Why ailing insurance sector needs total overhaul

Monday, November 2nd, 2020 00:00 |
Insurance. Photo/Courtesy

Kenya’s insurance sector can only be described as being in the Intensive Care Unit. Its performance is depressing.

Insurance penetration has been declining for the last six years in a row, even as the economy has been registering at least five per cent growth annually.

The regulator, the Insurance Regulatory Authority (IRA), says most insurance companies have concentrated their businesses in Nairobi, which contributes 83 per cent of industry premiums.

This is followed by Mombasa at 4.7 per cent, while most counties are not served.

In 2019, the industry recorded a measly Sh229.5 billion in gross premiums from the 49 registered companies in the country.

It gets worse. The Commissioner of Insurance, Godfrey Kiptum, sees this cover declining even further,  given the impact of coronavirus on businesses and incomes. As the economy grows and cover shrinks, the economy is left exposed. 

Where is the problem?

The sector lacks the financial muscle to handle its business. One manifestation is lack of capacity to attract the best brains in the country, and the perennial problem of refusal to pay claims.

The insurance industry operates in an almost laissez faire manner, left completely to its own devices. They do as they like.

An industry in the grip of dinosaurs which does  not want to lose control. There are enough reports of foreign investors who have been banging on the doors of the insurance industry for years, but the ageing owners will not accept their money because of fear of losing control.

Many insurance companies have remained little more than dukawallahs.

How can Kenya get itself out of this morass?

Capitalisation is the magic bullet. This worked for the banking sector. There must be a major disruption in this industry.

Enact a minimum core capital of a billion shillings, with rising thresholds for five years, for any type of insurance company- general or life. 

The sector will undergo major convulsions as it churns to align. Critically, insurance companies will be forced to seek new investors.

What will emerge are stronger, better capitalised companies from new money, which will attract more competition, fresh ideas, technologically driven business models, aggressive marketing, and a slew of new products.

Provide incentives and facilitative legislation to enable banks to expand their footprint into insurance.

Banks have a national footprint, and the capacity to drive growth of financial products through their national branch networks, aggressive reach, innovative products, and financing.

Financing will be key to boosting greater reach, and banks are naturally placed here.

Strengthen corporate governance in insurance companies. Again, very stringent corporate governance structures have worked well in strengthening the banking sector.

The IRA must vet all directors and  chief executives of insurance companies before they are appointed.

IRA should reject cross-directorships that are prevalent in this sector and have bred cartels, resulting in very expensive but poor products and zero growth.

The Commissioner of Insurance must also vet premiums to ensure that they are viable.

Undercutting is killing the insurance sector, and it falls under behavior that undermines competition. 

Another solution lies in reconstructing IRA. This institution as currently instituted, is incapable of growing the sector.

The government must give it the same capacity, resources and standing as the Central Bank of Kenya. 

The insurance sector is a critical economic platform that the government has treated casually for too long.

The Treasury Cabinet Secretary needs to look at this sector with a view to giving it an overhaul. It is time to heal the sick man of the financial sector. [email protected]

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