With its large population, diverse economy and an insurance penetration rate of less than 3% of GDP in the first quarter of 2018, compared to a global average of more than 6%, Kenya holds significant promise as an insurance arena. Recent years have seen the government and the industry regulator attempt to realise this potential: key measures have included the localisation of marine insurance business, the development of a micro-insurance framework, increased training for insurance agents and the promotion of technology in transacting insurance business. Juxtaposing these efforts are challenges including a lack of awareness among consumers and reputational damage caused by a number of historical insolvencies, as well as systemic weaknesses such as fraudulent claims and the frequency of delayed claims payments. An ongoing process of regulatory reform is central to tackling these obstacles. In the shorter term, solid growth forecasts for the Kenyan economy bode well for the prospects of continued premium growth in the sector.
Rapid Rise
The origins of Kenya’s modern insurance industry lie in the nation’s colonial period, when UK firms such as the Pioneer General Assurance Society (founded in 1930), Jubilee Insurance (1937), Pan Africa Insurance (1946) and Provincial Insurance (1949) founded agencies or branches in the country to provide cover to the largely agricultural concerns of settlers. By the time Kenya gained independence in 1963 the majority of these branches had been transformed into fully fledged insurance companies. The industry grew rapidly over the following years, but the incorporation of local insurance firms did not begin until 1978, following the collapse of the East African Community the previous year. The expansion of the market received further impetus in 1987 with the establishment of the Association of Kenya Insurers, an independent, non-profit-making consultative and advisory body mandated with encouraging insurance growth, and strengthening standards in Kenya and beyond. In 1990 the domestic market was liberalised, a development which resulted in an influx of new insurance providers – as well as increased market volatility. The first significant market failure came in 1996, with the collapse of the Kenya National Assurance Company. However, this event did not alter the upward trajectory of the industry, and by 2002 there were a total of 41 registered insurers in the country, holding licences for life cover or general insurance, or composite licences which allowed them to serve both segments of the market. Between the general elections of 2002, widely viewed as an important step in the country’s democratic evolution, and the introduction of a new constitution in 2010 the insurance industry’s total assets more than tripled, from KSh25bn ($244.9m) to KSh79bn ($774m).
The Modern Sector
By the first quarter of 2018 the aggregate assets of the Kenyan insurance industry had grown further, to reach KSh375.3bn ($3.7bn), according to the sector’s regulatory body, the Insurance Regulatory Authority (IRA). Kenya’s status as a regional economic hub means that the sector is populated by domestic, regional and global insurers competing for business both within the country and beyond its borders. As of January 2018 some 53 insurance companies were authorised by the IRA to transact business in Kenya, 26 of which are categorised as long-term insurers, offering products in areas such as life assurance, annuities, pensions, group credit, permanent health and investment (including unit-linked investment products). The largest category is general insurers, of which there are 41, which provide cover across a broad range of lines, including aviation, engineering, fire, liability, marine, motor, personal accident, theft, workers’ compensation, medical and micro-insurance. Kenya is also home to four reinsurance companies: Continental Reinsurance, East Africa Reinsurance, Kenya Reinsurance (Kenya Re) and Ghana Reinsurance (Kenya). Lastly, the insurance industry supports an array of ancillary service providers, including 204 insurance brokers.
Structure
Like many insurance sectors in the region, Kenya’s is a fragmented one, a trait which is most clearly seen in the general insurance segment, where none of the nation’s “big five” firms claim a market share of more than 10%. The largest general insurer is Jubilee Insurance, which accounted for 9.62% of gross premium income in the first quarter of 2018, according to the IRA. The rest of the big five is made up of APA Insurance (8.11%), Britam General Insurance (7.18%), UAP Insurance (6.95%) and CIC General Insurance (6.87%).
For the smaller firms, the battle for market share is largely carried out on the basis of price. Highly competitive quotations, however, have had a negative effect on underwriting quality. A recent trend of consolidation, driven by rising competition and new regulatory requirements, has therefore been broadly welcomed by market participants. Given the interconnectedness of the East African insurance arena, merger and acquisition activity in Kenya frequently has a regional dimension, such as the 2015 deal in which Nairobi Securities Exchange-listed financial services group Britam acquired a 99% interest in giant Real Insurance Tanzania, Malawi and Mozambique for $15.7m. The same year another exchange-listed firm, Pan Africa Insurance Holdings, bought a 51% stake in general insurer Gateway Insurance for KSh561m ($5.5m), which it increased to a 56% holding in 2016 for KSh55m ($539,000).
