Kuwait’s insurance sector has expanded rapidly in recent years, with numerous new entrants competing and driving down premium. This has led to concerns that companies are booking high profits at the risk of not keeping enough in reserve to meet future payouts on policies. To counter these worries, a new law was passed in July 2019 which is likely to have a profound impact on the sector and put the industry on a sustainable long-term trajectory (see analysis). However, with the law pushing for increased reserves and stricter regulation, flatter profit growth and a major restructuring of the market could be seen over the next two to three years.
History
Some of the country’s firms have a long history, dating back to the 1960s and 1970s. Founded by Emiri decree in 1960, the Kuwait Insurance Company (KIC) was the first national insurance firm that pioneered a range of now standard practices. Following its creation, Law No. 24 of 1961 provided the first regulations for the sector. The bill and its various amendments applied to every insurance provider in Kuwait, regardless of its status as a domestic or foreign firm. Local insurers must also follow the Civil Code laid out in Decree Law No. 67 of 1980, which covers the general principles of insurance contracting, including the rights and responsibilities of contracted parties.
In the 15 years after the 1961 law was introduced, a handful of new firms were established. These were Al Ahleia Insurance Company (AAIC, 1962), Bahrain Kuwait Insurance Company (1972) and Warba Insurance Company (1976). Together with KIC and the Gulf Insurance Group (GIG), which was founded in 1962 and operates across the region, these firms constituted the entire insurance market until the economic boom of the late 1990s and early 2000s encouraged a raft of insurance firms to come to market.
Oil-fuelled speculative trading in the mid-1970s contributed to the crash of the Kuwait Stock Exchange (KSE) in 1977 that ruined much of the country’s financial infrastructure and threatened even the largest insurance companies with bankruptcy. Led by the Kuwait Investment Authority (KIA), the government bailed out several illiquid businesses and ushered in a period of commercial investment by state-owned institutions. As late as 1993 the KIA owned over 80% of GIG, just under 60% of Warba Insurance, some 20% of AAIC and nearly 10% of KIC.
The 1990-91 Gulf War severely disrupted the insurance market once again, but by the mid-1990s another state-led recovery effort had generated considerable growth in the local economy. Domestic insurers welcomed high amounts of inward investment, prompting the KIA to sell most of its stakes in various providers, leaving the industry largely under private control.
Crowded Environment
Meanwhile, a cohort of new insurance firms were able to establish themselves in the market by capitalising on several supportive conditions, including the low cost of credit, relatively low capital requirements and high rates of return on the KSE. By 2015 Kuwait was home to 23 domestic and 10 foreign insurance companies.
This influx of new players in the late 1990s and early 2000s was the seed of many of the challenges the sector currently faces. The ease of credit access and the attractiveness of earning supplementary revenue on the capital market led to a race to the bottom on premium pricing. Charging low prices has made it a challenge for some companies to turn a profit on their core underwriting business, thus investment returns have become central to many operating budgets.
New players continued to enter the market, with a total of 42 insurers operating in Kuwait in 2019, including 11 foreign firms. This has increased competition and driven rates down further. “It is hoped that the new law will address various issues faced by the local insurance industry,” Varghese Abraham, reinsurance manager at Warba Insurance, told OBG, highlighting the high number of companies serving the market.
The authorities made some reforms ahead of the law to address the dynamics of the operating environment. 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 ($16.5m), while reinsurance groups must keep at least KD15m ($49.4m) on hand.
The Kuwaiti market remains accessible to foreign insurers, with 100% foreign ownership permitted and the Kuwait Direct Investment Promotion Authority offering a one-stop shop to foreign applicants.
Although the number of insurance companies is high, they are competing for relatively small pieces of the market. Insurance premium amounts to just 1.3% of GDP, suggesting low uptake of insurance plans among 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 government, which provides a range of services to citizens at heavily or entirely subsidised prices, including free medical treatment at clinics and hospitals.
