Kenya: Country profile
When Kenya is mentioned, it is usually as a result of political issues and not always positive ones. The insurance sector has weathered these storms and managed to secure an important place in Kenya’s economy. Beset by unrest and violence, the East African powerhouse still makes an attractive investment opportunity for insurers looking to expand to the region – and in fact savvy insurers, brokers and financial advisers have capitalised on the unique needs of the country to introduce niche insurance products.
Growing political and economic stability
While political turmoil has been the norm, change seems to be on the horizon, however. The recent general elections, the first since the violent conflicts of 2007’s elections, were relatively quiet by comparison. Political analyst and lecturer at Nelson Mandela Metropolitan University, Samuel Nzioki describes the current political situation as one of “uneasy calm”. “One would hope that this will be the first step to greater tolerance for difference of political preferences, given that the electoral system’s inescapable zero-sum game and winner-takesall format does not make it easy in a situation where competition for political value competition is primarily assigned on ethnic allegiances,” he says, warning that despite the success of the recent elections, ethnic division still remains.
Kenya’s economic position within the continent remains largely unchanged. “The immediate reactions by political risk analysts who have worked in Africa and assessed economic indicators in the lead to and post-election periods, point at little or no alteration in economic shape in the key sectors,” Nzioki says. “For a country like Kenya which remains the hub of business in East and Central Africa, there have been no major declarations because big business opted for caution, a wait-and-see attitude, which is usually temporary. Besides, by all indications there seems to be less appetite to pack and leave Africa by investors with recent discoveries in natural resources across the Southern to Eastern Africa coastal belt.” Added to this is a sudden growth of SMMEs in the country in the past 10 years, on the back of telecommunications, IT and other infrastructure to support the domestic retail sector. This has made Kenya marginally more economically sustainable than it was in the decades prior to the year 2000.
A well-developed sector but room for growth
Within this context, the situation is ripe for the growth of the insurance industry. “The Kenyan market is underpinned by good prospects for economic growth and a burgeoning and educated middle class, which provides the ideal climate for investment and growth,” says Mukesh Mittal, CEO of business development at Liberty Holdings. “Low penetration levels present opportunities for new entrants and growth.”
Marc Joffe of Global Credit Ratings (GCR) describes the Kenyan insurance market as mature in comparison with its regional counterparts, and says that it dominates insurance activities across the East African Community (EAC) and COMESA region. “The Kenyan insurance market is more than five times the size of the Tanzanian market and around 10 times that of Uganda,” he says. “The relative financial position of the industry overall is also encouraging, with most rated entities reflecting strong investment grade national scale credit ratings, characterised by sound solvency and adequate liquidity metrics.”
He adds that the development of the insurance sector has not been actively driven by international players, but rather local companies and to some degree India/Pakistan involvement. Old Mutual and Metropolitan Life of South Africa have subsidiaries in Kenya. In addition, Sanlam has a strategic relationship with Pan Africa Life with a 50 per cent shareholding. Chartis (a subsidiary of AIG International – America) also has a presence in the market. Rumours of increasing South African expansion into the Kenyan market have not yet provided concrete detail.
Joffe explains that, generally speaking, life premiums represent around one-third of total market premiums, with non-life comprising the remaining two-thirds. With respect to life, group life is dominated by CfC Life (26 per cent market share) and Pan Africa Life (22 per cent market share). In contrast, individual life is dominated by British American (24 per cent market share) and Pan Africa (19 per cent market share). ICEA LION Life is the market leader with respect to pension fund administration (29 per cent of investment funds under management), followed by Jubilee (22 per cent) and CFC Life (14 per cent). CfC Life, in which Liberty has a 56.82 per cent shareholding, is one of the major players in the market, owning approximately 30 per cent of the market share when considering total premiums.
“On the non-life side, the market is highly fragmented, comprising over 20 insurers, with no individual company responsible for more than a 10 per cent market share, deeming this segment highly competitive. The key players in the short-term arena are Jubilee, CIC General, APA and UAP,” he says.
Kenya’s regulatory environment is well developed with the Insurance Regulatory Authority having been established under the Insurance Act (Amendment) 2006 to “regulate, supervise and develop the insurance industry”. The IRA is dedicated to fair and integrity-filled regulation and supervision that enables industry players to be innovative and entrepreneurial. Bearing in mind industry differences in terms of size, extent and complexity, necessitating changes in operating and investment decisions helps cut down on compliance costs. Since this impacts on productivity and growth of the insurance sector, the authority deploys significant resources in monitoring market behaviours, compliance and solvency issues.
According to GCR, relative to GDP, insurance penetration in Kenya remains low, at around three per cent. In order to improve penetration, the government and IRA continue to focus on various strategies. This includes the development of micro-insurance, with a task force currently looking into various operating structures to facilitate this in the market.