Reinsurance
The regional dynamic also extends to the reinsurance segment. As well as the domestically licensed reinsurers, three regional reinsurers operate in Kenya: ZEP-RE (PTA Reinsurance), African Reinsurance (Africa Re) and African Trade Insurance Agency. Under the terms of the charters granted to them by the regulator, ZEP-RE and Africa Re receive 10% and 5%, respectively, in mandatory cessions from the domestic market. The locally licensed Kenya Re, meanwhile, receives 20% of all Kenyan reinsurance business. Retention ratios in the industry vary widely across business lines. In the case of motor insurance, around 97% of premium was retained by insurers in 2016, according to the IRA. “Motor insurance rates have been going down in premium, but the cost of repairs and the legal awards for motor third party claims are going up, which could pose a serious challenge in the coming years,” Vijay Srivastava, CEO and principal officer of GA Insurance, told OBG. Medical and personal accident lines showed an aggregate retention rate of 69% and 74%, respectively. Business lines with low retention rates include aviation, where only around 3% of premium are retained, and engineering, where insurers retain a quarter. As with the insurance segment, reinsurers operating in Kenya are facing increasing levels of competition, a fact cited by US ratings agency AM Best in its February 2018 decision to downgrade the financial strength rating of Kenya Re to “B” (fair) from “B+” (good). In August 2018 Johannesburg-based Global Credit Ratings placed Kenya Re’s claims-paying ability rating of “BB” under review, while revising its credit rating outlook from stable to negative. Currently, in the domestic market, it claims a 20% mandatory cession until 2020. As a response to the challenge of competition, Kenya Re announced in March 2018 that it was considering purchasing stakes in national reinsurance companies in other markets, as well as setting up new operations in foreign jurisdictions, including Ghana, Nigeria, Ethiopia, India and Nepal – business which now accounts for 40% of its reinsurance premium. In August 2018 Kenya Re released its earnings results for the half-year ending June 2018, which saw a 16% year-on-year decline and a KSh1.2bn ($11.5m) loss in gross premium because of a greater appetite by local reinsurers in those markets.
Takaful
Takaful, or sharia-compliant insurance, is a relatively new concept in the Kenyan market. The first fully fledged takaful operator to open its doors in the country was Takaful Insurance of Africa (TIA), which was licensed in 2011. Since then, the advance of takaful in Kenya has been modest, confined to a small number of operations such as the takaful arm of the Islamic lender, First Community Bank, and isolated initiatives such as the sharia-compliant reinsurance product offered by Kenya Re. However, with Muslims accounting for around 10-15% of the population, and the increasing popularity of takaful products in global markets, Kenya’s nascent takaful industry is one that holds significant potential. The likelihood of an expansion of takaful activity increased in May 2015, when the IRA introduced new rules which allow conventional insurers to offer sharia-compliant coverage through so-called Islamic windows. The following year an amendment to the Insurance Act established a new definition for takaful, while a new section (19A) was inserted to lay out the procedures for the licensing, regulation and supervision of the takaful business in Kenya. By March 2018 Kenya Re was actively looking at buying into re-takaful (Islamic reinsurance) markets in West Africa, Mozambique, Botswana and Zimbabwe, among others.
Distribution Channels
Insurance companies in Kenya secure business through three main channels: brokers, which work independently to offer cover from a range of insurers; agents, which typically are tied to a single insurer; and direct channels, which usually take the form of a proprietary telecoms team. Insurers have been teaming up with banks to sell insurance in the Kenyan market since the regulator first made provisions for bancassurance in 2004. The practice is generally carried out according to one of three models: insurers using their staff to sell products in bank branches; banks using their employees to sell insurance, usually from a dedicated desk within the branch; and banks joining with brokers to sell insurance and service existing contracts on a profit-sharing basis. While the channel remains a relatively undeveloped one, the potential benefits for banks seeking to grow their non-interest income, as well as insurance companies attempting to broaden their customer base, suggest bancassurance will play an important role in future growth.
As part of its drive to increase insurance penetration, the IRA has authorised the use of new distribution channels. Technology is likely to open up fresh routes to premium, a development which may strengthen an existing trend of more direct business being conducted by Kenya’s insurers. The rising tendency of direct procurement has prompted the chairman of the Association of Insurance Brokers Kenya (AIBK) to warn of a significant threat to the local brokerage business. As a response, the AIBK is in discussions with the IRA to change the way brokers are paid, from the current system of a regulated commission rate, to a fee-based system which better reflects the time and resources spent on clients both prior to sale and in the follow-up on claims. In April 2018 the AIBK said that brokers had lost 50% of their market share as of January 2018.
