Low insurance penetration a sign of less development

One simple measure of a country’s level of development is the penetration rate of the insurance industry. It is measured as premiums paid divided by the country’s Gross Domestic Product (GDP).

As a country develops, more wealth is created and insured.

We should be bold enough to admit that the low insurance penetration rate in Kenya is an indicator of our level of development, and we’ve little to insure.

Why has the penetration rate gone down to 2.43 per cent as per 2018 Insurance Regulatory Authority (IRA) report?

Why is it defying economic growth? The quarter one 2019 and 2018 annual reports from IRA have some surprises.

Regulatory issue

Why do three firms take 52 per cent of the market share by gross premiums income?

Do we need more competition in this industry?

Why does 58 per cent of the investments go to government securities? 

Is this lack of innovation or a regulatory issue? Motor vehicles and medical are the leaders on income and in claims?

Does this indicate that insurance has left out Wanjiku? Why does Nairobi take over 80 per cent of paid premiums in Kenya as per the 2018 IRA report?

When shall we see devolution in the insurance sector?

The reports show losses in motor vehicle and medical insurance.

The losses are attributed to fraud, but it’s more than that.

New laws could also shake the industry. Fraud often occurs in a highly regulated industry or where innovations are few.

Some have argued that we over “constituted” our constitution with 200 pages and that could partly explain why corruption is thriving in Kenya.

Back to insurance, what is unique is that it’s a mystery to most Kenyans. Most people think insurance is an industry where customers pay for services they never receive. 

It’s the only industry where you only benefit from suffering, at least to the layman.

To the sophisticated, insurance ensures you suffer no loss.

But to the laymen, there is nothing to lose; you can’t lose what you do not have.

The layman also feels insurance is forced by law. Clearly, one way to grow insurance is to expand the economy so that more people have something to lose and therefore insure.

Fraud results in lack of transparency.

What happens to the money you pay as premiums?

Unless you are a shareholder of an insurance firm, that remains a mystery unless you are making a claim or you are about to renew your cover! 

What of lack of standards and penalties for noncompliance?

Information asymmetry is another problem in insurance.

Take medical insurance, for instance. Doctors know more about the medical condition than the insured.

When the insured goes to the hospital, do they know the real value of their premiums?

Do they know the difference between generics and original drugs? Operational issues have plagued the industry too.

Why do insurance firms restrict payers to single hospitals or service providers? I have teachers’ medical insurance in mind.

This leads to inefficiency. Why not give me my cover and let me go to any hospital?

If I exhaust my cover I can top up. The competition will result in innovation and lower costs. What of sharing information? How much information about our health, our driving habits or risk-taking behaviour is shared?

Would that not reduce the cost of insurance? Legislating too much can be counterproductive.

Think of the amended Insurance Act 2019 that focuses too much on cash and carry, removing payment by instalment and removing the intermediating role of brokers.

Yet, by its nature, insurance should be paid by instalments. Why not weekly or as needed?

Can insurance learn from the mobile phone industry where we buy airtime when needed?

Don’t we even pay dowry by instalment?

The fact that some insurance is backed by law and we have no choice demands its payment should be made as easy as possible.

We can’t discount the fact that Kenyans are very religious and see insurance in higher powers. 

What of selling insurance as an investment?

Economic growth

Already, some insurance companies are giving back some money for good driving, more like getting lower interest rates if your credit report is good.

The carrot can work as much as the stick. The secrets of insurance growth will depend on the confluence of economic growth, regulation and understanding our behaviour and motivations.

Add innovations and the 2.4 per cent penetration can reach 10 per cent. Noted how optimal regulation led to the growth of M-Pesa and the Internet?

Some innovations cited by IRA include cancer insurance policy, funeral expense, critical illness, family income, livestock among others. Can I get insurance against my enemies?

There is no doubt the insurance sector needs a disruption, but not through legislation.

Did you notice how the interest rate cap failed to excite the banking sector compared with ATMs? What is the M-Pesa equivalent in insurance? 

Finally, what is attracting South Africans to Kenya’s insurance? What do they see that we can’t?

-The writer is an Associate Professor at the University of Nairobi.