Kenya: Coun­try pro­file

RISKAFRICA Magazine - - CONTENTS - Bianca Wright

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.

Reg­u­la­tion wear

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.

Com­pe­ti­tion time

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.

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