Oversight
The new insurance law passed in July 2019 created a dedicated unit within the Ministry of Commerce and Industry to oversee the sector. The unit will bring in new staff with the expertise to monitor the industry to a greater extent, and give more focus to its long-term development and stability. Prior to this, the ministry had already taken several steps in order to improve oversight of the industry. In 2017, for example, it set up an audit committee to check the accounts of all insurance companies to ensure the validity of their financial transactions. This came after the Kuwait Insurance Federation said some insurers failed to meet technical and financial requirements, warning that some were nearing insolvency, and may be unable to meet their financial obligations to individuals and companies due to low, unsustainable pricing models. The law will also introduce a new framework for takaful (Islamic insurance). Importantly, takaful products can only be offered by separate takaful-registered companies with their own capital, rather than by units of conventional insurance companies. Additional laws and regulations are expected to be introduced specifically for takaful providers.
Sector Developments
The insurance sector has seen rapid growth in recent years. Total premium rose by 20% from KD347.3m ($1.1bn) in 2016 to KD417.6m ($1.4bn) in 2017, and by a further 7.5% to KD449.1m ($1.5bn) in 2018, with approximately 1.8m people holding insurance policies. Investment income has also been healthy in recent years, mainly due to the strong performance of the KSE, which provides considerable support to firms’ bottom lines.
Much of the premium growth is the result of new medical insurance policies taken out by the government to cover public sector retirees. GIG won the first tender for this contract, which began in 2017, and won a second tender in 2019 that will run for two years with an option to extend for another year. The second tender is worth KD300m ($988.1m) in premium over the stated two years, and will thus provide a notable boost to income. GIG was able to win the contract for government retiree medical insurance mainly because of its large size, as the undertaking requires considerable capital investment and a significant number of new hires to serve an additional 50,000 customers.
While winning the second contract has cemented the dominance of GIG and driven an increase in written premium in the medical segment, the performance of most other lines remain relatively flat, and overall profit growth is likely to level off going forward. “The marine segment rises and falls with oil prices, and other business lines are likely to remain stable,” Ahmed Ragab, head of risk at GIG, told OBG. Other industry stakeholders are more optimistic. “Lines are growing across the board,” Abraham told OBG. “However, the most important customers remain the government and the oil sector.” Abraham also pointed to mega-projects that will have a significant effect on profits. “Silk City will be the next big thing for the sector in terms of construction insurance,” he said.
Structure
Of the 31 local firms operating in Kuwait, non-takaful companies accounted for 72.1% of market premium in 2018. Within this figure, 87.5% was accounted for by five businesses. GIG and its subsidiary Gulf Insurance and Reinsurance Company dominated with a combined 59% share. Given its strength in the market, GIG has looked abroad for expansion, with investments in Egypt, Jordan, the UAE and elsewhere. The others holding positions in the top five are KIC (11%), Ahliya Insurance (10%) and Warba Insurance (7.5%). The many remaining players accounted for a combined 12.5% of local, non-takaful premium in 2018.
Pure, local takaful companies accounted for 20.4% of total premium that year. However, combined takaful business is slightly larger than this given that many conventional companies had takaful windows in 2018. These will transition to standalone takaful providers once the new insurance law is fully implemented.
The 11 foreign companies, meanwhile, accounted for 7.5% of overall premium in 2018. They struggle to compete on the same scale as local insurers because they are not included on the panel of insurance providers to the government or the oil industry, both of which are key customers for the sector.
Segment Figures
Medical insurance made up 43.2% of market premium in 2018 and is outperforming other segments. The line received a boost as a result of the November 2017 announcement by the Ministry of Health and the Health Assurance Hospitals Company – a public-private venture created to handle the primary and secondary care needs of expatriates living in Kuwait – that the annual health insurance fee charged to foreign residents would rise 260% from KD50 ($165) to KD130 ($428).
Motor insurance, which accounted for 20.7% of the market in 2018, is the segment that is most likely to be impacted by new regulations. As third-party coverage is compulsory and motor is one of the larger segments in the sector, competition for business has been stiff among insurance companies, driving premium prices down. However, the new insurance law is likely to push up prices through tougher financial requirements (see analysis).
