BY LYDIAH WERE
Insurers are braced for more mergers and acquisitions as competition in the industry squeezes revenues. With nearly 50 players chasing after a gradually expanding cake, the ability of established insurers to raise or even maintain pricing levels is increasingly being undermined.
In fact, investment experts and analysts say an influx of new capital flows from sources such as private equity funds and foreign insurers is expected to enhance the overall capacity of the industry, thus increasing cut-throat competition that will touch off the long-awaited consolidation in the industry.
“This will in-turn kick-start mergers and acquisitions in the short to medium term as insurers seek efficiencies from economies of scale, a phenomena which has already started unfolding over the past two years,” Mr Thomas Njeru, Director Deloitte East Africa, says.
Over the past three years the sector has witnessed several acquisitions, the most recent being the planned purchase of an estimated 11% stake in reinsurer Zep-Re by World Bank’s investment arm International Finance Corporation for Sh1.9 billion. Last year, German-based DEG purchased 11% of the regional reinsurer for Sh1.3 billion.
UK-based Old Mutual has acquired a majority stake in UAP Insurance while Pan Africa Insurance bought Gateway Insurance to reenter the general business. Moroccan Saham Group acquired Mercantile Insurance last year.
In the Insurance Sector Outlook for East Africa 2015 released in May, Deloitte experts say capitalisation of the insurance industry continues to trend higher, spurring an expansion in insurable exposures, favourable investment performance from the capital markets, the real estate boom and relatively modest disaster losses in the past few years.
Also, low revenues are getting insurance managers back to the drawing boards in a new trend that promises to reward fewer but more nimble under-writers. The losses are mainly from health and PSV insurance. Medical claims paid out by insurance companies shot up by nearly 45% last year, pushing this segment of the industry into losses. According to figures from the Insurance Regulatory Authority (IRA), Sh12.3 billion was paid out in claims for covers in 2014, up from Sh9 billion in 2013.
This class of insurance recorded an underwriting loss of Sh437 million down from a profit of Sh282 million the previous year. Underwriting profits are calculated by deducting claims paid out and administrative expenses incurred to manage a portfolio from the premiums collected. “The losses are contributed by high healthcare costs and medical claims including fraudulent ones. Fraud is a concern,” says Mr Tom Gichuhi, chief executive of industry lobby Association of Kenya Insurers.
Last year, medical premiums accounted for 25.2% of the general insurance up from 24.2% in 2013. High claims, which constituted one-third of the total general business claims, have cast a dark shadow over the industry.
The cost of health insurance has been pushed up by fraud, mostly through a conspiracy of hospitals, and the rising cost of healthcare, with some healthcare facilities reviewing their prices twice last year.
The market for insurance has been expanding. There is, for instance, high insurance demand from infrastructure projects such as the Lamu Port Southern Sudan-Ethiopia Transport (LAPSSET) Corridor, modernisation of the railways network, the expansion of power generation, oil and gas exploration as well as the carpeted road network as project managers seek to evaluate, manage and transfer the project risks.
Mr Njeru of Diloitte says with the rapid expansion of East Africa’s economy, the insurance industry is on a solid footing as demand for both life and non-life products will rise as more households join the middle-income class and the market for project risk coverage soars driven by the on-going investment in infrastructural projects across the region.
“With a low penetration rate of insurance and complicated insurance products, experimentation and innovation are called for in terms of insurers engineering products that are more consumer friendly, improving methods of attracting and engaging clients through traditional as well as new channels and more effectively communicating the value of proposition they offer,” he said.
On the increasing the low insurance penetration level, the report observes that awareness alone is unlikely to turn the tide. “Overcoming the general public’s lack of awareness and understanding about the role and value of insurance is a key component to improving the penetration rate,” says the report. “In addition to educating the public about insurance, insurers should also think more creatively about how they market, design and distribute their products, while becoming more customer-centric to excel in an increasingly technology-enabled, self-directed environment.”
More insurers are likely to explore direct-to-consumer options, particularly to target younger, lower-income, and other underserved segments. While many will probably prefer to launch direct platforms on their own, some may choose to explore a partnership with major web-based retailers of call centres to leverage their existing technology platforms and customer relationships.
The renewed interest in bancassurance and annuity market are other big opportunities for the industry to grow their balance sheets and present viable growth opportunities for sustainable profits.
With risk-based supervision gaining currency, Mr Njeru says, insurers will need to strengthen their risk management functions and adopt more strategic risk management approach to deal with potentially disruptive trends and marketplace shifts.
There are 49 insurance companies in the Kenyan market and half of them offer medical cover. With slow growth in market, the only way to attract business has been through innovation and reducing premiums. Even then the market is not big enough for all players to be profitable.
Total premiums collected by the industry last year grew 22 per cent, which was one of the highest globally, to Sh157 billion, according to data from the Insurance Regulatory Authority. The Insurance Regulatory Authority reports show shareholders’ wealth grew to Sh122.54 billion from Sh98.21 billion in 2013, a 24.8% growth.
The shareholders’ funds comprised Sh31.1 billion in paid up share capital, Sh48.16 billion in retained earnings and Sh43.28 billion in other reserves. The growth signals that established firms are stockpiling their war chests to compete favourably in the industry, which has seen a growing number of mergers and acquisitions, with foreign investor interest rising.
