9 April 2016

East Africa: After Bad Year for East Africa Insurers, 2016 Outlook Seems Promising


The insurance industry in East Africa has witnessed tremendous growth over the past five years, though the continent's penetration ration remains low.

The insurance penetration ratio, which is the gross value of insurance premiums as a percentage of GDP, is often used as a measure of how developed a country's insurance market is.

Kenya ranks among the top insurance markets on the continent, behind South Africa, Namibia and Mauritius, despite the poor performance of the insurance industry in Africa on a global stage for its one billion people.

In fact, Kenya's penetration at 3.1 per cent is well above the 2.6 per cent average for emerging markets. In comparison, Uganda's penetration is around 0.8 per cent while Tanzania's stands at 1 per cent, well below Africa's average of 3.5 per cent.

According to a sector report titled Insurance in Africa, by KPMG -- the global network of professional firms providing audit, advisory and tax services -- the global average currently stands at 6.5 per cent.

Kenya's good showing has been supported by the fact that the country has achieved an average GDP growth rate of 5.4 per cent over the past five years, compared with 4.4 per cent achieved by its sub-Saharan African peers.

The good ranking is as a result of economic diversification that has propelled the country's growth in the face of weakening global conditions that have adversely affected commodity exporters as demand and prices decline.

However, last year the insurance sector in East Africa performed below projected forecasts. A number of companies operating in the region have announced poor results or given profit warnings to their shareholders.

This has been largely blamed on the depreciation of East African currencies and other macro-economic factors affecting major sectors that drive economic growth namely tourism, transport, agriculture and manufacturing. We have also seen sub-Saharan African stockmarkets underperform significantly. This is linked to the recent Federal Reserve rate increase in the US which has reduced risk appetite for securities in emerging and frontier markets, and made the US market more attractive.

Resolution Insurance, as one of the companies operating in this market -- having branches in Uganda, Tanzania and South Sudan -- has not been spared either. We too had a tough year as we made our foray into the general insurance space.

Uncertainty and pessimism have dominated the economic and business news in recent months. While on the face of it, the mood seems justified as many factors -- including China's financial gyrations, volatility in oil prices and the further weakening of the US economy -- are all colluding, the recent developments by themselves do not yet signal an imminent global economic recession.

Yet, the recent challenges to the global economy, have led to some significant adjustments by the Conference Board's Global Economic Outlook for 2016. Global GDP growth is now projected at 2.5 per cent, which is 0.3 percentage point lower than the November outlook.

The Conference Board Global Economic Outlook 2016 includes projections for 11 major regions and individual estimates for 33 mature markets and 32 emerging markets.

The largest downward adjustments are seen in emerging markets, being most pronounced in Brazil and Russia, as their economic outlook has deteriorated more rapidly than had been expected.

Banking industry

Back home in East Africa, the insurance sector is likely to benefit from the same forces that have propelled the banking industry on to the fast track over the past few years, including a rising middle class and the influence of technology.

I believe investment in modern technology, a stable regulatory environment and an expanding middle class will be the key drivers for growth in the insurance industry. Introduction of innovative products and solutions is also a step in the right direction.

Currently, with more than 80 companies offering insurance services in East Africa, there has emerged stiff competition making world-class service delivery channels and standards among the main competitive advantage fronts.

And with the new risk-based capital regulation, insurers are moving away from investment in property and the stockmarket towards government securities and the money market. This should see a shift in focus towards ensuring underwriting profit targets are met as the yields from investments will be lower albeit less risky.

However, in view of the low penetration, 80 companies are too many, suggesting pressure for consolidation. I believe this is already happening, although it will only pick up with harmonisation of regulations across the region.

There is a glut of shares right now as insurers raise capital to comply with the new rules. We are seeing international investors positioning themselves to take up these shares as they too expect some consolidation in the market.

There is surely light at the end of the tunnel for the insurance industry in the region this year.

The writer is the Group CEO of Resolution Insurance in Nairobi.

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