Further, in an effort to increase market access, the IRA has recently granted insurers authorisation to utilise additional distribution channels (such as banks), over and above the traditional platforms (such as agents and brokers). This was made possible through various amendments proposed under the Finance Bill, 2011. This bill has also granted the IRA the power to take over the control of assets of financially unstable insurers and hold the directors jointly and severally liable for the recovery of insurance assets where it is established that these have been misappropriated. In addition, proposed amalgamations and the transfer of certain business also requires the approval of the IRA (previously exercised by the Minister of Finance), which is expected to significantly reduce delays.
Further regulatory changes are expected going forward, given that the current Insurance Act is to be completely overhauled by the new Draft
Insurance Bill of 2011. This bill contains provisions that will improve transparency, management and service provision to the industry. A further important aspect is the proposal of a risk-based capital supervision model to replace the current mandatory minimum capital requirement (to align capital management to the level of risks underwritten). To this end, the capitalisation of each regulated entity, as well as their investments, will be based on their individual risk profiles.
Given the complexity and level of investment required in order to develop such a framework, the IRA (in collaboration with various consultants) intends establishing comprehensive guidelines for the industry as a whole. The bill also incorporates some of Treasury’s initiatives, such as the separation of life and general insurance businesses, while in terms of insurer shareholdings, no person shall control or be beneficially entitled, directly or indirectly to more than 25 per cent of the listed share capital or voting rights of an insurer, although certain exemptions exist.
Growth and diversification
Joffe notes that the Kenyan insurance industry continues to embrace information technology, research and innovation, thereby expanding its capacity to exploit the existing untapped insurance market. While this is likely to see sustained cost pressures, together with an improvement in the regulatory environment, it is also expected to enhance insurance penetration beyond current levels.
The Kenyan insurance industry has been among the few major beneficiaries in the financial services sector during this period of domestic growth driven by SMMEs, Nzioki explains. “The recent political situation has had positive impact on the insurance industry in these elections due to high returns on political risk insurance. This not only suggests that investors are no longer given to knee-jerk reactions, to pack and leave in the face of a major political event, but it shows some degree of insulation from political matters on the part of key business sectors under the new constitution.”
He adds that major re-evaluations by the government on ways to expand domestic trading and sustainability led to rapid growth in the banking industry and with it innovative financial products to small holdings. As part of the conditions set for trading in the broadly informal sector, which is driven by, for example, the transportation sector (both public and private), food business, clothing and furnishing retail, and traders are required to be insured.
“For instance, with cheaper imports for machinery, low-cost and low-powered motorbikes used for public transportation (boda-boda and Tuk-Tuks) and factory reconditioned vehicles from Japan, owners can only be licensed after being insured. This has seen a rapid growth of the insurance industry that caters for these interests,” Nzioki says. As these interests grow, so does domestic spending and more insurance for previously unaffordable needs such as medical insurance and life cover and other insurance linked investment policies.
Another area of growth is in pre-paid insurance and funeral policies, a market that is steadily opening up. “However, this does require a mobile type of technology to make it work and to take it to the people in their communities. It is attractive because it is pre-paid, meaning the money is paid upfront and the cover applies only for the period you have paid for,” explains Craig Aiken of CFS Rica, distributors of the V5 Biometric Registration terminal.
One of the core challenges for insurers and brokers, according to Aitken, is registering Kenyans in such a way that sufficient data is captured for each person; that is biometric data. “Also, many of the people being targeted are in informal communities where infrastructure is poor. Prepaid insurance and funeral plans are gaining momentum and there is a big drive among insurance companies clambering to capture the unbanked market. Technology to take on new clients is not readily available nor are current offerings robust enough to withstand the harsh conditions in which they are used,” Aitken says.
Other challenges include liquidity constraints in the equity and bond markets, lack of international tax agreement between South Africa and Kenya, culture clashes as well as the undeveloped distribution networks, according to Mittal. “Liberty remains steadfast in its diversification strategy to expand into a broadbased Pan-African wealth management company. Kenya, as an economic hub in the region, is key to the achievement of this objective,” he says.
Mittal says the challenges faced by insurers are similar to those faced in other markets in Africa. “As the Kenyan insurance market is immature, insurers have had to contend with a limited distribution capacity,” he says. “Most life companies have historically adopted the agency model for the retail life insurance industry. However, there are changes happening with much of it being technology driven.” He cites other challenges including margin pressure caused by market saturation; undercutting on rates and unsound underwriting practices; malpractices by agents and delayed court rulings; and a traditionally high inflation and high interest rate regime.
While the industry is fragmented and highly competitive – characterised by low profit margins – barriers to entry remain low. Around US$3 million is required to establish a non-life insurer and US$1.5 million for a life company. “The industry is relatively well developed when compared to several other African insurance markets, offering the broad spectrum of insurance lines, while evidencing ongoing product innovation,” Joffe cautions. “Furthermore, insurance skills are deemed adequate, and to some degree complemented by the presence of South African companies’ management and other expats operating in the market.”
He explains that a number of large multinational intermediaries are prominent in the Kenyan insurance industry, leveraging off of their parent company skills, systems and reputation, which is of benefit to many insurers. The regulatory environment is also considered adequate; it continues to improve and is generally better organised/managed that some other African counterparts.