Kenya: Insurers Turn to Low-End Niche to Boost Profits

Apr 2010
Nairobi, Kenya, April, 27 2010 - Insurance companies are fast embracing the low-end market as they seek new avenues for profits in an industry that has witnessed near stagnant growth. The number of firms offering micro insurance has grown from a single firm in 2007 — CIC insurance — to six, including Old Mutual, Kenya Orient, British American, UAP and Apollo.

The move is not only expected to guarantee a steady stream of earnings for these firms, but also offer an opportunity for individuals and small and micro enterprises to be roped into the insurance bracket.

The penetration of insurance products has remained at a measly 2.5 per cent for nearly a decade because of low confidence in insurance products and lack of products targeted at the low and mid-end of the market.

“The formal insurance market is saturated and we are looking at micro-insurance as an area that makes a profound impact on most of the population,” said James Wambugu, the CEO of UAP Insurance that recently launched micro-insurance versions of livestock and crop insurance.

In doing so, they will be following in the footsteps of the banking sector that went down-market in 2003 — leading to sharp a growth in the sector.

For instance, the banking sector has seen its pre-tax profits grow from Sh7.1 billion in 2004 to Sh24.6 billion in 2008 compared to that of insurance sector that dropped from Sh1 billion to Sh500 million over the same period.

Insurers estimate that at least one million Kenyans have bought micro insurance policies in the last three years for risks against credit default, loss of life and drought.

This growth is expected to accelerate as more companies establish their micro insurance departments and increase their marketing spend.

Microcredit infrastructure

Micro-insurance is expected to ride on the microcredit infrastructure and mobile technology which is the preferred mode of delivering micro-insurance products. 

Most micro insurance products are embedded in microcredit products to guard against risk of loan default with information technology becoming the preferred platform for transactions to reduce operational costs.

There are an estimated 6.5 million Kenyans using microcredit services while about 17 million Kenyans have access to mobile telephone services, offering a ripe niche for micro-insurance.

CIC Insurance has about 350,000 members under its micro insurance scheme, Britak has 75,000 members, UAP has 10,000 members while Appollo Insurance has 55,000 members.

The rollout of micro insurance is being aided by the interest it is generating in non-insurance companies, predominantly organized groups dealing with micro-credit.

For example, Jamii Bora, a microcredit group with focus has a health micro insurance product for its members.

Out of 300,000 members, at least 160,000 have bought the product.

“It is a growing area that is offering a growth potential and opportunity to reach more people for the mainstream insurance companies,” said James Irungu, the Micro-Insurance manager at British American Insurance.

The opportunity in micro insurance is seen in the fact that, 98 per cent of people across the world who earn a maximum of Sh150 every day are not insured yet they can afford micro insurance products — that cost an average of Sh30 per week in Kenya — according to a study by the International Labour Organisation.

The dominant feature of micro insurance products in the market is that they are ‘embedded’ in other products like microcredit and farm inputs.

The cover therefore exists only when the beneficiary is a client to a specific microcredit company.

Players blame lack of renewal of micro insurance policies to the “barter trade mentality” that if one pays a premium, they have to get a service and if for example they do not get sick — in case of health insurance.

Moses Banda, the CEO of MicroEnsure, said non-embedded voluntary products are possible because they already exist in Tanzania, Uganda and India.

Insurers also face the challenge of reasonable pricing of the insurance products that target a market that is extremely price sensitive.

Local players said actuarial scientists here have less regard for micro insurance products and their pricing models are way above what the target market can afford.

“The best way is to have an in-house actuarial scientist who is able to understand the direction of the company and therefore has better understanding in shaping the product,” said Mr Kuria.

Some risks are also are considered too high by the reinsurers and therefore their cost of insurance also goes high.

In the most recent case of livestock insurance product for Northern Kenya, the reinsurance cost was Sh616 compared to the cost of the cover at Sh693.


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