In the final installment of our special report into the insurance industry of Kenya, we take a deep-dive into one of the key sub-sectors of the general insurance landscape: life insurance.
A report by the major multinational accounting organisation, Deloitte, recently highlighted the competitive nature of the Kenyan life insurance industry. The report suggested that a lack of technological innovation and increased competition was driving prices down and reducing the profit margins of the major life insurers.
Price wars and increased competition are usually beneficial for everyday consumers because they result in lower fees. However, as we are about to find out in this article, reduced profit margins for insurance companies can result in reduced investment and growth in the entire economy of a region. This is because insurance companies are the key drivers of public investment.
Key Life Insurers
Life insurance premiums resulted in $8.6 million worth of income in 2018. This amounts to 41% of the entire insurance industry of Kenya.
The chart to the left indicates the market share taken up by life insurance premiums compared to other forms of insurance. Whilst the total share (41%) of life insurance premiums is smaller than the combined non-life insurance premiums (59%), life insurance represents the single biggest sector of the insurance industry.
The key companies that are swallowing up most of these insurance premiums will also act as key investors in other areas of the Kenyan economy. The biggest life insurer in Kenya is Britam Life which had nearly 24% of the market share in 2018. Next was Jubilee Insurance which had around 14.5% of the market share. The third largest life insurer in 2018 was ICEA Lion Life with a market share of just under 14%.
Those three companies swallow up over half the life insurance premiums across Kenya. The other 48% of premiums are shared among 22 different insurance providers with CIC Life, Kenindia, and Pioneer being the most notable of these.
The graph above illustrates the market share of the 25 companies which received insurance premiums in 2018, in descending order of market share.
Compared to other sub-sectors of the insurance industry in Kenya, life insurance has been one of the most productive in terms of increasing insurance premiums year on year. Since 2014, insurance premium receipts have increased by 35%. Only health insurance has increased by a margin better than that (39%).
Whilst insurance premiums are increasing year-on-year, the situation for life insurers in Kenya is not as strong as it seems.
The graph to the left shows how, despite equity and gross written premiums (GWP), increasing year-on-year, the return on equity (the blue line) for life insurance providers has looked far less consistent. Indeed, from 2017-2018 the industry experienced an unexpected decrease in return on equity.
This reduction in return on equity is bad for life insurers firstly. However, it is also not a good sign for the Kenyan economy as it can result in reduced investment. In the next section of this article, we will explore the relationship between insurance and economic growth and see what it could mean for the Kenyan economy.
How do our insurance premiums lead to economic growth?
According to a paper in the Journal of Economic Development, which you can access here, there is an intriguing and important relationship between economic growth and the receipt of life insurance premiums.
One of the key reasons provided by this paper for this relationship is that the increasing life insurance premiums has a positive correlation with investment in the stock, bond and real estate markets. This claim is supported by the evidence to suggest that developing countries without an operational financial sector do not experience the same benefits of an increase in insurance premiums.
Fortunately, the ‘institutional environment’ in Kenya has much improved over the last twenty years. As we pointed out in a TFR article a few months ago, considerable investment has been put into the creation of a financial sector in the heart of Nairobi. This infrastructure should help to maximise the benefits of increased premiums.
However, as the graph above illustrates, many of the larger and more established insurance companies (indicated by the size of the bubble) have been enduring lower profit margins than many smaller firms such as UAP and Liberty.
This has an effect on the recycling of insurance premiums into the rest of the economy. Larger firms like Britam may be more reluctant to invest into neglected areas of the economy due to fears of liquidity issues in a competitive landscape.
There is hope for some of the larger firms yet though. In the last few years, large stakes in insurance provider Britam have been sold off to big investors. The extra stimulus provided by may help the larger providers consolidate their position in what has become an extremely competitive market.
Life insurance in a post-Corona world?
The insurance industry, like many other industries in Kenya, may well be hit when the eventual reckoning finally arrives. Right now, it is an industry that faces some uncertainty. Despite this, there are reasons to be optimistic.
The aftermath of the pandemic could lead to a less competitive life-insurance market. This, in turn, could help provide the stimulus that the Kenyan economy will need after the effects of the virus have subsided.
Furthermore, periods of chaos and uncertainty can often lead to moments of innovation. One of Deloitte’s criticisms of the Kenyan insurance industry was the lack of technological innovation. Whilst many other industries in East Africa have benefited from ‘disruptive technologies and unconventional competitors’, there is little appetite for risky innovation in the East African insurance industry.
At The Filing Room, we sincerely hope that the insurance industry comes out of the coronavirus crisis stronger and more innovative than before. Not only is it in our interest, but it is also in the interest of the entire nation that we have a strong insurance industry.