Kenya economy’s profile suffers from insecurity setback

Kenya has been rated among African countries with the highest risk for insurers, pointing yet to another challenge that East Africa’s largest economy faces in its quest to attract investment.

US-based rating agency A.M Best has, in its latest Africa insurance industry report, placed Kenya, alongside Egypt, Nigeria and Libya, in tier five (CRT-5) of country rating – the lowest score reserved for countries with massive risks for investors.

The firm, which mainly rates countries for insurance and re-insurance companies, said in the report published last month that the tier five rating is reserved for “countries that pose the most risk and the greatest challenge to an insurer’s financial stability, strength and performance.”

A.M. Best says country risk factors affect all companies in a given market, but to differing degrees linking its assessment to Kenya’s overall business environment.

The rating is based on Kenya’s economic, political and financial system risks that are linked to factors such as increased terrorist attacks, widespread corruption and money laundering.

The tier five score means foreign investors coming to Kenya must take additional measures to shield themselves against abnormal risks such as political instability, sabotage and terrorism to protect their businesses.

“Risk averse investors are likely to keep off. But given the high returns in Africa, most investors prefer to cover the risks,” said George Otieno, chief executive of African Trade Insurance (ATI) company .

South Africa is the continent’s most stable economy with a score of CRT-3 followed by Mauritius, Morocco and Tunisia who are a band lower at CRT-4.

The high risk rating is particularly significant because it comes as Kenya is preparing for the roll-out of a Sh132 billion ($1.5 billion) sovereign bond to be listed at the Irish Stock Exchange by the end of this month.

Kenya’s dependence on rain-fed agriculture and its reliance on price volatile agro-exports such as horticulture, tea and coffee coupled with lack of value addition in the chain, make the list of the country’s economic risk indicators.

Crimes against humanity charges facing President Uhuru Kenyatta and his deputy, William Ruto, at the International Criminal Court (ICC), Kenya’s ever charged political environment and high crime rates constitute another layer of risk.

A.M. Best warns that the risks present a great hazard to the credit quality of underwriters in Kenya – as witnessed by the huge exposure they faced last year with the surge in claims paid out in the wake of persistent terrorist attacks.

“Most firms suffered huge losses in claims last year. Thankfully, Westgate mall was largely insured in London leaving the Kenyan market with only a small fraction,” said Mr Otieno.

The upmarket shopping mall was insured to the tune of $100 million (Sh8.7 billion) by London-based Lloyd’s with Kenyan underwriters taking only a small portion of the deal that covered the building, loss of income and third party liabilities.

Mayfair Insurance paid a total of Sh1.01 billion to Nakumatt Supermarkets for losses suffered at one of its branches following the terrorist attack at the mall in September.

READ: High prices slow down terror insurance

Nakumatt managing director Atul Shah said the retailer’s losses were more than Sh2 billion in the terrorist attack that razed its hypermarket at the mall.

The terrorist attack cost ATI Sh128.5 million ($1.5 million) arising from three claims.

The impact of Kenya’s risk climate is also exemplified by the Sh1.97 billion claim that APA Insurance paid to the Kenya Airports Authority (KAA) in compensation for the inferno at Nairobi’s Jomo Kenyatta International Airport (JKIA) international arrivals terminal.

Kenya’s insurance industry gross written insurance premiums grew by a fifth to Sh131 billion last year compared to Sh108.6 billion in 2012.

Claims incurred under general insurance business amounted to Sh33.4 billion in the year to December 2013, an increase of 13.6 per cent.

Kenya’s increased exposure to a growing list of unique risks has seen insurers double the cost of political risk cover in the last 18 months, with most people including such covers on statutory policies such as motor vehicle, fire and marine.

Heightened political and economic risk increases the cost of insurance and ultimately the cost of doing business in Kenya, making the economy less competitive in the race for investment.

Data from the Kenya Investment Authority (KenInvest) shows the level of FDIs inflows stood at Sh84.7 billion last year, a growth of 68 per cent compared to 2012.

Proposals lodged with the investment agency totalled Sh30 billion in the first three months of this year, meaning investors continue to see the risks as either posing minimal threat to their business or are only temporary.

“We are getting a lot of delegations coming here for business and they are concerned with the security situation. We need to deal with the risk posed by terrorism,” said Dr Moses Ikiara, managing director at KenInvest.

Analysts said that the country risk assessment by A.M. Best may have factored in Kenya’s ballooning public debt and difficulties in servicing international financial obligations.

Robert Shaw, an independent analyst, said Kenya’s increased uptake of debt is approaching worrying levels, citing the difficulties that last month forced the Treasury to reschedule payment of a $600 million (Sh52.8 billion) syndicated loan taken in 2012.

“Rescheduling a bank loan can, in certain circumstances, be considered a restricted default if the loan is material relative to the total stock of sovereign debt,” New York-based Fitch Ratings said in May.

Kenya’s gross public debt has more than doubled in the last five years to Sh2.1 trillion or 51.1 per cent of GDP as at March 2014 compared to Sh1.06 trillion (46.4 per cent of GDP) in June 2009.

“We need to ask ourselves if the current debt levels are sustainable given that our servicing obligations are growing fast,” said Mr Shaw in an interview.