Holding enormous untapped potential, Kenya’s insurance industry has expanded rapidly over the past 10 years, with both the life and non-life segments showing consistent double-digit growth as the nation’s rising middle class becomes increasingly aware of the benefits insurance entails. Although the sector is still dominated by the short-term motor segment, rapid uptake in life, medical and new micro-insurance products has seen lower-earning Kenyans gain coverage.
The industry faces formidable challenges – premium undercutting has put intense pressure on major players, while fraud and low penetration have hurt margins and prevented nationwide expansion of comprehensive coverage. Competition is high. Vijay Srivastava, CEO and principal officer of GA Insurance, told OBG, “Nobody takes insurance in Kenya. It is something you have to sell. This requires a fundamental shift in understanding and managing the risk by consumers.” However, with a number of sweeping regulatory changes in the pipeline, increased utilisation of ICT in service delivery and claims administration, and more domestic players are expanding their activities throughout the East African Community (EAC) and beyond, sustained insurance growth is expected in 2014 and 2015.
Sector Structure
As of early 2013 there were 47 operating insurance companies in Kenya, including 24 non-life businesses, 11 life insurers and 12 composite firms. Insurance companies distribute their products mainly through agents and brokers, and there are 187 licensed insurance brokers, 29 medical insurance providers and 44,631 insurance agents operating in the country, according to the Association of Kenya Insurers’ (AKI) 2012 annual report.
Other licensed players include 134 investigators, 105 motor assessors, 22 loss adjusters, two claims agents, eight risk managers and 27 surveyors. Unsurprisingly, given the large volume of players in the 43m-person market, the short-term non-life insurance segment is fragmented, with firms offering similar products and charging minimal switching costs. There are some 36 underwriters in the short-term segment, the top five of which account for approximately 37% of gross written premiums (GWPs), leading to price wars that have seen smaller players offering extremely low rates to remain competitive. Meanwhile, the long-term life market is much more concentrated, with five companies accounting for 70% of total premiums, and listed firms accounting for 69.4% of premiums, according to Standard Investment Bank’s (SIB) 2013 report, “Kenya Insurance Sector Initiation of Coverage”.
The four biggest companies by share of total premiums are Pan Africa, with 14.8%; CIC Insurance Group (7%); Liberty Kenya Holdings (6.6%); and Britam (6.3%). The largest business class in the short-term segment is commercial motor, accounting for around 26% of total premiums, followed by motor private at 19%.
Distribution
Insurance is commonly sold directly to policyholders by insurers or via brokers, although there has been a movement to expand the market using a bancassurance model, in which financial institutions sell policies to their banking clients. In 2013 the Central Bank of Kenya introduced new bancassurance regulations, stipulating that banks are not able to underwrite their own policies, but can act as distributors for existing brokers. Firms, including CIC, Britam, Kenya Orient, CfC Life (a member of Liberty) and Jubilee have partnered with local banks to offer bancassurance products.
At the same time, Kenyan insurers have begun exploring ways to develop newer distribution channels online and via mobile devices; Jubilee launched its Bima247 online insurance platform in July 2014, while mobile insurance apps similar to the money transfer system M-Pesa have proven increasingly popular among providers, particularly within the micro-insurance segment. CIC estimates that 85% of adult Kenyans with bank accounts are not covered by any type of insurance policy, indicating significant potential for bancassurance, online and mobile application delivery channels.
Regulation
Insurance regulation was based on UK law under the Companies Act 1960 until 1986 when the Insurance Act, CAP 487 created the Office of the Commissioner of Insurance. In 2006 the Insurance Regulatory Authority (IRA), a statutory government agency, was established under the Insurance Act (Amendment) 2006, CAP 487 to regulate, supervise and develop the insurance industry. The IRA is governed by a board of directors responsible for overseeing operations, regulating and supervising industry players, issuing guidelines and deploying resources to monitor the markets behaviour, compliance and solvency issues. Although the IRA has operated under a compliance-based model, lack of resources for enforcement and changing international practices have created a host of challenges for the authority – it released 16 guidelines aimed at improving corporate governance in 2013 alone – and has led to a strategic shift in recent years.
