Despite its good growth prospects, a lack of pricing discipline among many Kuwaiti insurers could weaken the creditworthiness of the sector as a whole. This is according to a report titled “Cut-Throat Competition Is Overshadowing Growth Opportunities In Kuwait’s Insurance Market,” published on the Global Credit Portal.
“We predict that the Kuwaiti insurance market will continue to grow faster than more-mature markets such as Europe and the U.S. over the long term, reflecting the still-low penetration rate of 0.5% in Kuwait,” Standard & Poor’s credit analyst Ali Karakuyu said. “We are expecting the market to report growth of about 8% again in 2012.”
The Kuwaiti regulator aims to improve local insurance legislation as Kuwait currently lacks the many key characteristics of modern insurance law. Without appropriate regulatory measures, such as risk-adjusted capital requirements, the industry’s high exposure to risky assets–a stance partly taken to compensate for premium reductions–could deplete capital.
The medium-term growth outlook for Kuwaiti insurance is stronger than that in some of the other Gulf markets.
“This reflects our expectation that the government’s infrastructure project investments will filter down to new insurable business. Kuwait’s ambitious five-year development plan, which envisages $100 billion-$125 billion of investments transforming the country into an international trade and financial hub, will boost the insurance sector, in our opinion,” Karakuyu said.
There has been an influx of new insurers–notably takaful or Sharia-compliant insurers–since 2000. This has overcrowded the sector and partly led to significant reductions in average premium rates in the retail business, notably in motor.
“Despite high competition and low and volatile investment returns, we believe the larger players are likely to report reasonable, if not strong, returns on capital in 2011,” Karakuyu said. “Meanwhile, small players will continue to post low returns. This largely reflects the variation in underwriting performance. We believe that this is likely to continue in 2012.”