Sector
The crowded nature of the market has resulted in competitive pricing, low underwriting income and a reliance on volatile investment income. Unlike some jurisdictions in the region, Kuwaiti insurers are not required to list on the domestic stock exchange, and therefore the financial standing of many firms, particularly the smaller operators, is difficult to ascertain. This situation has slowed the sector’s consolidation, which many observers believe to be necessary.
Other barriers to mergers and acquisitions (M&A) in the sector include a desire for family groups to retain control of their insurance operations and a tendency to overvalue their insurance businesses in negotiations with potential partners. There have, however, been recent indications of a willingness on the part of some players to expand their operations through a purchase or merger. In January 2017 Kuwait’s First Takaful, a leading provider of takaful (sharia-compliant insurance) coverage, called a board meeting to discuss a merger proposal. In discussions with OBG, First Takaful said that although the board decided against the merger, it has not discounted the possibility of increasing its market share through an acquisition.
Reinsurance
Like other GCC states, Kuwait’s insurance market is characterised by a high cession rate. The practice of passing on significant amounts of risk to domestic, regional and global reinsurers brings both advantages and challenges. The commission received by local insurers for transferring risk to reinsurance companies provides a stable revenue stream which suits the nation’s direct insurance model, allowing them to concentrate on the task of pursuing income from their investments. A highly competitive reinsurance market ensures that domestic insurers are generally able to secure favourable terms and conditions for this transactional activity. However, this reliance on commission for channelling business to reinsurance companies means that there is little incentive for Kuwait’s insurers to invest in technical expertise that would allow them to take on more risk.
Regulators across the GCC have taken steps to boost the amount of risk retained by their licensed insurance companies, a development which is viewed as essential for growing their respective industries and improving the quality of underwriting in the market. This effort has been aided by the regional growth of personal lines, such as medical and motor insurance, where retention rates are generally higher due to the direct and usually well-regulated link between premium and risk.
The non-life cession rate remains high in Kuwait, however, standing at 44% according to Qatar Financial Centre’s “2016 MENA Reinsurance Barometer”. This compares to a MENA average of 29% and a global average of around 8%. An OBG analysis of Kuwait’s four largest insurers (GIG, AAIC, KIC and Warba) showed that they ceded an aggregate 48.4% of their premiums in 2016, compared to 48.8% in 2015. In terms of reinsurance type, treaty arrangements ( covering an entire line of business) are more common in Kuwait than facultative insurance (for a single risk or defined package of risks). The bulk of insurance ceded by domestic firms is directed to international hubs, particularly London, although there are two reinsurance firms in Kuwait in addition to other players that also offer small-scale reinsurance services.
Kuwait is also home to the Gulf’s very first dedicated reinsurance company: Kuwait Reinsurance. Founded in 1972, it was listed on the Kuwait Stock Exchange in 2004, and is today majority-owned by AAIC, which retains a 91.7% stake.
Performance
The high levels of competition in the domestic market, coupled with the effects of the oil price decline which began in the second half of 2014, have resulted in a challenging business environment. Nevertheless, Kuwait’s insurers have continued to grow their premium take. In 2015 the industry brought in an estimated KD315m ($1.04bn) in total GWPs, a rise of 4.3% from the KD302m ($999m) of 2014, according to statistics published by Swiss Re, a Switzerland-based reinsurance firm. An OBG analysis of Kuwait’s “Big Four” insurers showed that they continued to increase their written premiums over 2016: aggregate GWPs for the period stood at KD347.2m ($1.15bn), compared to KD303.5m ($1bn) in 2015 – a rise of 14.4%. Kuwait’s largest insurers also succeeded in growing their investment income over the year, showing a rise of around 6% to reach KD19.2m ($63.5m).
Locally licensed insurers in the country benefit from a lenient regulatory framework with regard to investment activities, with only a small number of controls applied to designated funds. The larger insurance companies operating in Kuwait generally follow stringent risk-management protocols, and therefore tend to direct their non-designated and shareholders’ funds to fixed-income assets or high-quality listed instruments. Smaller companies, however, often seek higher investment earnings by implementing strategies with a greater emphasis on equities. As a consequence, their investment income is more volatile and their financial statements, where available, very often feature significant levels of unrealised income.
Price Wars
Net profit is one area that even the nation’s largest insurers have shown vulnerability in over the past year. The aggregate net profit of the big four declined by 33% in 2016 compared to the previous year, from KD34.8m ($115.1m) to KD23.3m ($77.1m). All four institutions showed a significant slowdown in profit growth over the year, while one of them posted a modest loss.
However, some areas have shown positive growth over the past year. “In terms of growth in 2016, several product types showed positive trends, such as employee benefit plans and, of course, insurance of large projects initiated by the government,” Anwar Al Sabej, CEO of Warba Insurance, told OBG. Although premium growth has remained positive, Kuwait’s insurers are being compelled to retain market share at the cost of profitability, engaging in a costly price war which threatens the long-term sustainability of the sector.
New Lines
M&A may represent the most obvious solution to the challenge of intense price competition, but, given the inherent resistance to consolidation in the Kuwaiti market, many participants point to other remedies. An obvious starting point for many is the broadening of cover. Despite its fragmentation, the premium base of the market is relatively narrow, with a large number of companies offering a similar array of cover types.
As is the case in the wider GCC, Kuwait’s insurance market is dominated by non-life products, with compulsory motor coverage accounting for the single biggest share of GWPs, followed by property cover. Life insurance accounted for KD52m ($172m) of the KD315 ($1.04bn) total taken in 2015, according to Swiss Re. A number of factors combine to challenge the growth of life insurance in Kuwait and the wider region. Perhaps the most salient is the antipathy to the concept of insurance, and particularly life cover, arising from religious concerns. However, the emergence of a regional takaful industry has begun to change perceptions across the Muslim world, and life cover is the chief beneficiary (see Islamic Financial Services chapter).