Under its Strategic Plan (2013-18), the IRA highlighted its need to shift supervisory measures from a compliance-based system to a risk-based supervision (RBS) model, with the reasoning that an RBS model would enhance service delivery while reducing risk exposure and premium undercutting. “The RBS focus resonates well with best practice in supervision of the insurance industry globally. More importantly, it mirrors our focus on offering good quality service to our customers as we continue to lay emphasis on issues of consumer protection, as per our mandate,” Steve O Mainda, chairman of the IRA, wrote in the forward of the strategy document. RBS models take an approach focused on early identification of potential risks, and include assessment of mitigating factors on a case-by-case basis, with resources channelled to high-risk areas. The IRA’s strategic plan also seeks to enhance complaints resolution, resolve 90% of claims within 30 days, improve insurance awareness, increase penetration to 3.5%, enhance access and increase customer satisfaction.
Growth
The sector has witnessed rapid growth over the last decade, with written premiums reaching compound annual growth rates (CAGR) of 15.1% between 2004 and 2014, while the number of agents has nearly doubled, growing from 2665 in 2007 to 4862 in 2012. AKI figures show that the industry grew by 18% in 2012, with growth in written premiums mirrored by expanding middle-class incomes.
GWPs increased by 18.5% in 2012, reaching KSh108.54bn ($1.24bn) from KSh91.6bn ($1.04bn) in 2011, according to the AKI. Gross earned premiums (GEPs) rose by 19% to stand at KSh84.38bn ($961.93m) in 2012, compared to KSh70.92bn ($808.49m) in 2011. At the same time, profits before tax grew to KSh14.8bn ($168.72m) in 2012, a 52.9% increase over KSh9.68bn ($110.35m) the year before.
The IRA reported that gross premium income grew by 21.9% in 2012, while the industry’s asset base stood at KSh311.22bn ($3.55bn) in 2012, of which 77.2% comprised income-generating investments. Short-term insurance took the largest slice of the pie that year at 66% compared to 34% in the life segment, an advance for long-term coverage from 25% of premiums the year before. Penetration remains low, at just 3.4% of GDP in 2013, a small increase from 3.02% the previous year, but still far below South Africa’s 14.16%. Long-term insurance penetration is especially lacking, at just 1.2% in 2013 compared to 2.2% in the non-life segment. This presents growth opportunities in a relatively untapped market. While Kenya suffers low penetration, it is nonetheless ranked by global rating firm A.M. Best as the third-highest in sub-Saharan Africa in profitability – after Nigeria and Ghana – and its market is under-exploited. Rising disposable incomes and new demand for project, property and political coverage are expected to drive growth going forward (see analysis).
New Insurance Act
The industry has had a turbulent recent history, following the closures of several large insurance companies, including Standard Assurance, Access Insurance, Kenya National Assurance, Stallion Insurance, Lakestar Insurance, United Insurance and others over the past two decades, due to insolvency rising from high claims. Underwriting profits have also remained low due to high competition, weak pricing and fraudulent claims, with premium undercutting putting a dent in profit margins. While the Insurance Act was an effective tool for regulating the industry in the 1980s, over time the law has faced criticism for being ineffective and vague, and for failing to provide adequate protection against fraud and undercutting, while companies have frequently exploited loopholes and avoided enforcement and fines. “In the past, governance has been found to be wanting to a certain extent,” Tom Gichuhi, CEO of the AKI, told OBG. “This tells you why we have had a number of insurance companies coming down in the past. There are many reasons, but one of them was corporate governance.”
Amendments have been made on a piecemeal basis. The IRA released 16 new guidelines in 2013 aimed at improving corporate governance to prevent fraud, strengthen companies’ capitalisation and prevent future closures. Among the improvements were requirements that all insurers have a risk management function, an actuarial function, a compliance function and an internal audit function. Insurers also must submit disclosures to the IRA more frequently, including a financial status report for each fiscal year that is signed off by the insurer’s appointed actuary. Further reforms are poised to have a stronger impact on the industry. Under development since 2011, the proposed New Insurance Act was introduced in late 2013. The draft bill, which has yet to be ratified by parliament, is expected to be operational by the end of 2014 and may result in higher premiums estimated at KSh250bn ($2.85bn), while both increasing the uptake of profitable life insurance and pension contributions to 80% of total premiums, and expanding overall penetration to 3.5%.
