Home » Business Monthly » Big deals loom in insurance sector as Liberty fights for slot in big five

Big deals loom in insurance sector as Liberty fights for slot in big five

Premiums written by the insurers dur- ing the first three months of the year amounted to Kes 55.27 billion, rep resenting a 9.6 per cent year on year

growth. this is according to data aggregated by the Insurance regulatory Authority  (IrA).

the market share—on a basis of “long-term insurance business”—of the major insurance companies has remained largely  unchanged in the first three months of the year, IrA data shows. Long-term insurance business collective- ly refers to: life insurance; annuities; personal pensions; group life; group credit; unit linked and linked investments; and deposit adminis- tration.

On the basis of long-term insurance busi- ness, britam is the leading insurer, with a market share of 20.66 per cent. It is followed by ICeA (13.92 per cent), Jubilee (13.84), pan Africa (7.97 per cent), and CIC Life Assurance (7.42 per cent). Collectively, the five command close to 70 per cent of the market, definitively making the the “big five,” so to speak, of the insurance sector.

top five insurers by market share as at 31st march  2015; Data: IrA

Whether these five insurers’ firm grip on the market will persist is anyone’s guess. this is because at the time of writing, earnings for the second quarter of the year for all insurers had not yet been reported and synthesized into a comprehensive comparative report by the IrA. Nevertheless, sector analysts expect negligible changes in market share in the second quarter and through the year in light of the fact that market con- ditions remained relatively uniform throughout the first half of the year. some  of  the  market conditions

in  question  include: rising  cases of

fraud; regulatory  changes  that will

see insurers increase their level of minimum capital to match the risk they insure; and growing expecta- tions of mergers and acquisitions as different insurers struggle to increase their capital and stay in the game.

 

Liberty eyes top spot

meanwhile, Liberty Kenya Holdings, which had a 6.0 per cent market share in terms long-term insurance business as at march 31, is angling for a more prominent position in the market. Liberty is capitalizing on the new regulations requiring insurers to beef up their capital base to scout for acquisition opportunities among smaller insurers, who are desperate for capital injections in order to comply with the regulator.

Liberty  Kenya  is  considering as many as 10  acquisition  targets as part of its five-year strategy to increase its foothold in Kenya, the insurer announced in mid-July. “that  is  on  the  cards  if  we   can get a suitable candidate,” managing Director, Abel munda, said in an interview in the capital, Nairobi. “We have a number of companies in the country that would be a good fit if they would be up for acquisition,” he added.

Amendments to the Kenya Insurance Act last year means that short-term insurers need to hold 600 million shillings in paid-up capital by 2018, from 300 million shillings previously, while long-term insur- ers need to set aside 400 million shillings from a prior level of 150 million shillings.

moreover, the amendments to the Act also specify that insurers will only be able to underwrite risks that are commensurate to their capital levels.this is to ensure their stability and, in the final instance, forestall systemic risks in the insurance sector and broader financial industry. the amended Act will come into force by 2018.

the  transition  to  the  risk-based

model has been lauded by analysts. It is “likely to enhance compliance, which in turn will improve the sol- vency of the industry as a whole and lower its risk,” elizabeth Ndirangu, an analyst at Genghis Capital Ltd., said in a report released earlier this year.

Not everyone, however, is excited about the new risk-based model and its implications in terms of higher capital requirements. smaller insur- ers with lower capital bases will have to cede their stake in lucrative high risk businesses or, alternatively, look for additional capital. this sets the stage for an aggressive wave of acquisitions in the insurance sector.

 

Major deals

major deals have already been inked, underscoring the appetite for take- overs in Kenya’s insurance sector. Old mutual plc, the London-listed insurer, bought control of UAp Insurance Kenya Ltd. last year, com- bining it with its local operations. similarly, pan Africa Insurance ear- lier this year boosted its stake in Gateway Insurance to 56 per cent, while  London-based  prudential plc bought shield Assurance Co. in 2014, the same year in which swiss re AG took a minority stake in Apollo Investments Ltd.

the appetite for deals has increased even more, as signaled by Liberty’s desire to pursue up to 10 acquisitions, a move that could effec- tively reduce the number of insurers in the market by up to 25 per cent.

the new regulations will trigger  a rush by many insurers who are merely getting by to raise capital, said Liberty’s munda. “there

are companies finding it  chal-

lenging to comply and may seek partners to try and infuse capital,” he further added. this is where Liberty’s opportunity lies.

Liberty Kenya is a unit of Johannesburg-based standard bank Group Ltd.’s Liberty  Holdings, which has a presence in 17 African countries. It is therefore well cap- italized and can zero in on the opportunities in Kenya. A report earlier in the year by AbC Capital observed that well capitalized firms with foreign backing are likely to dominate takeovers in the industry going forward.

“Cut-throat competition among underwriters has fueled quest for funds, making the sector a fertile ground for investors seeking to boost clout or make fresh entry into the market,” AbC Capital said in the report, adding that foreign stakes in Kenyan insurance firms will increase. Likewise, muammar Ismaily, a Nairobi-based insurance analyst at exotix Frontier research, expects there to be much more consolidation. “there are dozens of players, but only a handful control the majority of the market,” he says. “And with new capital adequacy rules coming in Kenya in 2018, many companies are going to have to merge or be taken over if they want to   survive,”he observed.

