High risk profile raises cost of insurance for Kenyan firms

Those able to pay the inflated premiums would on the other hand incur higher overall operating expenses in an environment already experiencing double digit inflation, a weakening shilling, high cost of credit and unease over the March pools.

Consultancy firm Deloitte East Africa says in a new report that Kenyan firms are increasingly turning to cost-cutting measures to ride out the tough business environment.

Such actions include a freeze on new hiring and plans to pay lower or no dividend to shareholders to preserve cash.

The economy slowed down to 4.4 per cent last year compared to 5. 8 per cent in 2010.

The government expects even slower growth of between 3.5 per cent and 4.5 per cent this year on higher political risk and lower agriculture output.

“There is a lot of uncertainty in the business environment and most companies are opting to preserve cash because they are not sure of strong revenue growth this year,” said Nikhil Hira, a partner at Deloitte.

“The general elections, high interest and inflation rates are the major challenges for businesses in the short term,” he said.

Analysts have linked the surge in premiums for political and terrorism insurance to inadequate capacity by local re-insurers to underwrite the risks.

This has in turn forced the participation of large multinational insurers like Lloyds which charge high insurance and re-insurance premiums on higher risk perception, sending a spiral of expensive covers down to businesses.

“These high rates have also been pushed up by the fact that Lloyds of London has now rated Kenya as high risk,” said Faiza Devji, the research and marketing manager at insurance broker Aon Kenya, adding that the capacity of local re-insurers is dwindling.

Lloyds is a major player in Kenya’s terrorism and political insurance market, taking up covers valued from $5 million (Sh415 million), with local insurers’ risk rating and premium quotations rising in lock-step with those of the London-based consortium of financial backers.

“Most local insurers and re-insurers rely on ratings by Lloyds which reinsures them and sets the benchmark for Kenya’s rating,” said Souvik Banerjea, a senior marketing officer at Africa Trade Insurance Agency.

Lloyds’ higher rating diverges significantly from AoN’s Political Risk Map which currently gives Kenya a medium-high risk rating.

The latest edition of Foreign Policy magazine is more optimistic, with Kenya’s standing in its 2012 list of Failed States Index remaining unchanged at 16 compared to last year and is down from 13 in 2010.

The limited capacity of local re-insurers is set to slow down growth of Kenya’s nascent political and terrorism insurance market which was born out of the 2008 post-election violence during which billions of shillings worth of assets and investments went up in flames. UAP, Jubilee, Heritage, Chartis and APA are some of the players in the Kenya market.