The long overdue new insurance law is expected to fix the sector’s problems and help put insurers on a sustainable path to growth.
The first insurance company in the GCC was founded in Kuwait in the early 1960s as the country was the first state in the Gulf to forge a special insurance law in 1961. Despite this long history of insurance and the country’s wealth and huge potential, Kuwait faces a wide array of challenges today. Compared to the rest of the GCC markets, the country ranks last by GWP.
For insurance, a major challenge the industry has always faced is having to operate under a subpar regulatory framework. Although Kuwait’s insurance law goes back to almost 60 years, it has only been updated once in 1981. Consequently, unprofessional practices became rampant, impeding development in the sector. Nevertheless, there are some players exercising better internal self-regulation standards and achieving success stories on the regional level.
Driven by the shortcomings of the sector’s performance and unhealthy practices in the market, there have been calls for a new insurance law and the setting up of a dedicated regulatory body to oversee the sector. So far, the Insurance Department at the Ministry of Commerce and Industry (MCI) has been in charge of supervising the sector, but it is vested with limited authority and resources. Last May, the country’s National Assembly approved a new insurance law in the first reading. The law aims to implement regulations which are in line with international standards and take into account the latest developments in the insurance business, including the setting up of an independent dedicated entity at the MCI to oversee the sector. The entity will have the necessary authority and be equipped with the needed regulations to enhance the level of the profession and take the market to the next level.
The new law, expected to be enforced sometime in 2020, will set better regulatory practices and more prudent pricing in the market, said Kuwait Insurance Co (KIC) CEO Sami Sharif.
Market developments: Medical making a difference
Despite the challenges, the market continued to grow satisfactorily over the past few years. In 2018, GWP grew to KWD449.13m ($1.48bn), an increase of 3% over the past year. Medical was the largest and fastest growing line as it reached KWD194m against KWD169m in 2017, an increase of 14%.
Medical insurance became an area of notable growth starting 2016 when the government launched the retiree compulsory healthcare policy Afya. The policy, funded by the government, has boosted growth in the medical insurance business and the market as a whole. In 2017, the market grew by over 25% to KWD435m from KWD347m in the preceding year. The second tender the state has released this year was granted to Gulf Insurance Group (gig), worth KWD307m for a two-year policy. This year, Afya would cover 135,000 beneficiaries or around 10% of Kuwait’s local population.
Motor, a source of challenges
Motor business accounts for around 20% of the market GWP. In 2018, motor premiums remained flat at around KWD93m, with KWD73m coming from the motor complementary branch and KWD20m from motor compulsory business (or third party liability). The slow growth in motor in recent years has been largely attributed to the sluggish motor sales over the past period (Chart 2). However, stiff competition has always plagued growth in this line. In Kuwait, agents and intermediaries control the biggest share of motor insurance sales, with the consequence of dragging rates downward.
Another major factor for low growth is the relatively low price of motor insurance as it is sold at as low as KWD18, which does not commensurate with the risk and liabilities that insurers bear. Increasing motor insurance prices, especially for TPL is absolutely necessary, said Mr Sharif. “The current prices are unsustainable. The increase in claims cost follows the inflation and the increase in (spare) parts. We need to increase the TPL tariff, which has been the same since 1991.”
Moreover, the size of motor premiums does not match the number of vehicles in the country, estimated to be over 2m in 2017, according to the country’s Central Statistics Bureau. These factors have resulted in the flat growth of motor insurance as the size of premium income for this segment has been in the same range for the past five years. Paid claims for motor insurance in 2018 reached around KWD78m, about 25% of the market’s overall paid claims.
Crowded marketplace
There are 38 insurers operating in Kuwait, including 27 local and 11 foreign providers, in addition to the country’s sole national reinsurer, Kuwait Re.
The market is also concentrated as the top four insurers control over two thirds of the market GWP. Gig, with its subsidiaries, controls over 40% of the market, while Al Ahlia, KIC and Warba together command another 23%. Big players in the market have been historically in control of corporate business and major projects, which include energy operations.
