Betting on consolidation of the insurance industry to increase product penetration

May 6, 2022 - 5 Minutes Read - By Amrit Labhuram

As of 2020, the insurance penetration rate in Kenya was at 2.17 percent, down from 2.34 percent in the preceding year. Kenya has maintained a descending trajectory since 2016, when the penetration rate was at 2.78 percent. 

Research conducted by the Insurance Regulatory Authority (IRA) has attributed the relatively lower level of insurance penetration in Kenya to a lack of awareness on available insurance products, low income levels among the key consuming public, perceived low rate of returns for life policies, cumbersome claim settlement procedures, lack of trust on insurance players, and expensive premiums among others.

Globally, small to medium sized financial service providers, including insurance agencies, face chronic asset quality problems which constrain their capital availability, casting doubt on their scalability and business sustainability. Larger financial institutions have proven to be better suited to insulate asset quality stresses that would otherwise result in the liquidation of small and medium sized insurers, causing major disruption and significantly hindering the uptake of insurance within the local financial sector.

Allianz has adopted a global expansion strategy that has seen the financial powerhouse recently conclude a merger with fellow insurer Sanlam, to combine their current and future operations across Africa to create the largest Pan-African non-banking financial services entity on the continent. With an estimated group equity value of €2 billion, the two insurers have been hailed by industry experts to increase life and general insurance penetration, accelerate product innovation, and drive financial inclusion in high-growth African markets.

The amalgamation of their capital and human resources, and leveraging on each other’s technical expertise, the merger has the potential to create value for all stakeholders through greater economies of scale, broader geographic presence, larger combined market share, and a more diversified product offering. 

Furthermore, the merger sits squarely within Kenya’s push for a more risk based regulation of the financial services market. The introduction of risk based supervision in 2017 has played a crucial role in ensuring insurance providers and reinsurers possess an adequate capital base to settle claims and sustainably provide insurance services in the Kenyan market. 

However, it remains unclear whether the Pan-African merger will significantly increase the uptake of insurance services within Kenya and across the continent. This emanates from the fact that the primary insurance products offered by the parties to the merger are general insurance, life insurance and asset management services. These are perceived as “luxury” financial products and are generally not considered as essential insurance products. 

Market research has identified micro-insurance products such as livestock and crop insurance have mass appeal to a large portion of the population in Kenya, as much of the population is employed in the agricultural and informal sector. Kenyans are more concerned with “tangible” threats such as heavy rains destroying crop, farmland and property and food insecurity occasioned by locust invasions which devastate the crops. 

It is yet to be determined whether the current Allianz-Sanlam merger and further consolidations of the insurance industry will result in the development of insurance products that are relevant and financially accessible to the majority of Kenyans. 

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