It is no longer
business as usual for the insurance industry as customers are becoming more
enlightened.

Aware of their insurance needs, customers are increasingly being sceptical of what insurers have to offer them, forcing a rethink by the insurers on the need to look for ways of remaining relevant in the competitive scene.

This means that
the insurance providers have to come up with solutions that not only look at the
takers but also ones which offer an improved environment in their operational efficiencies
using technology.

Feeling the tech disruption heat

The Insurance Outlook Report 2019/2020 East
Africa
by Deloitte notes: “The
first insurers who capitalise on the opportunities that digitisation and
automation offer will most likely be the biggest beneficiaries.”

While the pace
at which disruptive technologies have been taken up by incumbents and the
entrance of non-traditional insurers in the market is slower than expected, the
report underscores the importance of changing with the times if the sector is
to remain competitive.

“Globally,
insurers have taken steps to modify their product and service offerings in line
with customer behaviours.”

The disruptive trend is yet to be experienced in the insurance sector in East Africa but this is just a matter of time.

Already, other
industries such as banking, transportation and manufacturing have already
started feeling the effects of disruptive technologies and unconventional
competitors.

“It is up to
insurers to start small without fearing to fail and make iterative changes to
their business as usual approaches,” cautions the report.

Competition and dwindling returns

The outlook adds that insurers in the region have experienced better times than their financial performance in recent years.

However, the sustained
economic growth in the region has not translated into a positive trajectory for
insurers.

Insurers are revising premium rates downwards in the more competitive business classes even as the operating environment becomes more competitive.

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Insurance
companies have also suffered dwindling fortunes as they have registered suboptimal
investment returns on property and equity markets.

The companies
were using these returns as a safety net to compensate for underwriting losses.

Interestingly, the
operating environment has remained largely unchanged in the insurance industry.

To survive
though, the report says that “it is up to insurers to start small without
fearing to fail and make iterative changes to their business as usual
approaches”.

Economic performance in Kenya

The report notes
that according to the Economist Intelligence Unit (EIU), Kenya’s real GDP
increased to 6.3% in 2018 due to the strong agricultural performance and it is
expected to moderate to 5.7% in 2019.

This is mainly due to the late start of the rainy season having an impact on the agricultural performance of the country.

Nonetheless, growth
in 2019 will be supported by public and private investment, regional
integration and communication services.

EIU predicts that the real GDP growth in Kenya will remain strong, averaging 5.9% a year in 2020-23. This is supported by urbanization, regional integration, structural reforms and investment in infrastructure.

Pension business has had growth since 2014 due to the increased demand and uptake of retirement and savings products.

Deloitte Report

Inflation fell to 4.7% in 2018 due to favourable rains and stable food prices but is expected to be higher in 2019 due to poor rainfall and the rising cost of food.

In the long term, inflation is expected to average 6.6% a year in 2020-23 mainly due to rising global oil prices and the threat of drought. However, prudent monetary policy will offer some protection.

Based on our
internal projections and the historical relationship between gross written
premium growth and GDP growth, the insurance industry is expected to experience
growth in gross written premium in line with historically observed growth
rates.

Insurance sector performance

The report
notes that in the last five years, the life insurance market in Kenya has
experienced growth in both the level of direct premiums as well as in the equity
held by the industry constituents.

There has been
a record of positive returns on shareholder’s equity in this time frame. However, the return on equity has been varying year on year with a decline recorded in 2017 to 2018.

The report shows
a correlation between GDP versus premium growth.

“There has been
continuous growth in the life insurance market relative to the nominal and real
GDP. Life insurance premiums have been increasing on an annual basis as the
demand for life insurance products rises. In 2018, the nominal GDP grew
slightly slower at 7.5% (2017: 16.3%). However, the life insurance market
premiums grew slightly faster.”

The insurance
sector saw declines in the overall direct premiums for both ordinary and group
life businesses in 2018 but the possible effects were counteracted by the
increase in pension business direct premiums.

“Group life has
experienced a slower growth rate in comparison to other business classes within
life insurance due to the price wars that have been prevalent among the
industry players,” notes the report.

However, it adds, “pension business has had growth since 2014 due to the increased demand and uptake of retirement and savings products.”

Insurers have remained in traditional business classes despite loss-making behaviour.

Motor private and medical classes are the largest classes and among the most loss-making businesses. The insurers could investigate other emerging business classes that have the potential for growth to diversify their business mix. “Alternatively, insurers need to investigate means of reducing the loss ratios on the large business classes using big data and AI.”

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