Big Adjustments
The new law is a major departure from the current regime that we have in place in the sense that it marks a shift as set out in the current Insurance Act, from compliance/rule-based to risk-based supervision. Under the new act, the guidelines issued will be based on the class of insurance and other related operational risks each company is writing or facing, and designed to prevent the problem before it occurs,” Gichuhi told OBG. The new act also seeks to eliminate composite insurance by encouraging these firms to split their businesses. Some, including Insurance Company of East Africa, UAP Insurance and Britam, have already split their operations in anticipation of new requirements. Small insurance companies may find it difficult to meet capital requirements when the act passes, resulting in industry consolidation. For instance, in 2007 the IRA increased the minimum required paid-up capital for an insurance company from KSh100m ($1.14m) to KSh300m ($2.3m) for short-term underwriters and from KSh50m ($570,000) to KSh150m ($1.71m) for long-term insurers. Composite companies must have capital to cover both lines, making their requirement the highest at KSH450m ($5.13m). The new act will determine capital requirements based on individual risk profiles, with some analysts predicting that capital requirements will rise from current levels, especially for smaller firms offering lower premiums.
“RBS will address the problems associated with pricing without the IRA or AKI demanding that risks must be properly priced. The performance of every class of insurance will determine whether the rates an insurer is applying are sustainable. If you are not charging adequate prices, you will not be allowed to provide insurance for the particular line of business,” said Gichuhi.
Following the release of the proposed new act, several Kenyan MPs suggested amendments, including exempting the IRA from participating in the appointment of auditors for insurers and increasing fines for non-compliant auditors from KSh10,000 ($1140) to KSh1m ($114,000). Some suggested there should be a 21-day waiting period to obtain the information of companies used in RBS activities and that such information should only be obtained with IRA board approval, although this would contradict pacts on supervision of financial institutions in East African states. In December 2013 President Uhuru Kenyatta decided against ascenting to the amendments, due to ongoing concerns from the IRA about its supervisory role; however, he moved in March 2014 to sign into effect several amendments to the existing act, with stakeholders now expecting parliament to ratify the new law by late 2014.
Motor Cover
Motor vehicle insurance is mandatory in Kenya, and the auto insurance segment dominates the industry, accounting for 45% of short-term GWPs, according to SIB. As of 2013, the private motor segment held 16%, and the commercial segment 23%. Within the highly fragmented motor segment, CIC Insurance is the market leader, commanding 9.8% of total written premiums. The private motor insurance market has reported double-digit growth since 2008, when GWPs jumped by 19.73% to reach KSh7.3bn ($83.22m), expanding a further 36.9% between 2009 and 2010 to reach KSh9.95bn ($113.43m), and 16.53% between 2010 and 2011 to KSh11.6bn ($132.34m). Growth slowed slightly between 2011 and 2012, hitting 9.89%, to reach total GWPs of KSh12.74bn ($145.24m), according to AKI’s 2012 annual report. Despite the growth, motor vehicle insurance remains the only unprofitable class in Kenya, losing KSh746m ($8.5m) in 2013, up from KSh100m ($1.1m) in 2012.
In the commercial segment, growth has remained equally strong, with the segment expanding by 20.73% between 2008 and 2009; 23.51% between 2009 and 2010; 11.94% between 2010 and 2011; and 11.79% between 2011 and 2012, to reach KSh17.4bn ($198.36m) in GWPs in 2012. New vehicle registrations have averaged 123,648 annually between 2007 and 2011, and SIB expects motor insurance will remain a leading short-term class in 2015, bolstered by the high discretionary spending of middle-income households.
Regulatory reforms have also helped underpin growth. In January 2010 the IRA issued new premium rate guidelines for the private motor segment. Under the new rules, charges were revised upwards from the previous blanket rate of 4% of the vehicle’s value, to 7.5%, discounting by 10% for each year of no claim to a minimum of 3.75% of 50%. Claims and payouts have not been without issue, with claims blamed for Blue Shield’s relegation to statutory IRA management in 2011, according to the IRA’s CEO, Sammy Makove, following a massive influx of claims in its public service vehicle (PSV) segment, which at the time had a 50% market share. On announcing the 2013/14 budget, Henry Rotich, the Cabinet secretary for the National Treasury, introduced amendments to the Insurance Act that set a maximum payout for a motor vehicle accident at KSh3m ($34,200), although this cap has been criticised by the Law Society of Kenya as being unconstitutional. SIB reported in 2013 that the new rule has had a significant impact in terms of cushioning companies from fraudulent claims, especially within the PSV category (see analysis).
