Growth prospects for Kenya's insurance industry

Understanding Kenya’s local insurance market

The central questions for potential investors are how to enter this market and how to make money. Our insurance sector is not as complex as those in Western or Asian markets. Therefore, investors need to understand the uniqueness of our market and its potential.

As disposable incomes rise, insurance customers tend to choose medical insurance followed by life insurance and then wealth management products. Where motor insurance is compulsory, it allows insurers to cross-sell other products particularly when they are informed by data analytics about customer segments. A further growth area in Kenya is now the need for marine insurance to be placed locally.

In Kenya, private savings clubs currently serve short-term savings needs although increasingly, employers negotiate group discounts for insurance products for their employees. Financial inclusion and education are improving but many Kenyans still prefer to work with insurance brokers because when they have a claim to file, they use a broker to run around and complete the paperwork. Whilst advances in online and mobile platforms have made it easier to buy a policy, it is still difficult and often bureaucratic to file a claim. These are some of the challenges for investors seeking entry to Kenya’s insurance sector—however, they are not insurmountable.

Regulatory changes inspire confidence

Investors want to know that Kenya’s insurance sector is governed by international best practices that improve internal governance and awareness of risk. At the same time, Kenya’s insurers can use best practices to present themselves to investors in the best light possible.

Kenya’s IRA is implementing risk-based supervision. Although it is difficult to raise capital requirements, the overall effect on the industry is positive. The fact that IRA is implementing risk-based supervision will give insurance companies (and investors) more confidence in future capitalisation and most importantly, start to position Kenya’s insurance sector in line with leading economies.

Kenya’s life insurance companies are also now required to value their reserves on a new basis called Gross Premium Valuation (GPV) which is yet another step in the right direction as it brings us closer to international best practice. The IRA already requires a qualified actuary to independently assess the insurance liabilities; this contributes to greater confidence on the part of investors and the market overall.

IFRS 17 (previously called IFRS 4 Phase II) is still about four years away but developed economies have already started preparing for it and the time for Kenya’s insurers to start is now. This new standard will lead to a transformational change within individual insurance entities and across the industry as a whole. Some of the fundamental changes include a new profit recognition approach (and hence a new way of reporting insurance revenue), losses recognised immediately and increased volatility of profit and equity. Furthermore, the new valuation method for insurance liabilities is a complete move to best estimate reserving; indeed, as part of the enhanced disclosure requirements insurance companies will be asked to report on ‘what is the confidence level at which you are carrying your reserves?’ This is another way of asking, ‘what is the strength of your company?’

Complex skills and capacity for change

To implement these changes successfully, Kenya’s insurance companies require skilled resources. International experts seem to arrive in Nairobi daily and yet our local pool of actuarial expertise is still too small. It is heartening to see The Actuarial Society of Kenya doing such good work to build the actuarial profession, but we are still very far from sustaining the actuarial needs of this market with local resources.

Most often, insurance companies are looking for consultants to help them build capacity and then support them with implementation depending upon their internal skills gaps.

Based on global regulatory trends, we can expect the regulatory environment to become even more complex but local regulators must have the skilled capacity to implement and enforce changes. The concept of risk-based supervision is already complex and with the new global standards such as IFRS 17 coming up the need for local skilled resources is even more pertinent.

Pivotal changes leading to consolidation

Kenya is at a pivotal stage of development in almost every industry. The positive and innovative direction of our financial services industry inspires growth and investment opportunities but our insurance sector has not yet grown at the same rate as the banking sector, according to Kenya’s most recent economic survey. Insurance penetration is still quite low. Changes in the regulatory environment will not only improve the insurance industry but also drive much-needed consolidation. Regulatory change tends to be expensive to implement; systems and skilled resources cost money.

One factor driving consolidation is that the minimum capital requirement has effectively tripled. The requirement is challenging and it has inspired a lot of anxiety in the market. But it is my view that the requirement will cause consolidation in the sector, improving the competitive environment so that insurers price risk appropriately rather than conduct price wars. The current environment has created a market for low-level insurance products but this can change.

We know from global experience that corporate insurance products drive profitable growth. Most profitable risks can be insured in Kenya but re-insured elsewhere. Global insurers can underwrite such corporate insurance much more readily—based on the strength of their balance sheets in the US or the UK. If an investor wants to build a new hotel, for example, they will turn to one of these global players. A local insurance company will not have the capacity to underwrite that risk, let alone retain a substantial portion of it, but this can change, particularly as well-capitalised local banks enter the insurance sector through acquisitions or insurance companies grow their own capital base through consolidation. For general insurers there is a real opportunity to generate profitable growth with the requirement for marine insurance to be placed locally now.

Another way that the market can change is through innovation. A South African insurer has created an insurance product similar to a cash-back scheme. Like a debit card, the product allows an insurance customer to deduct the cost of medical services from their policy ‘pot’ and earn a proportion of the amount left over as a benefit. This product serves to minimise fraud at the source because customers are more likely to question unnecessary medical examinations and choose quality if their choices impact them financially. Other products reward insurance customers for buying fruit and vegetables, going to the gym and other positive health behaviours.

Many of the changes in Kenya’s insurance regulatory environment will impact the sector positively in the long run. Innovation and consolidation, coupled with global best practice in regulatory compliance, will make the sector more attractive to investors. In my view, we have every reason to expect that investment will improve the quality and affordability of insurance products for corporates and customers alike.

By Gauri Shah is a Partner leading PwC’s consulting and risk services