Insurance penetration drops to 15-year low

Insurance penetration in Kenya has dropped to 2.43 percent of Gross Domestic Product (GDP) -- the lowest in 15 years -- on the back of price undercutting in an industry where players are facing increasingly tough competition.

The reach hit its peak in 2013, when it stood at 3.44 percent of GDP, but has been dropping for five consecutive years.

This is a pointer that the sector has failed to ride on insurance opportunities presented by the expanding economy.

In an interview Wednesday, Kenya Association of Insurers (AKI) chief executive Tom Gichuhi said that the penetration level is not keeping pace with GDP growth and poor pricing has worsened the situation by slowing down the growth rate of gross written premiums.

The industry has also been accused of failing to develop innovative means to reach the uninsured.

“The number of insurable risks in this market is increasing yet premium growth is going down because of poor pricing.

"I can see us going further down and exiting the market if we don’t put our act together,” Mr Gichuhi said.

“The fortunate thing is that we know what we are supposed to do. The unfortunate thing is that we are not doing it.”

Winning customers

Predatory pricing, also known as undercutting, occurs when an insurer sets a very low premium with the intention of winning customers, but sometimes comes with the heightened risk of delayed or dishonoured payment of claims.

Insurers are at a crossroads on how to get rid of underpricing. Their attempts at setting minimum premiums for different risks were thwarted by the Competition Authority of Kenya, which dealt a similar blow to accountants.

The latest industry report by AKI shows that last year’s drop in insurance penetration was accompanied by a 61.56 percent drop in net profits from Sh9.21 billion to Sh3.54 billion, the lowest in 12 years.

According to the latest industry data, return on capital dropped from 10.4 percent in 2017 to 4.41 percent last year, showing the shrinking returns for the industry.

“We have a major problem of not basing our premiums at the correct level. We are the risk carriers and we should not allow brokers to undercut our risks,” said George Nyakundi, ICEA Lion life assurance general manager.

Underwriting losses

General insurance, which has 14 distinct classes, including motor vehicle, fire and medical covers, has also been on a decline, witnessing more than doubling of underwriting losses to Sh2.86 billion.

From the peak of 2013 when its penetration was 2.28 percent, general insurance has been on a free-fall, closing at 1.45 percent last year.

Growth rate has also been slowing, moving from the pace of 21.3 percent in 2013 to just 2.2 percent last year.

This, Mr Gichuhi said, was disappointing given that for instance, new investments and the number of new cars on the roads have been growing over time.

Data from the Kenya National Bureau of Statistics shows that registration of new motor vehicle has been rising, growing by 12 percent to 102,036 last year.

However, insurance for private vehicles recorded the highest loss at Sh2.7 billion, while commercial vehicles returned Sh1.1 billion underwriting loss.

Medical insurance remained in the red with Sh1.07 billion loss. “Medical cover is yearning for embracing of digital products. Unfortunately, we have an army of insurers still doing things manually,” lamented AKI senior manager Birian Akwir.

The insurance sector in Kenya and Africa remains one of the least penetrated globally, yet it presents great opportunities for growth.

Across the continent, South Africa recorded the fastest growth in penetration at 17 percent of GDP, followed by Namibia at a distant 6.7 percent.

Kenya had the best growth in East Africa although it remained low at 2.4 percent.