Over 40 percent of Kenyans have a bank account, and when one includes the use of mobile money over 80 percent enjoy access to formal financial services. Yet the penetration of insurance in Kenya stands at under 3 percent – and it is not rising. Understandably, many commentators therefore see huge potential for developing this arm of the financial sector, typically quoting South Africa’s penetration rate of 17 percent as a comparison and lamenting the unimaginative use of technology by Kenyan companies.
So why is our penetration so low, and what might be done to increase it? For sure many feel that insurance is “just for the well-off”, “a Nairobi thing”. Others feel the odds of needing to claim on a policy are too low to justify paying the premiums required – defying the whole basis of insurance, which is to collect from the many so as to be able to compensate the few who have legitimate claims to lodge.
I am a relative newcomer to the insurance industry, and for the sake of transparency let me state that a year and a half ago I became the chairman of Occidental Insurance Ltd, having been invited to serve on their board a while before. Through my earlier background in the IT industry I was aware that insurance companies typically lagged other sectors – not least banking – in their use of technology.
Indeed, back in the mid-seventies, in my last position in London before coming to Kenya, I was the manager of British computer multinational ICL’s business in the insurance sector. Then and since, my perception was that too many leaders in this sector were less innovative than their counterparts elsewhere, not least in applying the latest that technology could offer.
However, the more I have become familiar with the challenges faced by insurance companies here the more I have learned to sympathise with players in this market. Admittedly the case can be made that there are far too many of us, leading to an unhealthy fragmentation of the market. But a further significant factor is that as of December 2018, 92 percent of insurance business was passing through agents (of whom there were 10,000, accounting for 53 percent of business) and brokers (of whom there were 200, accounting for 39 percent).
So only 8 percent of business was handled directly by the insurance companies (down from 12 percent in 2017), with the balance dealt with by intermediaries. Much of what does or does not happen in the industry therefore depends on them, and yet insufficient attention is paid to their practices.
Now despite being highly regulated by the Insurance Regulatory Authority it is generally acknowledged that there is also much indiscipline in the sector, with serious premium undercutting and fraud leading to compromised growth and profitability.
How therefore can insurance companies find the resources needed to invest in research and development, including for acquiring new technology that will better serve both the market and their shareholders? One answer is collaboration, as has already happened with the introduction of data sharing platforms that have led to reduced fraud in the motor and marine classes of insurance.
But more is needed. Two major initiatives in the works are the introduction of the Risk Based Capital rules, designed to ensure capital adequacy and more robust risk management; and the rather more controversial “cash and carry” principle requiring premiums to be paid upfront or at the point at which the cover is issued, in order to ensure that the insurer is able to settle claims appropriately. Alongside these, companies are grappling to implement the consequences of the various stringent International Financial Reporting Standards.
Will these be sufficient to bring about a more sustainable insurance industry? Discussions among industry players are active in our Association of Kenya Insurers, and equally between us and the regulator. More trusting collaboration is needed, and less unhealthy competition. At the end of June 2020 the capital adequacy measures were due to kick in, and let’s hope that the requirements are adhered to, with appropriate oversight being provided by the regulator. And let’s encourage the regulator to keep going after those who shamelessly undercut their premium rates to gain undue competitive advantage… while jeopardising their ability to pay claims and to be sustainable entities.