How insurance deals with storms

Kenya’s middle class has been the worst hit by the current economic uncertainties that came just when the Covid-19 effects were going down. More than a third of the middle class are in a volatile category that the African Development Bank (AfDB) identify as the floating middle class.

A medical emergency or a job loss is enough to push the floating middle class into an even more dire economic position.

With businesses shutting down leading to job losses, reportedly similar to the situation experienced at the peak of Covid-19, more and more people are staring at adverse challenges in meeting their daily needs.

The most affected are the floating middle class who are accosted by the rising cost of living against a low financial reserve just as they start to recover from Covid-19.

The floating middle class find themselves without a sufficient financial cushion to withstand extra expenses arising from exposures of an economy taking hits from all sectors.

Conventionally, a huge number from the floating middle class have resorted to cash and cash equivalent investment instruments to complement their income and meet needs.

The popularity of cash and cash equivalents during such economic turbulence is driven by the desire for capital preservation, liquidity, risk aversion, and the flexibility to navigate uncertain market conditions.

Cash and cash equivalent investments may not offer high returns compared to other riskier investments, such as stocks or bonds, but they are safe and readily accessible assets.

However, the idea of holding cash with the hope of avoiding potential losses associated with market downturns, while it may provide easy deployment when market conditions become more favourable also exposes this group to the challenges of resource diversion.

The high cost of living and taxes have led to increased anxiety and risk aversion, especially within the floating middle class.

They need safety and protection as much as they need liquidity, hence the need to pursue assets that demonstrate stability and resilience.

Insurance covers emerge as an attractive option that would provide a unique combination of risk mitigation, financial security, and potential returns.

Insurance is fundamentally designed to mitigate risk and provide financial protection against unforeseen events. During economic downturns, individuals and businesses face heightened risks, ranging from job loss to business disruptions to meeting health challenges.

Rather than avoid or exit insurance plans, the middle class needs to spend more on life, health and property covers that would shield them from the financial fallout of unexpected events.

This risk mitigation aspect makes insurance an appealing investment option in times of uncertainty rather than a liability or an opportunity cost.

With innovations enhancing the affordability, efficiency and profitability of insurance covers, the opportunities available in the industry to cushion job losses and income can only get better.

The advantage is both ways because continued servicing of the various covers despite the challenging economic environment creates a stable and predictable cash flow for insurance companies, thus enabling them to respond better to the needs of their customers.

This predictability contributes to the stability of returns for investors in insurance-related instruments especially in the face of other investment avenues experiencing heightened volatility.

The stability of insurance premiums provides a predictable financial commitment for policyholders, helping them to budget and plan their expenses more effectively.

This means as economic conditions worsen, the demand for insurance should remain relatively stable.

This ensures that the floating middle class can continue to access essential coverage without facing drastic increases in premiums or limitations on available policies.

This continuity of insurance coverage is crucial for maintaining financial security during economic downturns like we are experiencing currently.

This counter-cyclical nature of insurance means the industry should actually perform well even when other sectors are struggling, and it can be of great benefit to the floating middle class.

Aloo is a strategic communication and international affairs professional.