Kenyan insurance companies’ exposure to risks of government debt has gone up in the last three years as a result of their heavy investment in bonds and T-bills, a new report has revealed.
The Central Bank of Kenya (CBK) says in its latest financial stability report that the growth in the debt securities in the portfolios of insurers has exposed them to credit and asset valuation risks.
The underwriters’ investment in government securities rose from 61.6 percent in 2019 to 67.1 percent in 2020 and to a new high of 71.7 percent in 2021.
“Increased share of government securities to 71.7 percent in 2021 from 67.1 percent of income generating assets in 2020 may indicate flight to quality and safety by insurers but raises sovereign (government) exposure risk,” said CBK in the report.
Insurers cut their allocation to other assets as they piled into government securities to lock in fixed, double-digit interest rates for the long term.
Real estate, fixed deposits, and mortgages are among the areas where the underwriters reduced their investments. The percentage of assets held in the property sector, for instance, dropped from 14.2 percent in 2019 to 13 percent in 2020 and 10.7 percent last year.
“The 2.3 percent decline in the share of investment property, may reflect Covid-19 pandemic aftershocks on the real estate and construction sectors,” the report says.
Insurers increased their investment in government bonds and T-bills by Sh66.2 billion or 15 percent in the quarter ended December.
Data from the Insurance Regulatory Authority (IRA) shows that the companies, including primary insurers and reinsurers, raised their investment in the assets to Sh506.6 billion in the review period from Sh440.3 billion a year earlier.
Investment in the risk-free assets grew by the largest margin, outpacing others including listed equities. T-bills and bonds have interest rates ranging from 7.2 percent to highs of 14 percent depending on duration, with long-term papers having the highest returns.
Most of the big insurance firms have been increasing their allocations to assets offering stable returns such as government securities and real estate, maintaining or reducing their exposure to the stock market which has volatile returns.
Life insurers were the biggest investors in government securities, raising their holdings to Sh400 billion from Sh348.55 billion.