- The Insurance Industry in Kenya accounts for 2-3% of the Gross Domestic Product of the country.
- The insurance industry in terms of Gross Written Premium (GWP) has grown by 15% on average over the period 2013-2016 to KES 195 billion.
- The industry has witnessed a heightened regulatory risk over the last three years with the introduction of market consistent/realistic valuation basis for liabilities and risk based capital.
- Fintech is the new buzz word in the financial industry. This is simply leveraging on technology to offer financial services and products.
The insurance industry accounts for 2-3% of the Gross Domestic Product for the country. This is higher than all the other Eastern and Central African countries that are below 2%. South Africa is in a league of its own at 14%, higher than most European countries.
The insurance industry in terms of Gross Written Premium (GWP) has grown by 15% on average over the period 2013-2016 to KES 195 billion. The life insurance sector has grown by 19% over the same period while the General insurance sector has grown by 14%. 2017 has been a tough year for the industry and we expect a lower growth. The main challenges include; the prolonged electioneering period which is still uncertain, high inflation rates driven by food inflation which has squeezed families to concentrate on the basic needs, drought which was experienced over the period 2016-2017, poor business prospects characterized by lay-offs and increasingly bad business practice driven by under-cutting.
The industry has witnessed a heightened regulatory risk over the last three years with the introduction of market consistent/realistic valuation basis for liabilities and risk based capital. The market consistent basis for valuing insurance liabilities is known as Gross Premium Valuation (GPV). This is an actuarial lingo which means the premium used in the discounted cash flow (DCF) model is the full premium charged to a client. The gross premium takes account of the benefit promised, business acquisition costs including commissions, expenses for managing the business and a profit margin. This is in contrast with the previous method; the Net Premium Valuation (NPV), where the premium used in the cash flow model only accounted for that portion that cover the benefit promised and ignored the acquisition costs and expenses for managing the business. The GPV uses the risk-free rate to discount the cash flows while the NPV the discount rate was prescribed at 4% for long term conventional endowments and 6.5% for retirement income products such as annuities. The GPV basis allows for the internal company experience when projecting cash flows in the DCF model. These internal experiences include expenses, persistency/lapse rates, mortality (death rates) and longevity (survival rates) as opposed to the NPV basis where these were prescribed in regulation.
Risk based capital (RBC) is a scientific method of determining capital requirement in relation to the risks being carried by a financial institution. The main risks covered are insurance risk, market risk, credit risks and operational risk. The capital held (capital charge) for each of these components is measured as a percentage of the exposure in each. The charge is determined statistically to ensure that the company’s balance sheet can withstand risk shock with some level of confidence. This is a step forward for the industry to best practice. The current model as structured for the industry has some challenges which are being addresses. The implementation will take a while before it stabilizes. The regulator has been at the forefront of improving actuarial skills in the industry which is still below par, by offering scholarship to bright students. There is a strong actuarial professional society which the regulator can work with to improve the regulations and instill some market discipline.
The market is characterized by a product range that has not changed over the years. This points to a lack of innovation and shallow product development functions. Insurance firms need to be more innovative and build expertise in product development in order to meet the market needs.
The selling structure through tied agents, independent agents and brokers has served the industry for a long while. Some companies have been able to harness the power of a strong distribution networks in life insurance essentially locking out new entrants. However, the selling agents and brokers have become too powerful both to the insurers and regulator.
They have squeezed insurers to offer high discounts on premium on top of asking for additional commissions (“overrides/management expense”) above the legally acceptable. The only thing on competition is price and hence product design has suffered. This has meant that policyholders receive less benefit and insurers are making losses in some of the products on offer such as medical and motor. To make the matter worse, agents are now holding on to premium leaving insurers which a huge debtors. Besides loosing investment income on the unremitted premiums, insurers are now forced to hold capital thereby increasing the cost of doing business.
Technology & Youth
Fintech is the new buzz word in the financial industry. This is simply leveraging on technology to offer financial services and products. Fintech is going to be a game changer in the coming years. Products will be sold digitally and all customer interactions will also be digital. This may affect some jobs such selling/agency, policy administration, claims, etc, will become obsolete and a nightmare on employment in future. The youth who make up over 85% of the population in Africa are digitally savvy and hence present a big opportunity. Insurers who will be able to tap into this market need to embrace technology as a child embraces her mother. Insurers who will reap huge benefits will be the ones who will through away conventional know-how for new untested out-of-the box way of doing things. This could mean hiring misfits with contrarian mindsets to run innovation and product development.
Most insurance firms are led by titans of industry who have helped shape what the industry is now. They have done a commendable job at putting the industry at a level of envy by our neighbours. Their management style is characterized by red-tape which will be a hindrance in the technology age. Organisations need to critically think about where the market is heading and re-organise its management and boards to be alive to the changing markets. They will need to bring on board younger people to help make decisions since the market is clearly young and tech savvy. Management teams need to be pro innovation building R & D teams to test different product offerings.
The future belongs to companies that will employ best practice financial management, innovative in their product offering and targeting the youth by embracing technology.