Third quarter performance shows insurance sector is still under siege
The Association of Kenya Insurers chief executive Tom Gichuhi. PHOTO | SALATON NJAU | NMG
What you need to know:
General insurers’ Sh2bn net underwriting loss at close of Q3 signals hard times for industry.
Financial services companies aren’t having a good 2016. About two weeks ago, I reviewed banks’ third quarter performance — and it was clear that they had a tough time. This time it’s the insurance sector.
And I want to focus on the general insurers, who accounted for 64 per cent of total insurance business — long-term and short-term businesses combined — at the close of third quarter and are therefore, in my view, very representative of the sector’s trends.
At the close of third quarter, general insurers reported a combined net underwriting loss of Sh2 billion, across all the 13 business classes.
That’s colossal, given that in 2015, the figure stood at Sh226 million for the full year. The motor vehicle and medical business classes alone, which account for 70 per cent of the general insurance business, reported a combined net underwriting loss of Sh2.1 billion.
However, premium growth was still strong, with third quarter gross premium income for general insurers rising by 12 per cent quarter-on-quarter.
Very important to note that insurers’ topline still remained strong. And this was the striking difference between general insurers’ third quarter performance and banks’ performance. The latter’s topline wobbled during the quarter.
Nevertheless, they both share one commonality — the midline: Midline issues though are unique to each of them. For general insurers, one big problem that keeps manifesting in the midline is the fact that premium retention rates are extremely low.
In fact, for the nine-month period ended September 30, general insurers were only able to retain just 19 per cent of gross premiums — that is after cession and claims payouts.
And because insurers are still inefficient in operations, when you have a margin of 19 per cent in which to plug in your direct costs as well as overheads, you are bound to make an underwriting loss.
Last year, insurers were able to retain 30 per cent but they still made an underwriting loss.
So insurance, especially general, is still a business under siege. In my assessments, I think, to a large extent, insurers incautiously bound themselves to a greater amount of risks than they may be able to discharge.
Essentially, there is a greater possibility that insurers, in most cases, do bite more than they can chew. And I say this for two reasons.
First, premium cession rates are still elevated in my view. Kenyan insurers cede about a third of their gross premiums to reinsurers.
Reinsurance is often described as “insurance of insurance companies.” It can be looked at as a commercial agreement whereby one company (the reinsurer) agrees to indemnify the other (the insurer or cedant) for insurance losses arising under policies of insurance issued by the latter.
Usually, I like following annual Reinsurance and Financial Stability publications by International Association of Insurance Supervisors (Sigma publications by Swiss Re are also very good).
I remember in their 2012 publication, which referenced 2010 data, they quoted global cession rates for both life and non-life at just five per cent.
It’s always difficult getting authoritative figures on these kinds of thing but such publications help paint an idea. But Kenyan general insurers aren’t doing that badly anyway. In Uganda cession rates were around 35 per cent in 2015, while in Tanzanian the figure was 45 per cent. But still there is room for more improvement.
Second, the revolving-door nature of premiums. I mean insurers barely hold onto premiums.
In the third quarter, while general insurers recorded Sh19 billion in gross premiums, they paid out Sh14 billion in claims. Probably someone out there needs to tell us the average shelf-life of general insurance business premiums.
But this inability to hold onto premiums for the entirety of a contract shows that business acquisition, in most cases, could be incognisant of the extent of underlying risks. Let’s hope the risk-based capital approach adopted by the regulator will be able to address this issue.
