There is a joke within the insurance circles that the only way to make money in general insurance in Kenya is to not pay claims. Sounds ludicrous, right? Yes it does. The first time I heard about it I laughed boisterously.
But the joke somehow powerfully satirises some of the ills causing general insurers in Kenya to bleed money.
Just to remind you, in 2016 general insurers reported net underwriting loss position of Sh390 million. In the previous year, the figure stood at Sh226 million—with the biggest drivers of this bloodbath being motor vehicle and medical business classes.
In fact last year, just half of the general insurers made money at the operating level; and that’s before overheads. After plugging in overheads, probably the number is much lower.
In my previous articles, I’ve taken you through the long journey of externalising these problems. And one ubiquitous problem is underwriting sloppiness, which in itself encompasses risk over-boarding and poor pricing (a ruinous combination).
Back to my joke anyway. Insurance companies receive premiums upfront and pay claims later. This collect-now pay-later model means they have to build sufficient claims reserves—just to make sure they are able to fulfill their Insurance Contract Liabilities as they fall due and probably invest the rest in yielding assets.
But because general insurers profit from the fact that not all policies will crystallise simultaneously in the course of their contractual life, their asset books need to be dominated by liquid near-cash assets.
On this point, I have a problem with general insurers holding a huge portfolio of investment properties. And so should you.
I mean general insurance policies have a life of just 12 months (which is why it’s also referred to as short-term insurance).
In 2016, general insurers’ property portfolio stood at a whooping Sh35 billion. What business is a general insurer doing holding investment properties, which are very long-term in nature, when they have claims falling due in under a year?
This balance-sheet mismatch, is probably a major contributor to some of them not being able to effectively handle claims. I’m not joking. And it probably also explains why some general insurers in this town are happy to onboard and warehouse businesses with historical loss ratios north of 100 per cent, especially businesses with promise of large premium turnovers.
I mean I have seen a loss ratio of 1,079 per cent from last year’s figures. Why would an insurer continue warehousing such a business?
But the good thing is the regulator, the Insurance Regulatory Authority (IRA), did notice this and has proposed corrective actions.
In its draft guidelines on capital adequacy, the IRA has now limited the concentration of investment properties in capital computation to just 30 per cent for insurers. Additionally, it has slapped a Market Risk Capital Charge of 40 per cent on properties.
This effectively means that it will be more costly for an insurer, especially general insurers, to keep ramping up investment properties. Essentially, general insurers should be winding down their property book to the floor.
I have seen some general underwriters with properties portfolios as high as half of their asset book. This should ideally come down to zero. And for investors, this should form a core part of their investment indicators.