Growth and Progress of Kenya’s Insurance Market

AM Best company has published a report on the overall state of Kenya’s insurance market and how price competition hinders its growth potentials. The key takeaways are challenging macroeconomic factors which are expected to abate from 2021, the successful execution of risk-based capital requirements that are strengthening the credit quality of market participants, and price undercutting becoming a hindrance for the companies in generating sufficient capital.

Kenya’s economy is relatively stable than the other markets in sub- Saharan Africa and that facilitates the growth of its insurance sector. But the market growth gets impeded due to the low awareness of insurance products and low trust in insurance companies. Price undercutting in the non-life segment has hampered premium growth and also causing underwriting losses in the sector. Each year from 2015 to 2020 faced underwriting losses. The life underwriting result of 2020 was also too poor. And the pre-tax profit result of 2020 was 8.1 which is nearly half less than the result of 2019. Each in the five years from 2015 to 2019, the real gross domestic product growth increased by over 5% per year on average whereas in 2020 it came down at -0.1%. The Gross Witten premium growth rate was also not satisfactory in the following year compared with the other five year’s growth rates.

Kenya’s economy, being the third-largest in sub-Saharan Africa, has always been strong and the GDP has also been steady. But for the first time in a decade, Kenya’s economy contracted in 2020 as there was a massive slowdown in exports and domestic demand also got weak. Yet the gross written premium (GWP) growth remained quite resilient. So, it’s anticipated that the GWP growth will return quickly to its pre-2020 level.

Some of Kenya’s key sectors as cargo transportation, tea, and flower exports, and tourism impacted unemployment greatly due to the COVID-19 pandemic. Besides, tax revenue also got affected. Kenya agreed on a three-year USD package with the international monetary fund.

The African Continental Free Trade Area (ACFTA) is the world’s largest free trade area by the participating countries and the Kenyan government ratified its membership here in 2018. It occurred on January 2021 connecting 55 countries and the combined GDP was USD 3 trillion.

A potential for unrest in Kenya’s political state is being anticipated through 2022 as President Uhuru Kenyatta serves her final term in the office. The unrest will affect the country’s economy negatively. If that happens, the underwriting and investment activities of insurers will face the same.

Currently, more than 50 insurance companies are running in the Kenyan market. Kenyan market generated KES 233 billion ( USD 2.1 billion) of GWP in 2020 and the growth was 2% over the year 2019. The average GWP growth rate came at 6% per year considering the previous five years. But the inflation rate stayed high during the time. But conditions of the market stayed soft.

With the five-year (2016-2020) 11% average growth rate, it’s easily noticeable that Kenya’s insurance sector has witnessed significant growth in recent years and that is in contrast with the non-life segment. This segment is considered to be in the early stage of its development where the underwriting and reserving practices are sometimes unsophisticated.

Kenya’s agricultural industry is so vital that one-quarter of its total GDP comes from here and its employees total two-fifth of the country’s overall workforce. Yet the insurance penetration is lacking in rural areas of Kenya. This insurance process gets unaffordable for rural people due to poverty and limitations in financial education. Some insurance companies are trying to spread this service throughout the country. Instead of on-sight visits, satellite imagery is being used to reduce expenses. By doing so, agricultural insurance costs can be reduced by the companies and the products will be more affordable for the farmers.

The basic minimum requirements are not always accountable for the unique risk profile of the insurers. Moreover, it doesn’t always increase in line with inflation. Kenyan insurers’ balanced sheets have grown gradually. But there wasn’t such a corresponding increase in their capital requirements. This created a steady downturn of balance sheet strength for many market participants. In recent years market GWP growth exceeded capital generation.

Some of the market participants were not able to meet the new solvency requirements. As a result, the RBC implementation got delayed. Though the COVID-19 pandemic made the economical states worse, still it is considered that the new requirements being quite challenging is another reason for the delay. In this case, the insurers need some additional transition time to cope with the new rules.

The capital adequacy of the sector will strengthen with the new capital standards. The insurers need to focus on risk-reward performance indicators and profitability. A risk-based approach to supervision will encourage them to do so and over time the competitive environment will improve greatly. Kenyan insurers’ investment portfolios are conservative in terms of asset allocation. While the assets being weak results in high capital charges in BCAR.

The IRA doesn’t stop the insurers from investing overseas. But the new RBC model encourages making investments in Kenyan government securities. Rather it is expected that most of the insurers’ investments will be country-centered.

The investment rate in bonds and other fixed interest securities is 68% which is the highest. The second one is real estate and the rate is 13%. And the third most invested category is cash and deposits with credit institutions and the rate is 8%. Other Investments include mortgages & loans, unquoted investments, and inter-company investments and the rates of each of them are 2%.

The non-life combined ratio of the Kenyan market has consistently been elevated. Rapid deterioration is seen in the years 2013 to 2016. It has exceeded 100% in each of the years since 2015. This result varies among the insurers though. When it comes to operating performance trends, the worst-performing companies are the small ones with capital and a surplus of less than KES 2 billion. These companies represent nearly one-third of the total non-life insurers but their expense ratio often remains high which is not beneficial at all.

The motor segment is the largest non-life line of business and this creates a massive impact on the market-wide profitability. The market’s combined ratio for motor business stayed above 100% from 2015 to 2020. And on average the rate was 109%. The market dynamics are placing additional pressure on performance as the minimum pricing, in particular, is getting extinguished. As a result, the profitability in the line of business got deteriorated in the years 2018 to 2020.

A sad truth is, some frauds are present in the market which affects negatively the result. Sadly, one-quarter of the total claims are estimated to be fraudulent. Some punishments and legal arrangements are set for these frauds. Though these arrangements are not enough as the number of these fraudulent is not decreasing.

Between 2013 and 2020, the market GWP has doubled and Kenyan life insurers have been benefitted through this greatly. In 2015, 2018, and 2020 the profitability of the segment was greatly dependent on investment income.

There are two main categories in the Kenyan reinsurance market. One is the regional African reinsurance companies with a physical presence in the country and the other one is global reinsurance groups operating from offshore.

A deterioration In the underwriting performance of the Kenyan reinsurance business was observed by AM Best. There were some different reasons behind this performance.

The weighted average ratio of the Kenyan reinsurance business got upgraded gradually. By the end of 2014, the rate was 91%. But the rate increased to 104% in 2019 which is 13% more in 5 years. During the period, a higher frequency of mid-sized losses arisen from medical and property lines of the country affected the underwriting results of many reinsurers quite negatively. But surprisingly the market hasn’t reported any recent claim events. Thus, rate erosion is not getting away and remains unchecked among price-driven direct insurers.

 Among all the reinsurers, those which were rated the top three Kenyan reinsurers were pretty stable during this time. They were able to cope with the pressures and challenges and maintained a stable credit profile. It is because they use different work strategies and having a varied geographical reach is a plus point for them. These three companies are Kenya Reinsurance Corporation Ltd, ZEP-RE (PTA Reinsurance Co.), and East Africa Reinsurance Co. Ltd. And Kenya is the key market for all three companies.

The COVID-19 pandemic has created massive fallout in the economic sector of most of the countries all over the globe. Kenya’s economy also had to face the consequences. This economic downturn surely has created a bad impact on its reinsurance market. The reinsurers are being challenged constantly. The challenge includes deterioration in the collectability of premiums. Still, the cons were not too much in Kenya’s insurance market compared with other regions.

Source: A.M. Best Company Inc.