Kenya BEHIND THE NEWS
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Energy growth sparks risk culture Liz Booth
news@commercialriskafrica
[ n a i r o b i ] — T h e o v e ra l l message for Kenya is positive—not least thanks to the recent development of oil and gas reserves. Deniese Imoukhuede, Senior Financial Analyst at credit rating agency AM Best, explained that the burgeoning energy market is having a ripple effect across the whole business community and driving the adoption of more mature risk management and transfer techniques. “The development is being carried out by multinationals and risk management is improving because these firms are working with international reinsurers and are being exposed to those demands,” said Ms Imoukhuede. She cautions, however, “When we talk about growth at the moment it is not substantial growth. Insurance and risk issues are developing off a very low base, so you may see a multi-100 percentage growth but reality the actual numbers are still low. “It is still mostly the multinationals that have insurance programmes and risk management plans—in the SME section of the market there is still a very long way to go.” Total insurance premiums in Kenya reached US$1bn in 2011, with total insurance penetration of 3.2% making the country east Africa’s largest insurance market. Kenya has rolled out some initiatives for microinsurance and Takaful. Last November, Insurance Regulatory Authority (IRA) Technical Manager Agnes Ndirangu outlined a draft microinsurance policy. She said insurance penetration in Kenya is low at around 3%, compared with other markets like South Africa at 15%. The aim of the IRA, she said, is
that: “The new policy will help Kenya achieve 5% penetration within the next five years. There are 43 licensed insurance companies in Kenya and Kenyans’ uptake of insurance cover, both at corporate and personal levels, remains predominantly in the motor, fire, industrial and personal accident classes. Both the IRA and the government more generally have been quoted as stressing the importance of access to insurance for all, helping to protect the most vulnerable which in turn will help develop the economy and boost larger businesses too. Like Mr Roberts, AM Best’s Ms Imoukhuede is optimistic for the future—not least because of the level of regulation in Kenya. “The Kenyan regulators are very proactive,” she said. “More insurance associations have been formed to drive growth and there are plenty of local insurers providing a competitive marketplace for buyers.” Kenya established the IRA as the new insurance regulator in 2007 following the Insurance (Amendment) Act 2006. Following the act, Kenyan (re)insurers were required to meet higher minimum capital requirements (MCRs).
COMPETITION Primary insurers have faced pressure on their capital positions owing to a volatile stock market and AM Best expects consolidation to follow, given these pressures. Kenya’s insurance market is very competitive, in part as the main insurance buyers tend to be governmentrelated bodies. These entities are obligated to accept cover based on pricing as opposed to terms and conditions. Insurers therefore face pressure on margins. Non-life risks are commonly broker-
sourced, with the top three brokers generally having access to better quality business. Increasing competition from regional and international reinsurers continued in 2012. Foreign participation in Kenyan risks is mainly from regional financial groups—from eastern and southern Africa, or India, where there are cultural links. For example, General Insurance Corporation of India has a 14.8% stake in East Africa Re. In 1979, four Indian insurance companies operating in Kenya merged to form Kenindia Assurance Co. There is little visible foreign participation from large, western players. Recent legislation has restricted the maximum shareholding by any one party in an individual institution to 25% of paid-up share capital. AM Best says that, as is common with other emerging insurance markets, there are compulsory cessions for reinsurance risks in Kenya. Kenya Reinsurance Corp. Ltd., which is partially privatised and 60% controlled by the Kenyan government, is supported by compulsory cessions
that oblige insurers in the Kenyan market to cede 18% of all treaty business written to the company. ZEP-RE (also known as PTA Reinsurance) is a regional reinsurer created in 1992 by an agreement of heads of state and governments of the Common Market for Eastern and Southern Africa (COMESA) countries.
TREATY RULES Cedents in its core markets of Kenya, Uganda and Tanzania must place 10% of treaty business with the company before ceding risks with other reinsurers. Meanwhile, Africa Re receives a legal cession of 5% on all reinsurance treaties from insurance companies that operate within its member states. Reinsurers tend to have material voluntary business, in addition to compulsory risks. These legal cessions in both the local and regional markets, and the greater economies of scale enjoyed by the larger reinsurers, limit rival reinsurers’ competitive positions and constrain their ability to increase market share, according to Ms Imoukhuede. The government had promised to phase out these cessions—originally
scheduled to happen in 2011, delayed to 2013 and currently on hold until 2015. “Don’t hold your breath on that one,” advises Ms Imoukhuede, who believes that it will shake up the market when change finally happens. The delays aside, Ms Imoukhuede says all the signs are of a developing market in which insurance will play an increasing part in risk transfer. Kenya does still face some other economic challenges and AM Best says the country still suffers from high political, economic and financial system risks. The collection of premiums also remains an issue for the market. The inflationary environment in Kenya throughout 2011—when inflation reached an estimated 18.6%— and the subsequent increase in interest rates affected results. Although inflation fell to an estimated 7% in 2012, AM Best expects the economic environment to remain volatile. Meanwhile the IRA reveals that insurance claims numbers have been rising throughout 2012. For the second quarter, it reports that claims incurred under general insurance business amounted to KES14.36bn by 30 June, 2012. This had increased by 17.0% from KES12.27bn recorded in the previous year. For the third quarter of 2012, insurance claims incurred under general insurance business amounted to KES22.43bn by 30 September, 2012. These had increased by 15.4% from KES19.43bn recorded in the same period of the previous year. The claims numbers reflect increases in insurance premiums paid to insurers in both quarters, in turn reflecting an ever-increasing use of insurance as a risk transfer mechanism.