The Kuwaiti government’s efforts to balance its economy’s revenue sources through the development of non-oil sectors, along with more stringent regulation of the insurance market, will have beneficial consequences for the nation’s insurers, according to new research released by Timetric.
Despite this, there are sill significant challenges in the Kuwaiti insurance sector that must be overcome through other means.
A move away from oil
Kuwait possesses the sixth largest oil reserves in the world, which form the backbone of its economy. However, in an attempt to secure stable economic growth in the future, the government has recognised the need to diversify its revenue sources through the development of non-oil sectors. By 2035, it hopes Kuwait will stand as a major financial hub and trade centre. To this end, it has enacted the Development Plan (2010-2014), which has put more than 130 infrastructure projects in the pipeline, at a cost of KWD35.9 billion (US$130 billion).
This comprehensive effort to bolster its infrastructure, combined with its significant oil revenues and steadily increasing population, is contributing to the healthy growth of Kuwait’s insurance industry.
Expected consolidation to improve profitability
Another significant factor in the Kuwaiti insurance industry’s future prospects is the 2011 ruling by the Ministry of Commerce and Industry – the regulator of the Kuwaiti insurance industry – that raised the minium capital requirement for insurers and reinsurance companies. These steep rises are predicted to precipitate the exit of some of the smaller players from the market, and a rise in mergers and acquisitions as local and regional companies seek to become market leaders. This is expected to mitigate pricing pressures and improve the profitability of the industry.
Lack of diversification
Despite forecast growth, the Kuwaiti insurance market is not without problems. In terms of earnings, the Kuwaiti insurance industry is largely skewed towards the non-life segment, with cultural and religious sentiment proving a difficult barrier to overcome in the development of the life segment. Furthermore, the majority of Kuwaiti insurance companies’ operations are concentrated in the domestic market, with no major geographical diversification. These problems must be overcome if the insurance sector is to maximise its potential in Kuwait.
Dependency on reinsurance
In Kuwait, insurance companies cede a larger percentage of their gross written premium to reinsurers than other companies in the international market. This high dependency on reinsurance not only poses a challenge in terms of bottom line growth, but also exposes companies to counterparty risk.
The majority of Kuwaiti insurance companies’ operations are concentrated in the domestic market, with no major geographical diversification