Performance
Despite fears that the political turbulence of an election year would negatively affect business, Kenya’s insurance sector showed relatively robust growth over 2017 and 2018. According to the IRA, the insurance industry’s asset base grew by 14% to just over KSh624.2bn ($6.1bn) by the first quarter of 2018, from KSh547.4bn ($5.4bn) at the end of March 2017. Aggregate insurance premium expanded by 3.2% for the 12 months leading up to March 2018, compared to growth of 14.4% during the same period in 2017. The long-term insurance business was up 1.3% for the 12-month period, compared to a 4.2% rise for general insurance business. This continues the trend of long-term insurance eating into the dominance of the general insurance segment. However, this change is taking place at a slow rate, and in the first quarter of 2018, 66.4% of the industry’s KSh65.2bn ($639.2m) in aggregate premium continued to be sourced from general lines, compared to 65.7% and KSh41.6bn ($407.2m) in the first quarter of 2017. The investment activity of insurance companies also showed gains in the first quarter of 2018: total investment increased by 16.7% year-on-year, from KSh436.5bn ($4.3bn) to KSh509.4bn ($5bn). The most popular asset class was government securities, which accounted for 55.5% of the total, followed by investment property (15.4%), equities (12.3%) and term deposits (8.1%).
Regulation
Insurance in Kenya is governed by the Insurance Act of 1984, enacted in 1986, which also established a regulatory body for the industry: the Office of the Commissioner of Insurance. A 2006 amendment to the Act implemented the IRA as the new supervisory body for the sector – a role it retains to this day. The 1984 legislation, and its subsequent amendments, continues to govern the industry’s activities, covering the core areas of licensing, assets, liabilities, solvency and investment, inspection, rates, claims, assignment, brokers and reinsurance. Amongst its key provisions is the requirement that at least one-third of company ownership be East African, and a prohibition on any one person owning more than 25% of an insurance company, except in exceptional circumstances.
The law also establishes minimum capital requirements for insurers, but this framework is currently undergoing a transition from a simple capital requirement to a risk-based model – a supervisory system which takes into account the risk exposure of a company and assesses its ability to react to the occurrence of those risks. By September 2018 risk-based regulations had been embraced by insurers across Africa that were willing to comply with new legislation. While it poses difficulties for some market participants, the move to the new system is broadly perceived as essential to the long-term sustainability of the industry, which has seen a number of failures over recent decades – including the insolvencies of United Insurance, Standard Assurance, Blue Shield Insurance and Concord Insurance.
The new requirements were established by the Insurance Act of 2015 and, although insurance providers have been given until 2020 to meet them, they are already having an effect on the capital adequacy ratios (CARs) of most firms. The IRA has established a minimum CAR requirement of 200% of capital to risk-weighted assets where there is no supervisory intervention – a target some insurers have found difficult to meet. A study by the Actuarial Society of Kenya, published in 2018, reported that in the 2015-17 period the sector’s average CAR dropped from 412% to 131% for general insurers, and from 206% to 136% for life insurers. Smaller players, in particular, have found the new regulatory environment a challenging one, increasing the likelihood of more consolidation in the sector.
The domestic market could face further pressures with the implementation of international financial reporting standards (IFRS); however, Hassan Bashir, CEO of TIA, believes that the benefits would outweigh the challenges in the long term. “The introduction of IFRS-9 and IFRS-17 are likely to bring about some short-term pains but in the long run, the impact will be very positive,” he told OBG.
Convergence
The IRA continues to pursue its mandate to regulate, supervise and develop the industry. However, in April 2017 the Cabinet approved the draft Financial Services Authority (FSA) Bill 2016, by which the government intended to merge the functions of four regulatory bodies: the Capital Markets Authority, the IRA, the Retirement Benefits Authority and the Sacco Societies Regulatory Authority. In May 2018, however, the Financial Markets Conduct Bill was tabled, replacing the FSA Bill. The new bill will allow the Financial Markets Conduct Authority to regulate and supervise services and products for its retail customers, with the potential to protect people making financial investments or managing financial risk. The combination of regulatory functions is intended to eliminate overlaps and opportunities for arbitrage, thus reducing systemic risk and increasing protection for consumers.
Outlook
Demographics will play an important role in future premium growth in Kenya. With around 45% of citizens earning between $2 and $20 per day, the country has East Africa’s largest middle class proportionally.
Challenges to growth remain, most notably the prevalence of fraud in the market, and these will take time to address. The long-term prospects of the industry, however, are underwritten by the anticipated growth of the economy: in April 2018 the IMF estimated that GDP will expand by 5.5% in 2018, compared to 4.8% in 2017.
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