Takaful Potential
In Kuwait, companies such as GIG have started to offer takaful alongside conventional insurance as a means of tapping the potential that sharia-based insurance offers. Another potential driver of insurance growth is direct government intervention. Other than motor, the only other compulsory insurance line in Kuwait is workplace cover. Many people in the industry hope that the government will accelerate the insurance market over the coming years by introducing further compulsory lines and, more generally, by encouraging greater private sector participation in the industry.
“We face many challenges, but there are some potential growth drivers: all government property could be insured, for example, as it is with other jurisdictions. Also, if the government is able to encourage the private sector to participate more fully with the major projects it has planned, sector premiums could grow considerably,” Hussein Ali Al Attal, CEO at First Takaful, told OBG.
In 2017 a government decision is already likely to result in a considerable rise in aggregate GWPs for the year: in 2016 GIG won a tender round to provide health insurance for retired citizens, shortly afterwards signing a social insurance contract for retirees worth KD82m ($271.3m) a year. The move has been widely interpreted as the first step towards universal medical insurance for all segments of Kuwaiti society. This follows a regional trend towards increased private sector participation in the provision of health care and, while Kuwait has yet to finalise and publish its plans, in 2016 the Ministry of Health (MoH) began to outline how this might be brought about. The proposed plan calls for separate health care facilities for expatriates and a requirement that foreign workers in Kuwait secure cover from a number of domestic insurers. Its implementation would, according to the MoH, result in expatriates paying an annual premium of KD130 ($430) per person (see analysis).
Regulation
The government is also being petitioned by many in the industry to address the clear lack of an independent regulator for the market. The question of how Kuwait’s insurance sector is governed has emerged as an important issue in the sector in the last few years.
The legislative framework’s principal law was promulgated in 1961, and since that time it has been sporadically added to by ministerial orders, resolutions and decrees which have addressed areas such as the activity of insurance intermediaries and foreign company licences.
Rather than being overseen by an independent regulator, the domestic insurance industry is governed by the Ministry of Commerce and Industry (MoCI) through its Insurance Department. The current legislation places a relatively light burden on both domestic and foreign insurers. Locally incorporated non-life insurance companies must comply with a minimum capital requirement of KD5m ($16.5m), while reinsurance companies must meet a level of KD15m ($49.6m).
In addition, insurance companies must deposit guarantee funds in a Kuwaiti bank or a Kuwaiti branch of a foreign bank, the amount of which depends on the number of insurance lines that the company is licensed to offer, and ranges from KD500,000 ($1.7m) to KD1m ($3.3m). Following a 2015 ruling by the MoCI, foreign insurance companies which operate branches in Kuwait are exempt from capital requirements. To date the MoCI has not sought to introduce a solvency framework in a similar vein to the EU’s Solvency II, which is widely seen as the global standard. Neither has it sought to control the actuarial practices of domestic insurers – the process by which they apply probability and statistical theory to price their products – as its neighbouring jurisdictions have done.
Both the age of the insurance law and the lack of a specialised regulatory body pose challenges to the expansion of the industry. The relatively unregulated market allows smaller players to compete with larger operations by reducing premiums to levels that are unsustainable, which Kuwait’s more established firms are unable to respond to without violating their underwriting principles. It is therefore this segment of the market that has been most vocal in its call for regulatory reform.
A New Draft
A new insurance law has been circulating in draft form since 2012, but the industry still awaits its final approval. In September 2016 local press reports asserted that the legal committee charged with drafting the new law had finalised 75% of its articles, and was hoping to submit a completed draft to the relevant authorities for debate and approval by the end of the year.
A Work In Progress
By the close of the first quarter of 2017, however, Kuwait’s new insurance law was still being written. The industry also awaits clarification on one of the proposed law’s key components – its provision for the establishment of an independent regulator for the sector. For many market participants, the creation of a dedicated regulatory body is essential for the proper running of an increasingly complex industry, but conflicting statements issued by the MoCI have led to uncertainty surrounding the issue.
In February 2017 the late Khaled Jassim Al Shamali, former undersecretary at the MoCI, told the audience at an insurance industry event that a more complete picture would emerge after the revisions of the new insurance law were finalised. Beyond the establishment of a new regulator, the most significant innovations of the new law are likely to be new capital adequacy requirements and a section in the legislation which, for the first time, directly addresses the processes associated with takaful.
Outlook
There is clearly scope for the expansion of insurance activity in the Kuwaiti market. The domestic industry plays a relatively small role in the economy, with banks and investment companies accounting for 94% of the financial system as of December 2015, according to the Central Bank of Kuwait. Insurance density in Kuwait, which stands at around 0.9% of GDP, according to Swiss Re, is low even by regional standards.
For local insurers, the short-term priority is to reverse the decline in net profits seen in 2016. They will be aided in this by the continued roll out of the Kuwait Development Plan, under which the government plans to spend KD34.15bn ($113bn) on infrastructure development and a variety of other projects over the 2015-20 period. In the longer term there are a number of routes to growth.
A process of consolidation in the market would increase the capital base of individual insurers, in turn allowing them to retain more risk and alleviating the damaging price war that currently prevails. However, government intervention may be necessary to overcome the industry inertia in M&A, most obviously through raising the capital requirements required by the new insurance law.
In addition, the introduction of more compulsory lines of insurance would have an immediate impact on aggregate GWPs, which has been the case in similar markets around the GCC region. For the coming year, however, the introduction of compulsory health care coverage for expatriates in Kuwait is likely to be the most significant market alteration, as the government presses ahead with its longer-term reform of health care provision in the country.
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