Personal Finance

Reinsurance: Sector's key role in industry transformation

BDInsurance

Life insurance is a contract between a policyholder and an insurer in which the individual pays regular premiums and the insurance company pays out a benefit to the individual's specified dependents in the event of their death. FILE PHOTO | SHUTTERSTOCK

The insurance and reinsurance markets are drastically evolving in an unpredictable world of new risks, either underestimated or just dynamic and challenging to model.

We have witnessed rising costs of claims since the onset of the Covid-19 pandemic. The world is now being bogged down by skyrocketing global inflation that no one knows its end.

As risks and costs of insurance rise, an insurance company faces the same dilemma as individual policyholders and business owners.

Without reinsurance, the insurer shoulders all risks from policyholders and will lack the advantage of spreading such risks.

Should the catastrophic risk accumulate, it will find its capital ruthlessly strained.

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Recently, Kenya’s insurance companies reviewed their premiums, especially car insurance. And so did the reinsurance counterparts.

But do insurance companies have a choice?

The costs of reinsurance do not supersede the cost of losing the entire company in case of overwhelming claims.

Therefore, the answer is that reinsurance is the way to go for insurance companies and other businesses.

As we assess the dynamics in the insurance industry, it is important to understand the significance of reinsurance to insurance companies and businesses.

Businesses can use this knowledge to kick-start a reinsurance premium purchase process or seek more advice on reinsurance from professionals.

The most important thing is that we need consumer confidence in the insurance and reinsurance subsectors.

Kenya’s insurance industry is robust, but still relatively small compared to other markets.

The country has 49 registered insurance companies providing general and life insurance, with three locally incorporated and two regional reinsurers in Kenya.

Data from the country’s Insurance Regulatory Authority (IRA) shows that towards the end of 2020, the gross written premium for Kenya’s insurance industry stood at Sh 232.95 billion, representing an increase of 1.8 percent from Sh228.80 billion in Q4 of 2019.

General insurance business underwriting results improved from a loss of Sh2.97 billion in Q4 2019 to a loss of Sh1.18 million in Q4 2020.

In Africa, the value of insurance reached $70 billion in 2020 with targeted market growth of about 7 percent between 2021 and 2026.

Analysis by both McKinsey and World Economic Forum confirms the high potential Africa has in the world economy. Such potential portends huge opportunities for the growth of the insurance market in the region.

Globally, non-life insurance premiums grew by 1.2 percent as life insurance premiums declined by 2.2 percent in 2020 as shown in a report by the Organisation for Economic Co-operation and Development.

The impact of Covid-19 was a major key influencer in the trend and performance.

Today, however, the leading transformative agenda in the industry is on technology adoption. For example, in 2020 investment in technology reached $7.1 billion.

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Companies invested in automation targeting claims, underwriting, and other customer service products. Emphasis is also being made on migration to the cloud as an efficient and cost-reduction strategy.

Mr Mbeshi is the Acting Managing Director of Kenya Reinsurance Corporation.