Kenya Re seeks new revenue lines as cession fees end

Kenya Re-insurance is facing a fresh threat to its business as the government moves to end the compulsory payments it receives from insurance firms.

Local insurance firms are required by law to give Kenya Re 18 per cent of their business — a move that has guaranteed the state backed reinsurer a steady flow of business.

The government, in an effort to cushion Kenya Re from intense competition had legislated compulsory payment of the cession fee.

This arrangement is expected to end in December 31, exposing Kenya Re to its rivals.

The law placed the firm at an advantage when it comes to competing in the marketplace with rivals since they don’t enjoy compulsory re-insurance premiums from local underwriters.

The big question in investors’ minds is whether Kenya Re would survive in a situation where compulsory business is not in place and its rivals have intensified their activity in the market.

It earned about 40 per cent (Sh1.48 billion) in 2009 from compulsory payments, a year in which its profits fell 18 per cent to Sh1.4 billion.

“The expiry of the compulsory contribution at the end of this year is likely to lead to a decline in revenue but we expect to make it up by aggressively extending our reach into new markets in the Middle East and Asia”, said Jadiah Mwarania, the acting managing director of Kenya Re.

Mr Mwarania reckons that the end of this arrangement may not necessarily lead to a substantial loss of revenue as most local players reinsure with Kenya Re above the mandatory 18 per cent.

“In life insurance we are re-insuring at approximately 95 per cent and we control about 60 per cent of the general business in the local re-insurance market”, said Mr. Mwarania.

Suffer losses

But insurance analysts reckon that Kenya Re will suffer revenue losses should the government fail to extend the arrangement.

“The expiry of the cessation fee requirement will affect its revenues substantially and thus its profitability,” said Mr Isaac Ng’aru, the managing partner of Ng’aru and Ng’aru Associates — a local insurance consultancy firm, adding that the government was likely to extend the cessation plan beyond December to cushion the earnings of the company, in which it owns 60 per cent.

Kenya Re’s competitors in Kenya are Zep Re-insurance, Munich Re, East Africa Re and Africa Re-insurance.

All these are regional re-insurance firms with Africa Re being a continental firm owned by all 53 African states.

Zep Re is owned by the 19 countries that make up the Common Market for Eastern and Central Africa (Comesa); East Africa Re is a privately owned reinsurer under some insurance companies while Munich Re is a Germany based international re-insurance company.

Africa Re charges a five per cent cessation fee while Zep Re levies 10 per cent.

Despite controlling a sizeable chunk of local re-insurance services, Mr Mwarania reckons that opening up the market to other players is likely to tilt the field in their favour.

“The potential loss will largely be due to the fact that Kenya Re earns the cession fee without having to engage in active marketing hence an income source earned at no cost”, said Mr Ng’aru.

To also make up for the expected revenue decline, Kenya Re is set to actively engage in equity trading to improve its investment income and partner with property developers to improve its parcels of land across the country.

Other areas Kenya Re is focusing on to improve its top line include equity trading, to boost its investment income.

“We have traditionally been buying equities and holding on to them but we intend to actively engage in trading with the aim of realising gains and improving investment income,” said Mr Mwarania.

New drive

Kenya Re which holds a substantial chunk of land across the country has in the past rebalanced its investment portfolio with a drive to disengage in property holding.

While planning not to end up holding fixed real property, the new drive is to partner with property developers to improve pieces of land it has and increase its revenue base.

“We do not want to end up owning property hence the strategic decision to partner with developers where our equity is land and the developers undertake the development either for sale or rentals”, said Nelius Kariuki, the chairperson.