While insurers have been able to absorb the underwriting impacts of large loss events such as COVID-19, the impact on insurance companies’ profitability is still uncertain.
This is according to a recent report by Deloitte, which states that despite the efforts put in place by governments to cushion the public from the adverse economic effects of the pandemic, the outlook on long-term impacts and recovery from the pandemic is still uncertain as it will take time for businesses to recover.
“With stock markets showing declines in performance and flattening yield curves, insurers are set to experience poor performance in their investments and this will flow through to their bottom line results.”
The insurance industry in East Africa therefore continues to grapple with low penetration rates, obscure and complex products, high cost of doing business as an insurer, slow business, and a slow-down in the economy due to the global pandemic.
While countries struggle to gain momentum after the huge economic hit due to the pandemic, experts predict that the average household disposable income is expected to shrink because of business closures, employee salary cuts, and retrenchments.
This will in turn negatively impact the insurance industry owing to a sharp decline in premium income as consumers prioritize savings-type products over risk-only products.
An industry analysis from Deloitte states, “Customers will not be satisfied with the status quo when they only use their car for a limited time every day, or worse if they do not now own a car as we see in the shared economy. They will look for better, smarter, and cheaper alternatives to the traditional annual policies. Start-ups are increasingly providing these solutions as the incumbents are slow to change. Insurance companies need to take better ownership of the customer relationship that has been largely in the brokers’ hands in this region, and start understanding their customers better. As they work on this, there will be an increasing need to partner with companies that have already started amassing the data that is needed to enable usage-based insurance.”
As part of the East African Community’s integration agenda, the EAC Secretariat in collaboration with World Bank and other development partners established the EAC Financial Sector Development and Regionalization Project I. The project’s objective is to support the establishment of a single market in financial services among the EAC Partner States. To realize harmonization of financial laws and regulations the EAC Secretariat embarked on having in place the EAC Insurance Policy that envisions a world class integrated insurance sector within the EAC and its mission towards an integrated, safe, stable and inclusive insurance sector.
Individually, countries in East Africa seem to be responding differently to the effects of the pandemic.
Uganda saw its government amend the Insurance Act, barring brokers and agents from accepting payments from policyholders or prospective policyholders. Any payments made by the policyholder will be directed to the insurance company directly. This Act was effected on the 1st of January in 2019.
Generally however, although the insurance sector in Uganda is small with the market being dominated by non-life insurance, economic growth is boosting life insurance uptake which in turn resulted in growth in the overall premiums.
According to data from the Insurance Regulatory Authority Uganda, (IRA), total Gross Premium written through bancassurance agents amounted to Ush52.040 billion ($14.1 million) as at the end of Q3 2020 (6.36% of Q3 2020 industry GWP of Ush818.721 billion ($221.97 million). Gross Commission received Ush8.216 billion ($2.227 million) at the end of Q3 2020 compared to USh6.538 billion ($1.772 million) over the same period in 2019 (25.6% growth).
In Tanzania, the Insurance Regulatory Authority of Tanzania in its effort to foster the development of an inclusive insurance market launched the Insurance (Bancassurance) Regulations in May 2019. The articles of the regulation expound on the dynamics of bancassurance while considering the challenges, concerns and the solutions to the success of bancassurance in Tanzania. It is expected to take a central role in the strategy of many banks and financial institutions because it enriches the customer portfolio and generates income in form of commission at a minimum set-up cost.
From 2012 to 2017 there has been persistent positive year-on-year growth in gross written premiums over the last five years. Equity values have been on the rise; however returns on shareholders’ equity have been fluctuating year-on-year from 2012 to 2017, registering a low of approximately 25% over the last two years. A strong medium term growth has been forecast for life and non-life segments, largely attributed to Tanzania’s mandatory health insurance system and investment in real estate and infrastructure, according to Market Research. As elsewhere, the COVID-19 pandemic has had a dampening effect and weakened economic conditions, impacting consumer confidence. However, growth in 2021 and going forward is expected to be strong as the market recovers from the current tough economic conditions.
As governments begin to ease restrictions put in place to contain the spread of COVID-19 pandemic and revive tumbling economies, the insurance industry continues to be battered by the resultant effects of the pandemic due to uncertainties in the market, increased claims and hostile market environment that has for a long time relegated insurance to a ‘nice to have’ as opposed to a ‘must have’.
Insurers are grappling with the effects of COVID-19 amidst new capital adequacy requirements by the Insurance Regulatory Authority (IRA). The IRA requires companies to meet 200% (previously 100%) of the Prescribed Capital Ratio (PCR). While a good number of insurers were compliant by the effective date of 30 June 2020, there are others who had not met this requirement.
Data from KPMG shows that the current market turmoil puts pressure on insurers to remain sufficiently capitalised and others to navigate the new challenges and comply. The IRA is also closely monitoring the liquidity of insurers in Kenya. In a directive to all insurers, IRA has required submission of stress and scenario tests, including capital adequacy calculations and liquidity strains to determine the impact of COVID-19.
In Kenya, the proposed changes to the Insurance Act will ensure that no insurer will assume a risk in respect of insurance business unless and until the premium payable thereon is received by the insurer. Furthermore, it will ensure that no insurance intermediaries will receive any premiums on behalf of an insurer with a hefty penalty of Ksh. one million charged on each contravention.
The insurance sector in the bloc shows potential of growth and it takes companies embracing new trends and trying to remain relevant in the market as well as launching products that are responding to challenges like COVID-19 that is affecting those in the industry.