A Big Step Forward
Roger Phillips examines the draft of the new insurance regulations passed in Kuwait.
The insurance market in Kuwait has seen a continuing increase in the numbers of licensed participants. Although a small number of insurers dominate the market, there are many smaller companies competing with each other on price which is driving rates down. Health insurance is the largest market and likely to attract even more competition with government initiatives to mandate health insurance in a country with a large expatriate population needing cover. In common with most GCC countries, whilst there is generally poor awareness of the value of insurance and consequently low penetration, there is conversely considerable scope for growth in the Kuwaiti market.
Now Kuwait is embarked on a similar overhaul of regulation which is designed to build a strong platform of regulatory supervision and ensure resilience in the sector, protecting the existing market participants from increasing financial pressures and also creating a framework that is suited to Kuwait’s particular market with stimulation of confidence and growth.
Law No.125 of 2019 concerning Kuwait Insurance Regulation (the New Insurance Law) became law on 1 September 2019 providing for a new, dedicated insurance regulatory authority (Insurance Regulatory Unit) and with a legal framework of regulation replacing the outdated old law, Law No.24 of 1961.
However, the New Insurance Law provided only a framework and its implementing regulations have been anticipated with great interest.
A ‘one year’ transition period
The new regulations require some time for planning and for firms to update systems and compliance procedures. Therefore, Resolution No. 21 of 2021 concerning the issuance of the executive regulations and bylaws of the New Insurance Law has provided all existing licensed firms with a transition of one year (until 31 March 2021) to comply with the changes. However, all newly licensed firms must comply from day one.
A new, dedicated regulator
The Insurance Regulatory Unit is financially and administratively independent. The new regulations provide for the establishment of the new regulator and its operating framework, responsibilities and powers.
The Supreme Committee of the Unit is the governing body and its responsibilities (Article 21) include granting licences, applying ‘international criteria’ for supervision of the insurance sector, undertaking control and inspection of the sector and implementing necessary rules, regulations and procedures for compliance.
Further responsibilities include generating market awareness about insurance and development of professionalism and qualifications in insurance with reference to incorporation of an institute for the purpose.
Financial and solvency requirements
The new regulations specify classes and types of insurance that can be offered in Kuwait as well as provide extensive detail on the licensing processes and documentation required for particular insurance activities to be practiced in or from Kuwait.
For insurers in Kuwait there are further solvency measures and a requirement for compliance with a solvency margin and technical provisions. These provisions must be calculated at least once a year. These calculations must also be reviewed once every three years by an independent auditor approved by the Insurance Regulatory Unit.
Whilst there are more detailed technical provisions, the regulations are less transparent on type, valuation of and limits on permitted assets for insurers with reference only of need for market valuation of assets and limitation that investment in one asset should not exceed 20 percent of total assets.
Regarding the required solvency margin, the regulations specify that for general and property insurance it shall be assessed on the higher of the minimum capital requirement, total written premiums or claims. For life insurers, the method is a specified percentage of technical provisions, individual and group life covers.
Prudential regulation, risk and regulatory capital
Unsurprisingly, there has been much interest in the financial regulations. Kuwait has become an increasingly fragmented and a crowded market of insurance businesses and concerns have been growing over the financial strength of the insurance companies and brokers and their continuing ability to meet their liabilities and commitments. There has also been very little consolidation in the market as the number of licensed firms gets bigger. Therefore establishing the right capital, solvency and reporting requirements consistent with international standards is essential.
For insurers doing life, general property and casualty insurance, the minimum capital required is KWD5 million (USD16.5 million), for composite insurers KWD10 million (USD33 million) and for reinsurers KWD15 million (USD49.4 million). In all cases the issued capital must be paid in full.
The insurance companies must also have in place a deposit with a local bank to guarantee their insurance obligations – this is calculated by way of a fixed amount between KWD500,000 (USD1.6 million) to KWD1 million (USD3.3 million) depending on the activities) plus 20 percent of total premiums. However, the Insurance Regulatory Unit can increase the amount if the risks of the particular business justify such a measure.
The regulations further reference obligations of insurance companies to have in place a board approved investment policy and the need to ‘adopt appropriate measures to manage risks’ to the business with reference to specific categories of risks in determining the appropriate investment portfolio.
