MAJED AL-ALI analyses the Takaful industry in Kuwait and highlights the challenges that need to be overcome as well as the future of the market.
The Takaful industry globally has witnessed tremendous growth as the compatibility of this type of insurance with the provisions of Islamic law, was a major cause of its spread and acceptance of many social groups in the Muslim world, including Kuwait, where the staggering growth in the Islamic investment sector, has helped to spread of this type of insurance.
Takaful companies in Kuwait have been able to prove their presence in the domestic insurance market, and successfully acquired a good market share amounting to about 34% of the total insurance premiums among national companies, where this ratio has increased slightly from the total number of insurance policies.
Presently, there are 11 Takaful companies in the local market, which are active and able to overcome the impact of the global financial crisis, despite the slow growth of the sector. However, they have had shown less reduction in total underwritten insurance premiums compared to conventional companies.
The sale and purchase of shares of insurance companies reflects no excitement, where the shares of insurance companies on the Kuwait Stock Exchange Market are inert. The reason behind this inactivity is because the investment returns in insurance stocks are not immediate, as this type of investment takes time to reap the revenues and profits. Therefore, trading shares of insurance stocks are generally stable.
The domestic insurance market is considered from the perspective of many observers and practitioners as the “burner” of prices, at the expense of services. The domestic insurance market also faces several challenges such as the increased cost of skilled manpower; lack of awareness; some insurance companies retain shares more than what they should in some risks; payment of some unearned compensation; poor government support, incompatibility of the laws of insurance with the current requirements, absence of the supervisory role and a centralized data, and shortage of re-Takaful companies.
The Kuwaiti market is no longer able to accommodate new insurance companies, where there are presently 30 active insurance companies, as the growth of the number of companies is more than the growth of total insurance premiums in the past six years.
On the other hand, although local insurance companies could be encouraged to merge with other companies to expand customer base and avoid congestion in the market, there is still the problem of approvals being granted to establish such companies. Furthermore, the competition between firms still needs to be organized and regulated.
Competition with conventional
The Takaful companies in Kuwait have started to compete with conventional insurance companies due to its financial strength, as shown from a report by Standard & Poor’s.
According to official reports, the insurance industry had shown an increase in the total gross premium which reached KWD206 million (US$750.5 million) and thus Takaful shares has grown by more than 28%. Some analysts have predicted that the growth was mainly linked to government’s development package and plans.
It is also expected to continue growing this year, where the insurance sector will witness a significant improvement in performance due to increased projects in the pipeline within the development plan, which the state intends to implement over the next four years, amounting to US$107 billion.
The growth in the insurance sector in 2011 is expected to increase 10%, and to reach KWD318 million (US$1.16 billion) in 2014.
The growing acceptance of Takaful in the Gulf region will give a strong impetus for the growth of the insurance sector, especially since the Takaful industry has not appealled to the local population in the region. Kuwait has the lowest degree of insurance penetration as compared with others in the GCC region.
Banks and Takaful
In Kuwait, several banks, Islamic or conventional, have established their Takaful companies which has proven to be successful. Some observers believe that without the Central Bank of Kuwait’s restrictions on local banks, income of gross insurance premiums including Takaful will be even higher.
The rankings by international ratings agencies on local insurance companies confirm the financial strengths of these companies which will will further promote the development of the insurance sector.
The rating agencies analyzes the technical operations, and investment portfolios of the companies to determine the proportion of liquidity and diversity of investment and focus on efficiency and solvency of the company’s capital and shareholders’ equity as well as assess the company’s ability to compete and diversify its products and services.
In Kuwait, there are attempts to implement laws and decrees governing this sector. The commerce ministry has also still not imposed a law requiring companies to obtain a solvency rating to improve their reputation in the Kuwaiti insurance market.
Hence the Kuwaiti insurance market is in need for an independent insurance authority, new insurance laws, and regulatory decisions that commensurate with international standards. Only then will it push the insurance sector to higher levels.