This concentration of business leaves little room for other players to manoeuvre. Therefore, the majority of operators work hard to expand their market share by hitting motor, medical and other personal lines, as well as other small to medium businesses in areas of medical, fire and other commercial lines.
Over the years, this has resulted in stiff competition where a majority of players command very small market shares, leading to increased price-cutting and unhealthy market practices. Over the past two years, the MCI has tried to address such issues. Last April, the Ministry suspended the licences of six insurers for three months or until they deal with the violations, which mainly revolve around failing to meet their financial obligations to the MCI or other parties. The Ministry has also set up an audit committee to examine the accounts and financial soundness of players. The committee was formed following concerns related to the financial status of some players flagged up by the Kuwait Insurance Federation (KIF).
Despite the positive impact of these actions, it remains vital to have a dedicated body to follow up and ensure implementation. Several previous initiatives launched over the years fell through due to the lack of proper follow-up on implementation.
The new law will have stringent financial and solvency requirements, and there will be higher capital requirements, as well as an efficient reporting system.
Takaful, a large segment
There are 16 takaful operators in Kuwait. Takaful first emerged in the country in 2000 and a majority of operators were established after 2006. In 2018, takaful operators’ contributions controlled around 21% of the market direct premiums and 22% of paid claims (Chart 3).
Motor business accounts for 38% of takaful contributions, meaning that players write around 38% of the market’s motor premiums. The second largest line is medical, with contributions accounting for almost 22%. Family takaful contributions reached KWD13.4m in 2018, making up almost 15% of the overall takaful market.
With their business concentrated in motor and medical, both generating thin margins, takaful operators are facing increasing pressures. While the paid claims ratio for the whole market is 70%, it exceeds 75% for takaful operators.
As takaful providers are relatively new to the market compared to their conventional counterparts, most of them are forced into writing motor and medical lines to gain a foothold in the market and expand their market share. This has caused difficulties to several providers, evident in the fact that the six insurers who were suspended last April were all takaful providers.
Overall, the need to diversify the business and innovate is crucial for all players, not just takaful operators.
Untapped life market
Life insurance in Kuwait has been concentrated in group business where it is estimated to account for around 80% of the life premiums. The lack of awareness, along with generous state pensions and subsidies, has always stood in the way of developing a sophisticated life market in the country. There is a market for life business in Kuwait, said Mr Sharif. “The need for the life business is there. We simply need a robust sales force to grow this business,” he said, stressing that growth opportunities in the market are in personal lines.
Another potential segment could come from family takaful, where contributions account for 25% of the market’s life premiums. The Kuwaiti population welcomes shariah-compliant solutions as the country was the first in the GCC to launch Islamic financial institutions. Providers should take advantage of this and roll out suitable products that would gain public interest. Generally, life premiums have been witnessing unstable growth over the past five years (Chart 4).
Positive outlook
Kuwait’s insurance contribution to the GDP stands at 1.2%, while insurance per capita is estimated to be around KWD94. Though below expectations, this implies that there remains ample room for growth. Potential has always been there and the introduction of a strong regulatory setup should stimulate development in the sector.
Insurers, however, should bear greater responsibility especially in enhancing distribution, where they need to modernise their tools to reach out to larger social segments. Technology adoption in Kuwait remains in an infancy stage, where the online channel is stagnant with agents and brokers dominating distribution, especially for personal lines. More can be done in this area especially with the country’s young population and high rate of using smartphones.
As the government is keen on developing a healthy insurance sector in line with international standards, there is an opportunity to see M&A activity. Mr Sharif said improving the regulatory standards would have a positive impact on the insurance industry. “Sound companies will remain functioning in a healthy competitive environment, while weak companies will have to follow the right standards or exit the market.”
However, he observed that the biggest challenge the sector continues to face remains in the supervisory authority capabilities and the large number of insurers.
Growth for this year is expected to be in line with 2018 or even enhanced on the back of several initiatives the state has launched in various fields, especially healthcare insurance. A new insurance law will be a game changer for the industry and all eyes are set for this to take effect in 2020. M