Industry

Insurance policy cancellations hit Sh5bn on Covid-19

IRA

Insurance Regulatory Authority CEO Godfrey Kiptum. FILE PHOTO | NMG

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Summary

  • Insurance policy cancellations and withdrawals jumped by nearly a third in the six months to June last year after Covid-19-induced layoffs and salary cuts made it difficult for customers to keep up with premium payments.
  • Latest data by the Insurance Regulatory Authority (IRA) shows that policy surrenders rose by 26 percent to Sh5.33 billion from Sh4.22 billion posted in the preceding similar period.
  • Insurers have linked the rise in withdrawals and surrenders—majorly in life assurance and pension products — on the Covid-19 pandemic that halted economic activities leading to revenue falls, job losses and salary cuts across sectors.

Insurance policy cancellations and withdrawals jumped by nearly a third in the six months to June last year after Covid-19-induced layoffs and salary cuts made it difficult for customers to keep up with premium payments.

Latest data by the Insurance Regulatory Authority (IRA) shows that policy surrenders rose by 26 percent to Sh5.33 billion from Sh4.22 billion posted in the preceding similar period.

Insurers have linked the rise in withdrawals and surrenders—majorly in life assurance and pension products — on the Covid-19 pandemic that halted economic activities leading to revenue falls, job losses and salary cuts across sectors.

The number of insurance policy lapses — cancelled covers due to missed premium payment and exhaustion of cash surrender value — also surged in the review period.

Data from the Association of Kenya Insurers (AKI) showed that the number of policy lapses in life business jumped by 26.7 percent to 40,411 as the value involved hit Sh1.53 billion, being a 51.9 percent rise from Sh733.6 million in June 2019.

AKI chief executive Tom Gichuhi said many people struggled to keep up with premium payments as others took loans against their policies to navigate through the economic turmoil.

“There was certainly going to be a spike in surrenders because we had layoffs, salary cuts and struggling businesses,” he said.

“The next thing people were looking for was the next opportunity to get some cash or cut spending. That led to surrendering of policies and increased requests for policy loans.”

The amount of loans drawn against insurance policies jumped by 3.7 percent to Sh2.75 billion in the review period, highlighting the increased demand for cash.

Surrenders were highest in pension business where Sh3.55 billion was withdrawn. This was followed by life assurance products (Sh997.94 million) and Sh775.78 million from investment products.

The withdrawals, despite offering short-term reprieve to those hit by the pandemic, look set to leave them exposed in their sunset years.

The findings are in line with the forecasts that insurers had made at the peak of the pandemic where an estimated 1.72 million workers lost jobs in three months to June alone.

Most of the insurance products are popular with salaried people, meaning that disruptions such as job losses and salary cuts directly impact insurance.

Many insurers were forced to divest from where they had invested money, such as in Treasury bonds, to meet obligations of increased withdrawal requests for pensions and surrenders from life products.

While withdrawals from umbrella or individual pension scheme or surrenders from individual life products offers the much needed survival income for such Kenyans, they come at a cost.

Early surrenders do not give value for money since the products are structured to allow insurers to recover expenses incurred to sell these products early.

Many life products have a maturity period starting from five years and many insurance firms usually recoup onboarding costs within the first few years.

This means that those exiting early are deducted costs such as commission paid to agents and also leave their future exposed at a time the economic situation is depressed.

The latest half-year pace of jump in surrenders is nearly twice that posted in 2019 when surrenders and withdrawals rose by 14 percent to Sh9.24 billion from Sh8.11 billion.

Splash

Audit and advisory firm Deloitte is forecasting muted growth in premiums across East Africa in products such as life assurance as firms and individuals cut spending to rise from the pandemic.

“Consumers are under pressure to cut down on ‘unnecessary’ expenses, and insurance premiums are likely to fall under this category, putting pressure on both new business volumes and client retention,” says Deloitte.

Kenya’s economy contracted by 5.7 percent in the second quarter of last year — the deepest in nearly two decades — hurt by measures imposed to curb the spread of the coronavirus.

The measures included a country-wide dusk-to-dawn curfew, restrictions on travel in and out of the capital Nairobi and closure of learning institutions, hotels and restaurants.

Insures will be hoping for improved business environment in the New Year as different sectors start cutting the corner on the Covid-19 pandemic.

Data from the Kenya National Bureau of Statistics showed that more than 1.8 million jobs were created in three months to September last year, buoyed by more firms resuming operations after the easing of some restrictions imposed to stem the spread of the disease.