Covid-19 job losses lift profile of layoff covers

When customers walk into banking halls in the quest for loans, the biggest concern for lenders has been about what would happen to the loans in case of critical illness, disability or death of their clients.

Therefore, at the minimum, many banks have been demanding that customers take credit insurance covers to curb loan defaults in case of death or disability.

But with Covid-19 health crisis, having quickly morphed into a financial crisis and dealt a blow to an already fragile economy that was awash with layoffs, retrenchment covers are gaining popularity.

UAP Old Mutual lead for corporate life business Evans Manduku reckons that the brittle situation in the economy is making more employed people pay closer attention to retrenchment covers.

“Retrenchment has been a rider under credit life cover but it is now evolving into a basic minimum just like death or disability. The Covid-19 situation has exposed the need for this product given the massive layoffs and there is likely to be a surge in uptake,” he said.

As a result of the Covid-19-induced economic downturn, an estimated 1.72 million workers lost jobs in three months to June alone, according to the Kenya National Bureau of Statistics (KNBS).

The three months layoffs have surpassed the 500,000-mark that President Uhuru Kenyatta had predicted to happen in nine months following the reporting of first Covid-19 case in Kenya on March 13.

Insurance firms and institutions such as banks are reviewing their products to turn attention to retrenchment covers at a time the infectious virus has hit earnings, worsening layoffs at corporate Kenya.

Standard Chartered Bank of Kenya is, for instance, partnering with Prudential Life Assurance Kenya on a product that offers a bridge between one losing their job and getting another one, helping contributors avoid the agony that comes with an abrupt end of income.

Called Vantage Insurance Plan (VIP), the cover was rolled out in July, allowing workers to pay a monthly premium of as low as Sh235 per month to guarantee them monthly income for up to 12 months in case of retrenchment.

Head of wealth management at Standard Chartered Paul Njoki says more than 1,000 people expressed interest during the launch month and the number is rising.

“The traction has been good since launch. We see the number almost doubling every month. We are seeing a lot of interest,” says Mr Njoki.

The bank says it has so far paid out claims on the credit life policy — a cover that takes care of loan obligations in case of death and disability — with the retrenchment as a rider for interested customers.

“We extended our credit life policy to cover redundancies. This product has been helping laid-off workers to service loans but clients have been desiring a product that can help them continue putting food on the table when job loss happens,” says Mr Njoki.

For minimum, one can contribute Sh235 per month to guarantee themselves monthly retrenchment benefits for six months. This is for those with a net salary of between Sh10,000 and Sh80,000.

Surge in claims

UAP Old Mutual’s Manduku says that banks are leading the evolution of credit life product to take care of retrenchment.

“Of late, retrenchment has become a key risk that banks are not willing to absorb, especially when giving out loans against a payslip,” says Mr Manduku.

Stanbic Insurance Agency Limited (SIAL), which in 2017 rolled out the income protector policy to cover death, disability and retrenchment, says it has seen a surge in claims related to job losses.

“Due to the Covid-19 pandemic, there has been a significant increase in claims. Between April and September, we have received over 300 claims,” says Charles Ochieng, the head of SIAL.

The retrenchment cover has also been running as a rider for Stanbic’s credit life cover, with many customers not keen on it.

But Mr Ochieng says more customers are now willing to add it to death, disability and injury covers.

“There has been an increase in both new customers looking for products with the embedded retrenchment cover as well as existing customers who had previously not opted into the cover but now looking to be opted into the cover,” says Mr Ochieng.

KCB Insurance Agency, which currently partners with APA Insurance and Sanlam Kenya, also reports that it expects premiums from its credit life insurance cover that incorporates retrenchment, to surge.

Attractive covers

In 2018, the firm says premiums hit Sh129.94 million in comparison to Sh51.4 million two years before and Covid-19 situation looks set to make the cover more attractive.

“More customers are keen to have retrenchment cover incorporated in their loan applications, especially for corporate entities,” says Aggrey Mulumbi, KCB Insurance Agency managing director and principal officer.

But as more customers turn their attention to this product in Kenya, insurers beyond the borders are taking a cautious approach, especially with Covid-19 caseload still growing.

In South Africa — the country with the highest Covid-19 infections in Africa — Old Mutual and Liberty opted to temporarily close their retrenchment cover products.

The two insurers issued separate communication saying the halt was to determine a fair and reasonable price once the Covid-19 pandemic was factored in.

The uncertainty related to the infectious virus and the difficulties in assessing the potential risks meant that insurers were not sure about how to price premiums for new applicants.

“We use past experience to determine a fair and reasonable price for that cover. Going forward, we have no idea what the reasonable experience is that we will encounter as a result of Covid-19,” said John Kotze, protection product head at Old Mutual.

Muted cases

The cover extended by these insurers normally hedge against a portion of employees ‘salaries — up to 75 per cent for six months after involuntary retrenchment.

Insurers in Kenya, where Covid-19 cases have remained somewhat muted, say it may take a while before they start having conversations about reviewing the pricing of retrenchment covers.

“For now, we haven’t reached a point of reviewing the price of this product. But if the loss ratio jumps sharply, then it may call for a review,” said Mr Manduku.

But for the largest insurer in Kenya, Jubilee, there is another concern — the rising risk of corporates with pre-planned retrenchment programme, rushing to take this cover.

Jubilee Insurance head of corporate life business Christine Karoki says, while retrenchment cover is meant to help employees who leave the office for “unforeseen and unplanned” reasons, some corporates may abuse the product.

Informal sector

Ms Karoki says the reason retrenchment cover may not be widely offered despite the growing demand can be summed up in one word that insurers dread — anti-selection.

Anti-selection is the tendency for people to take out insurance only when the probability of loss is high.

“Some corporates may go for retrenchment cover because they want to activate a retrenchment plan. So they are in essence transferring a planned or predictable risk,” she says.

And with a country such as Kenya having up to about 70 per cent of the workers engaged in the informal sector, Ms Karoki thinks the government must come up with products that complement income protection covers.

The other gap is that Kenya’s insurance penetration — the ratio of gross direct insurance premiums to the gross domestic product — has declined to a low of 2.34 per cent against the world average of 7.2 per cent.

“There is a space insurance industry cannot complete There needs to be a compensation fund created by the government to take care of the lower cadre people, mostly working in the informal sector,” says Ms Karoki.