For the other insurance participants such as insurance brokers, loss adjusting companies and third party claims administration (TPAs), specific financial provisions cover these professional groups. These include significant capital requirements, professional indemnity insurance, guarantees and reporting obligations. For insurance and reinsurance broking, the regulations explicitly confirm both activities can be combined under one legal entity.
Significant role of the actuary and international standards for insurers
Under Kuwait’s regulations, the actuary has particular obligations to ensure pricing of insurance is reasonable, policyholder expectations are met and for ongoing review and reporting on the financial condition of the insurance company, appropriateness of investments and the solvency of the business.
The recent changes to international financial reporting standards, notably IFRS 17, will bring further leverage on Kuwaiti insurers to better assess the resilience, profitability and solvency of its business and adjust capital accordingly with the new accounting requirements. The reporting by and communications with the appointed actuary will be critical to regulatory supervision in Kuwait.
International business and KDIPA
Part VII of the insurance regulations specifically addresses foreign branches of insurance companies. Article 170 makes it a condition that for approval of licensing ‘the companies must provide sophisticated insurance products and services that are not provided by the existing insurance companies or it must provide coverage needed by the insurance market in Kuwait’.
With regard to international insurance businesses, the New Insurance Law and regulations continue to provide access and opportunities for foreign insurance companies and other foreign insurance businesses. Law No. 116 of 2013 concerning the Promotion of Direct Investment in Kuwait (KDIPA Law) and its implementing regulations provide encouragement and opportunity for foreign insurance businesses that meet certain criteria of Kuwait’s Direct Investment Promotion Authority (KDIPA) to apply for establishment and licensing in Kuwait.
Online and technology
Online distribution arrangements for sale and servicing of insurances continues to represent a potential area for development in the insurance market. However, the regulations have no particular provisions in respect of online sales and servicing just yet.
Protections for the insureds
Decree Law No.67 of 1980 concerning Kuwait’s Civil Code (Civil Code) already provides an established legal framework and laws for the issuing of insurance contracts and addresses the rights and responsibilities of insurers and insureds.
The new regulations do have some specific requirements that brokers and insurance consultants must observe. Articles 236 and 237 of the regulations provide for specific duties for insurance consultants to follow in terms of evaluation and provision of advice to customers on risks and insurance coverages as well as including rules on ethics for this profession. For insurance brokers, Article 198 sets out particular obligations owed to customers including requirements for ensuring professional technical advice and consultations are provided where there are competing insurances and with explicit record keeping requirements.
Raising standards and professionalism
The qualifications, skills, experience and general professionalism of those operating in the insurance sector is key to ensuring compliance, confidence in and development of the sector.
The regulations are reasonably flexible and not overly prescriptive on requirements with few designated specialist roles, no particular regulatory training and competence programmes or indication as to whether such persons (such as compliance, actuarial or risk management) have to be internal to the business or can potentially deliver services in an external consulting capacity.
In the regulations, takaful insurance companies need to have an appointed internal auditor. Also, appointment of an actuary for all insurance companies is central to the regulations.
For insurance brokers, Article 185 refers to a requirement only to ‘provide necessary technical and administrative cadre to practice business’. In applications for licensing of broking companies, the applicant company must also produce a training plan for staff.
Under the regulations, there are registers held by the Insurance Regulatory Unit for certain professions including insurance consultancy, actuaries, auditors, loss adjusters and assessors. The licensing of such individuals requires qualifications and experience to practice.
Early days – importance of regulatory practice and supervision
In issuing the new regulations, the Insurance Regulatory Unit made it clear that the new regulations were not the finished article and further changes and regulations would be required. We can expect more details to follow as the regulations are kept under review.
Part X of the regulations provide details on the Insurance Regulatory Unit’s Disciplinary Board and how violations of the law and regulations will be dealt with, including processes for
notices of violations, investigations, defences as well as penalties – as well as suspension of business and licences, depending on the seriousness of the violation, fines of up to KWD50,000 (USD 160,000) may be imposed.
In issuing the new regulations, it was made very clear these were preliminary in nature and there will undoubtedly be further new regulations to come shortly in certain key areas. The Insurance Regulatory Unit will need to build awareness, develop relationships with the regulated, establish optimal supervisory processes and see how the currently issued regulations bed in – it is a learning period for both the regulator and the regulated.