Are insurance firms in Kenya biting more than they can chew?

Insurance premiums in Kenya, for the first time, crossed the Sh200 billion ($2 billion) mark. That’s a remarkable achievement for an industry whose reputation has been eroded over the years as a result of both perceived and actual malpractices.

Despite the milestone, annual premiums growth in the sector slowed down to seven per cent in 2017, from 12.3 per cent in 2016.

The slowdown was a result of stagnation in the non-life (commonly referred to as general) business. In Kenya, the non-life business accounts for 60 per cent of insurance premiums, while life insurance constitutes the balance.

This dominance is driven by two business classes (within the non-life category): motor vehicle and medical businesses.

They accounted for 66 per cent and 40 per cent of non-life and total industry premiums respectively in 2017. When they sneeze, everybody else catches the cold. And they did sneeze in 2017, growing by a mere 40 basis points year-on-year.

This seems to have dragged down the entire industry but also, it was a pointer to the general slowdown in the pace of economic activities during the year, for obvious reasons.

But something else emerged in the industry in 2017: non-life (or general) insurers ceded 30 per cent of their premiums to reinsurers, being the first time it has hit such level since I started tracking it, in 2007. Their life counterparts, on the other hand, only ceded seven per cent of gross premiums earned.

Usually, insurance companies do not absorb all the underwriting risks they onboard. Sometimes the risks can be colossal to the extent that, if they were to crystallise, the insurance company underwriting such risks can be wiped off the face of the earth.

To limit the total loss given a risk occurrence (or claims), insurance companies opt to transfer some risk(s) to other insurers known as reinsurers. Reinsurers, in turn, agree to purchase those risks at a price. Of course.

READ: Half of Kenya’s medical insurers post 2016 losses

Insurers then pay reinsurers by way of reinsurance premiums. In industry jargon, the insurance company transferring some of its risk(s) to a reinsurer is then said to cede some of its premiums, hence cession. Non-life insurance records the highest cession rates; and this is due to the short cycle (and high risk) nature of the business. Two variables drive cessation. First is premium volumes. That as premiums grow, generally your cessation gets elevated.

Second is risk-pricing. Not every risk is reinsured. However, the higher the reinsurable risks, the higher the cessation. Consequently, a higher ratio is a pointer to an elevation in the reinsurable risks. Of course the goal is for an underwriter to match risks with capacity—and in the absence of that, there is a high possibility the insurance company could be biting more than it can chew.
By extension, this also speaks to the quality of underwriting. At 30 per cent, reinsurance costs are definitely rising, and points to two possibilities: either it is a pricing issue between insurers and reinsurers; or, there is an issue with underwriting quality. It could be the latter, in my view. My argument is further concretised by the sustained elevation in incurred claims ratio.
In 2017, incurred claims ratio was unchanged at around 60 per cent. In simple terms, for every one shilling of written premium, 60 cents is claimed before the expiry of the insurance contract. The medical business reported the highest incurred claims ratio—at 72 per cent. And given that general insurance is a 12-month cycle business, it means the claims division of any insurance company is the busiest (especially medical claims). Essentially, the more a non-life underwriter volumises its business, the more it creates a revolving door.