Westgate attack to raise cost of terror insurance

The recent Westgate Shopping Mall terror attack could raise demand for terrorism insurance cover as well as premiums payable by vulnerable businesses, international ratings agency AM Best has predicted.

In a new report reviewing the East Africa insurance market following the Westgate attack, AM Best says that “before the Nairobi attack, demand for political and terrorism cover had been declining in view of the increased stability surrounding elections across Africa.”

The agency however says this is set to change, and also add a premium on the cost of insurance as local companies seek re-insurance deals with international firms that have the financial muscle to pay hefty claims associated with terror attacks.

“While an increase in the purchase of terrorism insurance will not necessarily occur across the African continent, any rise in demand will ultimately benefit the international reinsur­ance market, as African reinsurers generally do not have sufficient capacity or a strong enough credit profile to underwrite and retain a significant amount of these risks,” said AM Best.

The Westgate mall is said to have been insured by Lloyds of London to the tune of Sh6 billion.

According to AM Best, the vacuum created by the low appetite for underwriting political risk insurance by local reinsurers and the absence of a terrorism reinsurance pool in Kenya means that Lloyd’s insurers are likely to assume majority of the risk following the Nairobi attack.

A.M. Best expects international reinsurers to attempt to increase rates on these covers to recoup their losses.

This will force African reinsurers to lift their pricing on the most affected classes.

The terror attack on Westgate left at least 67 dead and massive damage of the building and cars parked in the mall, exposing the limitations of the comprehensive cover when it comes to incidents such as terrorism.

International reinsurers are likely to gain more from any rise in terrorism insurance cover than their local counterparts, says ratings agency AM Best.

AM Best says that the demand for terrorism cover is likely to rise in East African countries, especially for high-risk corporations in the region.

Based on past trends, the ratings agency says in an insurance industry briefing that African reinsurers tend to retain more risk for certain lines of business like motor, accident, medical expenses and life, with political and terrorism risks not commonly underwritten.

The likelihood of a continent-wide rise in demand can only occur if a notable increase in terror attacks is experienced across Africa, said AM Best.

Risks that the local reinsurers have a low appetite for are usually passed on to international reinsurers, a factor also determined by the limited capacity of the African reinsurance market for large, volatile risks.

According to senior marketing officer at African Trade Insurance Agency and specialist on terrorism covers Souvik Banerjea, there was a sharp increase in clients seeking political cover in the build-up to the elections.

“Overseas reinsurers shall get the biggest rewards in terms of higher volumes of premium because they take the lion’s share of the risk on such large transactions as Westgate,” said Mr Banerjea.

He added that the government and the Commissioner of Insurance should actively press for creation of a market pool for terrorism covers.
“This is the only way that local capacity can be increased and more premiums can be retained within Africa,” he said.

Kenya has the largest insurance market in East Africa. The industry’s gross written insurance premiums amounted to Sh63.3 billion by the end of the second quarter of 2013, according to Insurance regulatory Authority data.

This represented an increase of 15 per cent from Sh55.0 billion recorded by the end of the same period in the previous year.

Total insurance premiums reached Sh113 billion in 2012, with insurance penetration of 3.1 per cent. The insurance companies held assets amounting to Sh310.4 billion by June 2013, with reinsurance companies holding assets of Sh31.8 billion.

Insurance companies have the option of three local reinsurance firms, these being Kenya Re, ZEP-Re (also known as PTA Reinsurance), East Africa Re and Nigerian based Africa Re which has a Kenyan subsidiary.

In the AM Best ratings, the four companies are rated between B and A-, with their retention ratios (net premiums as percentage of gross premiums) ranging from 81 per cent for ZEP-Re to 95.2 for Kenya Re.

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