Operational inefficiency in Kenya insurance sector need to be capped – Cytonn

Concerns have been raised over rising levels of inefficiency in the operations in Kenya’s insurance sector which has adversely affected their growth.

According to Cytonn Investment Insurance penetration remains low at 2.8 percent lower than the average of 3.5 percent in Africa attributed to the collection of premiums and distribution of products that have emerged to be costly for the insurers.

“This indicates that for insurance companies to penetrate the Kenyan market they will need to invest in better and efficient distribution channels,”  said Cytonn’s Investments Analyst, Caleb Mugendi.

“The listed insurance sector expense ratio is more than 50 percent, indicating more than half of insurance company revenues are used up in administration and distribution expenses, and with loss ratios above 50 percent, insurance companies are struggling to eke out a profit from their core business,” he added during the launch of the Half Year 2017 Insurance Report.

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The report further disclosed that Insurance products in the market are not tailored to the common consumer and players in the market lack the much-needed innovation in product offerings, tailored to meet the needs of their target customers.

Besides, heightened regulation and compliance, on capital adequacy and risk charges on respective investment options and capital raising Initiatives, the sector is set to witness increased product innovation and operational efficiency to drive sustained profitability.

“Following the adoption of a risk-based framework for capital adequacy assessment, the sector is set to experience an increase in mergers and acquisitions, and the move is also likely to lead to capital raising initiatives by some players in the sector to shore up capital,” said Dennis Kariuki, Assistant Investment Analyst.

“Technology and innovation are one of the key factors that are shaping the performance of the sector and thus we expect improved product innovation and operational efficiency to drive the growth of the sector amidst the heightened regulation. The growth of the middle class, adoption of alternative distribution channels and regional expansion are also key contributors to the growth of the sector,” adds Caleb.

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In the report, Kenya’s listed insurance companies recorded a 5.6 percent decline in core EPS growth, compared to a growth of 69.4 percent in H1’2016.

On key operating metrics, the loss ratio across the sector rose to 72.7 percent from 66.5 percent in H1’2016, despite introduction of tough measures by market players to reduce fraudulent claims, while the expense ratio dropped marginally to 54.3 percent from 55.5 percent in H1’2016, owing to a decrease in operating expenses amidst a robust growth in net premiums earned.

On average, the insurance sector has delivered a Return on Average Equity of 10.9 percent a marginal improvement from 9.0 percent in H1’2016.

In Kenya there 55 insurance companies, 3 reinsurance companies and 206 insurance brokers. There are a total of 8,123 insurance agents in Kenya.