Life insurance is a line with potential for growth, as corporate policies accounted for 10% of premium in 2018 and individual life polices for 2%. “Car sales have grown sluggishly, which has led to less activity in motor insurance,” Anwar Al Sabej, CEO of Warba Insurance, told OBG. “However, one driver of growth has been employee benefits on the corporate side, as there is higher demand for life and medical insurance to help recruit new employees and retain talent.” The 2% individual figure is low when compared to other countries in the region: in Lebanon it is 30%, in Egypt 40% and in the UAE 25%, for example. The main growth constraint in this segment is a lack of awareness of the benefits that life insurance offers, thus the majority of life premium comes through corporate packages.
Fire, marine and aviation, and other general insurance, meanwhile, accounted for a combined 24.1% of the market. These lines are primarily driven by government projects. While government spending has eased recently, a recovery would provide a boost to local insurance companies.
Reinsurance
Local insurers have historically ceded a considerable amount of risk to the reinsurance industry. In 2019 Kuwait’s insurance companies continue to reinsure a relatively large portion of their risk, at around 50%, according to GIG, which compares to a regional average of 30%. Much of this risk is taken on by large international reinsurers such as Swiss Re or Munich Re, especially risks in specialised areas such as financial risks for investment managers and cyber-risks, which are only covered in detail by the main global reinsurance companies.
There is a local reinsurance market, but it is mostly confined to larger companies for two reasons. First, capital requirements for reinsurers are three times greater than standard insurance companies, at KD15m ($49.4m). Second, the scale of insurance risks is high, particularly in the important government, real estate and energy sectors, forcing small local insurance companies to reinsure much of their risk. The structure of the reinsurance market is unlikely to change going forward, given the amount of internal risk already retained in the local market.
Domestic reinsurance business therefore mainly flows to a few big firms, such as GIG’s Gulf Insurance and Reinsurance Company, and Kuwait Re. The latter, which is the country’s oldest reinsurer and a subsidiary of AAIC, undertook a major portfolio realignment in 2017 that resulted in a 57% jump in net profit that year. The company then reported solid profit growth of 10% in 2018 to KD3.37m ($11.1m) despite large payouts due to heavy rains and floods that struck Kuwait. In the first half of 2019 Kuwait Re recorded profit growth of 49% compared to the first six months of 2018, with strong increases in both premium income and investment income from the KSE.
“Rates and conditions in the reinsurance market are hard,” Abraham told OBG. “The unprecedented rains in 2018 have pushed up the cost of reinsuring for the construction sector, especially for road projects, while heavy losses for insurance companies globally have pushed up reinsurance rates more generally.” This will have the knock-on effect of driving premium upwards.
Outlook
Given the competitive environment and low premium rates of recent years, excessive risk is likely to have built up in the sector. Profits have risen as premium income has been healthy, reinsurance costs low and investment income strong. All these trends have the potential to reverse, however, and costs and capital requirements are set to rise with the new law, squeezing profits in the short term but ultimately resulting in better controls.
In the future, new accounting regulations for insurance companies, such as International Financial Reporting Standard 17 (IFRS17), are likely to force insurance companies globally to recognise more future risks in their accounts today. IFRS17 is expected to start impacting insurance companies from 2021. “IFRS17 will be another big change for the sector, as it will affect systems, data and financial accounts. Accounting will not just be recording revenue and losses today, but expected revenue and expected losses, and this will be reflected throughout all areas of the business, including pricing, reserves and capital management,” Ragab told OBG.
Although larger companies are likely to have enough cash in reserve to withstand any downturn in the market, there is risk among smaller firms that a dip in the stock market – combined with new regulations – could threaten their solvency. A considerable restructuring and consolidation of the sector is therefore a likely outcome of the new insurance law, in addition to a few years of rising costs and lower profits for all players. This should be positive for the sector in the long term, incentivising companies to streamline their internal processes. Hiring additional skilled staff could also raise the standard of professionalism in the industry.
