High risk profile raises cost of insurance for Kenyan firms

Kenya’s risk profile rose sharply in the past 12 months, pushing up terrorism and political risk premiums by up to 100 per cent and making it difficult for businesses to find cover in the run-up to next year’s General Election.

Lloyds of London – the dominant re-insurer of big-ticket risks in Kenya — said rating agencies had raised the country’s risk to 4.5 just 0.5 points shy of the maximum rating of five.

This marks a deterioration in Kenya’s risk profile which stood at four early last year.

A rating of 4.5 puts Kenya on the same list as the world’s war-torn countries that are regarded as bearing the highest risk to businesses, insurers and re-insurers.

A rating of five signifies maximum risk, four (high risk), three (medium risk), two (low risk) and one minimum risk.

“One of the companies used (by Lloyds) reflects that Kenya’s risk rating has been trending upwards since 2010.

In early 2011, it was just under 4.0 and now it is between 4.2 and 4.5,” said a London-based analyst specialising in terrorism and sabotage insurance.

“In coming weeks, as Kenyan forces prepare to enter Al-Shabaab’s stronghold of Kismayu, concern has been rising in the local business community that any retaliatory attacks from the militant group may cause a further decline in the country’s rating, adding to the cost of insurance premiums,” he said.

Besides raising the cost of premiums payable by businesses and government agencies for terrorism and political risk covers, the higher rating has forced insurers to cede larger proportions of premiums to re-insurers who are cutting back their exposure in Kenya.

The basket of risks covered under terrorism and political insurance plans includes malicious damage, political violence, interference, sovereign defaults and supply chain disruption.

The cover guarantees businesses compensation for property lost and a pre-determined gross profit margin in the event of loss.

Kenya’s top re-insurer — Kenya Re — has, for instance, covered only nine local insurance firms underwriting terrorism and political risks, turning away more than 20 others.

Newton Gatamah, a manager at Jubilee Insurance, said the main casualties of the higher risk perception includes banks, media houses, critical government installations and establishments close to US and Israeli embassies that have been singled out as high risk targets.

“Companies and insurers seeking new terrorism and political risk covers in recent months have seen a steep rise in premiums of up a 100 per cent and some have been rejected altogether by the underwriters,” Mr Gatamah said.

A steep rise in the cost of premiums and denial of cover to ‘high-risk’ clients exposes the economy to major losses in the event of an attack because there will be no compensation for the losses.

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.

Higher premiums and difficulty in getting covers for terrorism and political instability will likely remain in the medium term as the elections and threats from Al-Shabaab hang over the country.

A lack of political risk cover raises the prospect of slowing down new investments and business operations as companies seek to minimise their exposure, hurting the creation of new jobs and aggregate demand in the economy.

In recent months, Kenya has become a target of Al-Shabab which is unhappy with Nairobi’s support for Somalia’s UN-backed transitional government.

Since September last year, Kenya has been a victim of 10 explosions targeting buildings and public transport vehicles. More than 200 people have been injured in the blasts.

An intelligence report earlier this month disclosed that Al-Shabaab is planning to target tall buildings in Nairobi.
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