 

Size matters

In business, size matters: bigger is often better. this premise has been validated by the wave of consoli- dation on a global level that has created better capitalized firms that can leverage on economies of scale to deliver value for both their share- holders  and customers.

there is of course the argument that the takeovers, especially those financed by foreign capital, will crowd out smaller local companies. this is a typical counterpoint to glo- balization and valid in some instances, especially where protectionism is

the order of the day. Nonetheless, it is not the case in insurance. bigger underwriters are typically able to take on a wider range of risks, effec- tively increasing insurance penetra- tion levels—that is, the total value of insurance premiums as a percentage of  GDp.

the wave of acquisitions in Kenya’s insurance sector therefore has positive implications for the country. It will help create bigger underwriters who can increase pen- etration and help the country catch up with leaders in the continent such as  south Africa.

south Africa accounts for almost

80 per cent of all premiums in sub-saharan Africa and the country has an insurance penetration level of about 13 per cent, well  above  the developed world average. Of the rest  of  African  economies,  Kenya is  among  the  most  advanced, with

a  penetration  rate  of  3  per    cent.

Nigeria’s,  in  comparison,  is   about

0.3 per cent, despite the fact that it is Africa’s largest economy.

there are a lot of opportunities in Kenya’s insurance sector, precisely because the country has established a reputation for innovation. New channels such as mobile are rede- fining the game, and there is a lot of room for penetration of products on account of this.

What only needs to change is product development. Development teams have to be more in tune with the needs of the market. Otherwise, the fundamentals are good: income levels are increasing on the back of a growing middle class, financial literacy is on the up, and innovation is presenting new channels that can reach customers more efficiently and conveniently.

“there’s a real buzz about the sector because opportunities are immense,” says James Norman, KpmG’s regional insurance head. “there’s a young population, a growing middle class — most with smartphones — and an increasingly large diaspora coming back,”he says. “there’s a whole new generation of savvy consumers with disposable incomes and large infrastructure projects being built,” adds Norman.

However, to capitalize on these opportunities, firms need the neces- sary human capital. this is where the challenge comes in. Although Kenya is generally ahead of its regional peers in terms  of  quality of human capital, some gaps still exist, especially in fields such as insurance which demand specialized knowledge. the scarcity of skills in Kenya’s insurance sector has been highlighted before by thought lead- ers in the industry.

the new IrA guidelines require each insurer to have an internal actu- ary and risk management expert. but as seth Chengo, a manager in Assurance   services   at  pwC

argues in pwC’s Financial Focus 2015 report, there is a short- age of actuaries in Kenya. “there were only 12 Fellows of the Institute and Faculty of Actuaries (UK) reg- istered in Kenya as at september 2014,” Chengo wrote, further com- menting that a general shortage of skills was a significant threat for the insurance sector.

the low reservoir of specialized skills not only undermines insurers’ ability to render world class services, but it also increases direct costs of recruitment, training and retention. Firms are therefore using high pay to retain the limited talent there is,  a point that Kuria muchiru, pwC’s human resource leader for Central and southern Africa underscores. “Companies are offering higher pay as a key talent retention strategy,” he says.

this means that, increasingly, firms with more money to  spend  on administrative expenses such as talent recruitment and, more impor- tantly, retention, will survive. that is why better capitalized firms are the ones best positioned to make great strides in Kenya’s insurance sector.

 

Fraud mitigation

bigger firms also have the capaci-  ty to mitigate an increasingly seri- ous risk for insurance firms—fraud. the amount of cash involved in insurance fraud more than tripled while the frequency of the crime rose by nearly 22 per cent in 2015, according to the IrA, which said the total amount of money lost through fraud was sh366.9 million in 2015 compared  with  sh102.76   million in 2014.

Industry experts say that things could actually be worse than imag- ined, considering very few cases are reported due to fears of undermining a firm’s reputation or eroding public confidence in the financial system. meanwhile, efforts to curb the men- ace continue, despite the stiff   chal

lenges of nabbing elusive fraudsters. the challenge of mitigating fraud is further exacerbated by the fact that fraudsters are now mov- ing online. this requires extensive investments in ICt  infrastructure to mitigate. similarly, it is no secret that most of the fraud within the Kenyan context is largely initiated from within organizations. rogue employees often collude with fraudsters to falsify claims.

Automating the claims process, as well as other business processes, removes direct human involvement and logs data electronically, making it harder for fraudsters to cover their tracks.

However, a complete overhaul of data systems and the use of spe- cialized technological tools, though essential in fighting fraud, is a costly affair. Only big firms with robust balance sheets can do this without seriously impacting their financial health and long-term commercial performance.

this is why Liberty, which has unveiled the most ambitious acqui- sition strategy so far in Kenya, is best positioned to make the biggest impact in Kenya’s insurance sector over the long-term.

the market shares of top under- writers in the industry may be fairly static for now, but it appears Liberty may shake things up in light of its five year expansion strategy that will put it in a position to mitigate industry risks and deliver value to customers by way of competitive premiums occasioned by economies of scale.