Kenya Insurance Report Q2 2010

This is our first report on Kenya’s insurance sector. As is the case with our other insurance sector reports, we seek to place the non-life and life segments in a regional and global context. We discuss the main insurance lines and describe the competitive landscape in some detail. Kenya provides evidence that the insurance industry can thrive in Sub-Saharan Africa in face of highly challenging economic and – especially – political problems. As of the end of 2008 the combined assets of Kenya’s 42 insurers amounted to KES146.12bn – or nearly US$2bn. Both the non-life and the life segments have had sustained double-digit growth over the last five years. One does not need to make aggressive or radical assumptions to produce a scenario where the double digit-growth continues through the forecast period.

The development of the life segment is particularly encouraging. Life premiums account for about onethird of the total. Notwithstanding the fact that Pan Africa, the largest player in the segment, with a market share of around 20%, has a strategic alliance with a subsidiary of South Africa’s Sanlam, the segment is dominated by local firms. In essence, Kenyan institutions are gathering long-term savings from Kenyan investors. In this respect, Kenya is hugely different from Nigeria, and even from much richer and more stable countries in the Middle East.

As is the case in the Middle East – and to a lesser extent in Nigeria – the insurance industry is strengthened by its links with local entrepreneurs. In 1980 the government introduced laws that required local ownership of the insurance companies. As a result, insurers have since tended to be owned and/or run by local entrepreneurs with a deep understanding of the challenges of doing business in Kenya and well developed tolerance for risk.

A side effect – probably unanticipated by the government nearly 30 years ago – is that Kenya’s insurance sector is fragmented. In this respect it is similar to its counterpart in Nigeria, but also the Philippines and Indonesia or the UAE, where local entrepreneurs often see insurance as a valuable adjunct to the other activities undertaken by the family conglomerate. The three largest non-life companies – The Jubilee, APA and Kenindia together speak for about one-quarter of total premiums written in the segment. APA is the consolidation of Apollo with Pan Africa’s non-life operations. However, there is scope for much more consolidation.

AIG’s Kenyan subsidiary is one of the 10 largest non-life firms. It is important to note that foreign insurers are not entirely absent from Kenya. Aside from Sanlam’s involvement with Pan Africa, Old Mutual – another giant from South Africa – has a small life operation in Kenya. Four major Indian insurers – New India Assurance, Oriental Insurance, United India Insurance and Life Insurance Corporation of India – are minority shareholders in Kenindia. What all these foreign groups have in common is that, relative to multinational insurance companies from developed countries, they have a high tolerance of emerging markets risk and low exposure to the volatility of capital markets in the wake of the global financial crisis.

Another indicator of the strength of Kenya’s insurance sector is that non-life insurance has moved well beyond motor-related lines. Figures published by the Association of Kenya Insurers (AKI) indicate that private and commercial motor insurance respectively generated gross premiums of KES6,102.7mn and KES9,322mn in 2008. The next largest lines were personal accident (KES7,070mn), fire-industrial (KES4,322.7mn) and workers’ compensation (KES2,145mn).

Writing in early 2009 AKI chairman Nelson C Kuria suggested that the long-term future for the insurance sector was bright, given the low levels of penetration, increasing usage of information and communication technology (ICT), research, product development and focus on new distribution channels. Nevertheless, the challenges are significant. One is that that many Kenyans have little understanding of insurance and/or a low opinion of it. A survey by the AKI in 2003 found that the development of group life, for instance, was hampered by the rigidity of products, the limited scope of coverage, inefficient marketing and legislation. The providers had to deal with a lack of consumer education, the lack of incentives to employers, the domination of the market by brokers and cut-throat price competition. The comments from Kuria in his introduction to AKI’s 2008 annual report (which was released in early 2009) indicate that these problems persisted nearly seven years later. However, Kuria was hopeful that the new insurance act would ‘accelerate the growth and development of the insurance sector tremendously’. We discuss a number of scenarios as the country moves away from the disputed 2007 election and towards the next elections in 2012. In most scenarios, the insurance industry – which has weathered very difficult conditions in 2008 and 2009 – should continue to thrive. A wholesale breakdown in law and order would be disastrous. As the AKI notes in its 2008 annual report: ‘major man-made disasters caused losses of US$7.8bn in 2008, with large-scale industrial fires, explosions and losses in the energy sector at the top of the list. Man-made catastrophes resulted in 5,600 deaths in 2008.’ Most casualties were the result of shipping and boating accidents: however, social unrest and bombings also claimed many lives.

Issues To Watch Product Development And Pricing In common with their counterparts in other countries in Africa and the Middle East, the Kenyan insurers have often produced sub-optimal and undifferentiated products and have competed on price. This needs to change if the profitability of the sector is to grow. In 2008, the industry made a net profit before tax of KES5.05bn on gross earned premiums of KES46.32bn and total assets of around KES146.12bn. During that year, 21 companies – or about half the total – made underwriting profits: collectively, the life insurers suffered an underwriting loss of KES1.29bn.

Further Industry Consolidation Given that commercial challenges are limiting the profitability of many players, we would see any consolidation as a favourable development. We would also be heartened by any move of the foreign groups who are already present in Kenya to increase their investment. We recognise that the small present (and, in world terms, future) size of the market means that Kenya is unlikely to be seen as a country of opportunity by many major multi-nationals.

Actions Of the IRA From May 2007 regulatory responsibility for the insurance sector was transferred to the Insurance Regulatory Authority (IRA). In 2008 the IRA published a corporate plan that indicates it has a clear understanding of the problems facing the industry. The IRA is likely to have a role in the development of the new insurance act (as has the AKI). The IRA’s actions over the next year or two will provide an indication of the extent to which the industry’s problems and challenges are likely to be overcome.