Medical
Medical insurance ranks in a distant second behind motor lines, with the medical class comprising 15% of industry GWPs. Despite posting a strong CAGR of 14.8% between 2009 and 2011, the class only recently returned to profitability due to intense competition and rising health care costs negatively affecting underwriting profits. SIB reports that the medical segment reported KSh650m ($7.41m) in underwriting losses in 2011, while profitability of KSh119m ($1.4m) was achieved in 2013. In an attempt to mitigate the segment’s risk exposure, companies have introduced copay systems in which the underwriters share costs, such as hospital administration, with policyholders. This may reduce medical loss ratios, which are projected to have reached 49% in 2013, up from 46% in 2012. The most promising method of reform, however, will likely be in the New Insurance Act. When ratified, the new act is expected to coincide with a rise in medical premiums, while the growing uptake of group insurance schemes for white-collar workers will likely contribute to sustained medium-term growth. New technology, including biometric identification systems, is also expected to reduce the incidence of medical insurance fraud.
Meanwhile, the country’s National Hospital Insurance Fund is also actively working to expand medical coverage to the poorest segments of Kenyan society, recently introducing annual premiums set at just KSh160 ($1.82) per month for informal workers and their families (see Health chapter). The expansion of micro-insurance products is also expected to bolster medical coverage, and SIB projects the segment will register the highest growth rates in the sector over the medium term.
Micro-Insurance
With insurance penetration still low despite years of strong growth, micro-insurance has been identified as a critical channel through which to deliver new products to the low-income population, as evidenced by the IRA’s decision to incorporate new micro-insurance regulations in 2012. Under these regulations, micro-insurance is defined and incorporated under the IRA’s 11th Schedule, with commission rates for micro-insurance companies set at 10%.
A poor savings culture and low levels of disposable income have been identified as two of the key factors behind low penetration rates, but with micro-insurance set to offer smaller-scale coverage to low-income earners, charging minimal premiums for coverage including accident, illness, death, fire and national disasters, as well as rapidly growing mobile phone protection packages, uptake of insurance is expected to increase. According to a 2010 report by the Centre for Financial Regulation and Inclusion (CFRI), 53% Kenyans have incomes between $2 and $10 per day, representing a potential target market of 10.8m people.
With an aggressive consumer education campaign aimed at raising awareness of the benefits of insurance policies and addressing the issue of affordability by promoting insurance and by extension micro-insurance, it is expected that this will serve a dual purpose of enhancing public awareness as well as consumer rights. The IRA focused its efforts on the informal sector, farmers and farm workers, and domestic help, groups that typically lack to appropriate mechanisms to control risks. Insurance companies are increasingly adopting to the micro-insurance concept, expecting to cash in on growing demand for smaller products. For example, CIC has a micro-medical policy, Afya Bora, providing family outpatient coverage for KSh50,000 ($570) annually; UAP’s Salama Sure offers medical, accident and life policies at rates ranging from KSh200 ($2.28) to KSh400 ($4.56) per month; and Faulu Kenya’s Faulu Afya policy is a comprehensive medical micro-insurance scheme. According to the CFRI, conservative estimates of the micro-insurance market stand at 150,000 to 200,000 policyholders, but if formal credit life insurance policies are added, the numbers increase to between 650,000 and 700,000 insured, or 3% of the adult population. The agricultural sector has also seen an uptake in micro-insurance products, with several underwriters currently developing agricultural products, including Kilimo Salama, a weather-index-based micro-insurance mobile programme protecting small-scale farmers against financial losses.
The programme uses automated, solar-powered weather stations and a “pay-as-you-plant” mobile payment system, which allows farmers to experiment with the policy before expanding coverage, an important allowance for farmers, who may be sceptical of the benefits of crop, livestock and farm asset insurance (see analysis). In addition, the agricultural insurance policy has already been developed through a multi-stakeholder engagement process spearheaded by the Ministry of Agriculture with support from the World Bank and other development partners. Indeed, “there is tremendous opportunity for insurance providers at the county level, through products like crop and livestock coverage,” Muema Muindi, managing director of Kenya Orient Insurance, told OBG.
Going Mobile
Indeed, mobile payment and registration applications represent a key component of micro-insurance coverage. ICT uptake has been identified as a critical factor through which to expand coverage, and micro-insurance providers are at the forefront of the ICT insurance boom. “ICT plays such an important role in the industry and it is only going to expand,” Ashok Shah, group CEO of Apollo Investments , told OBG. “ICT innovations, including mobile service delivery and premium payment platforms, offer a huge channel for future growth. We are lagging at the moment, but I anticipate strong uptake in the future.” UAP’s Salama Sure, for example, allows clients to activate policies via a simple text message and pay monthly premiums through the M-Pesa mobile money application.
More recently, Kenya’s largest mobile operator, Safaricom, launched a health care micro-insurance project in partnership with Changamka MicroHealth and Britam. The Linda Jamii programme will target 1m subscriptions in low-income areas using the M-Pesa platform to collect premiums, which run at about KSh12,000 ($137) annually, covering everything from dental, maternity, optical and hospital visits to funeral expenses. Launched in January 2014, the programme is currently only available in Nairobi, but is expected to expand nationwide by the end of the year, granting low-income policyholders access to over 1000 hospitals. User-friendly technologies like these help companies reach out to under-served customer bases, reduce transaction costs, and enable real-time policy and payment monitoring. ICT platforms and digitisation of claims and contracts are also expected to reduce fraud and boost overall industry efficiency, and both the IRA and private insurance providers have been keen to implement new ICT strategies to reduce overheads and expand coverage.
Electronically Efficient
Under the IRA’s five-year strategic plan, and in line with Insurance Core Principles developed by the International Association of Insurance Supervisors, the New Insurance Act will also see the creation of an appropriate framework to leverage ICT usage in the industry. In January 2014 the IRA launched an Electronic Regulatory System (ERS), a web-based platform that allows companies and agents to log into a shared system. The ERS portal manages formal communications with the IRA, with regulated entities expected to complete and submit all required paperwork online. The system is expected to reduce the time taken to prepare data outputs and analysis, which has been a major challenge for the IRA, while online submissions will enable the regulator to improve data depth, consistency, quality and accessibility.
At the same time, technology uptake could also be instrumental in preventing fraud and improving profit margins. Electronic registries in the motor insurance segment, for example, can prevent double payments of accident claims, while biometric identification systems are expected to replace photo ID cards in the medical segment, reducing the incidence of fraud in that class – although these types of initiatives are capital-intensive and can take several years to roll out.
Life
Although overall penetration is limited, Kenya’s long-term segment has high potential, having shown impressive growth in recent years, and grew the most of any life segment in Africa in 2013. Life policies reported a CAGR of 16% between 2006 and 2011, with SIB data showing that net premiums within the segment expanded by 25.8% between 2011 and 2012 to reach KSh17.3bn ($192m). The AKI pegged the long-term segment’s GWPs at $436m as of 2013. Within life insurance, deposit administration and pensions account for 34.6% of premiums, followed by ordinary life, which accounts for 34% of premiums. SIB projects the market structure will remain generally unchanged in the medium term, with dominant group schemes expected to keep the majority of business among the segment’s main players – Kenya Re, Pan Africa, CIC, Liberty Kenya Holdings and Britam – and forecasts penetration will remain sluggish, reaching 1.22% by 2015. Representing 34% of industry premiums as of 2014, the sector holds considerable scope for expansion. Life insurance is a profitable class, and the long-term segment’s current low penetration offers expansion opportunities.
Reinsurance
There are currently six reinsurance companies operating in Kenya, led by Kenya Re, which posted an 11% rise in pre-tax profit in 2013 to reach $38m. This segment, too, holds significant potential for future expansion, with SIB reporting that lack of reinsurance support, particularly in the micro-insurance segment, continues to pose problems for growth among underwriters. In addition to restricting product innovation, SIB reported that concentration in the reinsurance market puts insurers at a pricing disadvantage, with the situation made more difficult as insurers derive their premiums from a highly competitive market.
Political risks had traditionally lacked reinsurance support until the African Trade Insurance Agency began providing reinsurance support for political underwriting in 2008, which became a prominent class following the 2007-08 post-election violence. Political and security risks have garnered significant attention recently, after two major security incidents occurred in 2013.
Following the fire that gutted Jomo Kenyatta International Airport’s arrivals terminal and the Westgate shopping centre attack, the importance of both reinsurance and political/terror risk coverage was thrown into the industry spotlight. APA Insurance paid out a KSh1.97bn ($22.46m) claim for the airport fire in April 2014, one of the largest in Kenya’s history, while Mayfair Insurance paid the Westgate Nakumatt a KSh1bn ($11.4m) claim for damages incurred during the attack. APA paid just KSh200m ($2.28m) of the airport settlement from its own accounts, with the rest spread among reinsurers, including Kenya Re, Zurich-based Swiss Re, Zep Re, East Africa Re and Africa Re. Stakeholders expect reinsurance premiums to rise after these incidents, though the market has yet to feel the full impact.
Outlook
Although the dominant short-term segment is highly fragmented, with fraud, price competition and low penetration rates limiting higher profits, the insurance market holds considerable promise in the medium and long term. The expansion of coverage to lower-income groups via micro-insurance products also promises new opportunities to expand the market.
Read More from OBG
