The insurance and reinsurance markets are drastically evolving in an unpredictable world of new risks, either underestimated or just dynamic and challenging to model. We have witnessed rising costs of claims since the onset of the Covid-19 pandemic. The world is now being bogged down by skyrocketing global inflation that no one knows its end.
As risks and costs of insurance rise, insurers look for other entities to shoulder these burdens. This is where reinsurance comes into play – still not well understood but is a major element within the insurance space.
Reinsurance, at its core, is transferring risks and spreading risks that are consistent or are supported by the theory of insurance. Insurance is concerned with spreading risks, especially when policyholders pool their peril of loss and transfer them to insurance companies. The insurance company accepting the potential loss charges premiums based on the probability of risks of loss.
The way policyholders spread risks of loss by buying insurance, is how an insurance company spreads those risks for policyholders to reinsurers in exchange for a share of premiums received from its policyholders. In other words, insurance companies accept risks from customers and then pass them to someone else known as a reinsurer at a fee.
Kenya Reinsurance Corporation, or Kenya Re, is a perfect example of reinsurance. It has operated in the reinsurance space longer than its peers. It currently provides reinsurance to over 480 companies in more than 80 countries in Africa, the Middle East, and Asia. Kenya Re is also listed in the Nairobi Securities Exchange (NSE) with 60% shareholding by the Government of Kenya, while 40% is held by private investors. Kenya Re also operates three subsidiaries in Uganda, Zambia, and Côte d`Ivoire beside Kenya.
My interactions with different individuals within the insurance and reinsurance spaces have compelled me to believe that the reinsurance model is a very interesting one.
First, reinsurance makes risks bearable – insuring many homes, vehicles, businesses and other properties against damages or loss is a huge risk, especially when there is a high probability of losses. Reinsurance is an excellent strategy for managing risks because it allows an insurance company to transfer some of them to a reinsurance company rather than shouldering the entire burden alone. This makes a lot of sense given that when the burden is unbearable, we often need someone to come through whether at a cost or not.
Secondly, reinsurance expands capacity by reducing the risks of insolvency, allowing an insurance company to accommodate more policyholders. In other words, reinsurance allows an insurance company to write more business using the reinsurer’s capital in lieu of the insurer pumping in additional capital to accommodate more risks as per the regulatory requirements.
This brings me to the third importance of reinsurance, which is stabilizing losses. It means that though an insurance company can pay all claims within a short period, such a scenario can lead to an inimical financial situation and instability. However, reinsuring guarantees stability when an insurance company is ambushed with huge claims that have the potential of causing severe strains. Further, reinsurance allows an insurance company to focus on expansion because significant loads of risks have been lifted.
Finally, reinsurance helps in risk advisory and technical resource building. A reinsurance company has highly qualified and seasoned personnel with global experience in territorial scope which helps them cluster and treat risks with utmost precision. This is a quality benefit that insurance companies leverage while transferring risks to reinsurers.
What happens if there are no reinsurance companies?
My undertaking is that without reinsurance companies, insurance companies would venture into capital markets and bonds or purchase an Industry Loss Warranty (ILW). In one way or another, an insurance company would still find ways to reinsure its risks to reduce overall exposure.
An insurance company faces the same dilemma as individual policyholders and business owners. Without reinsurance, the insurer shoulders all risks from policyholders and will lack the advantage of spreading such risks. Should the catastrophic risk accumulate, it will find its capital ruthlessly strained.
Recently, Kenya’s insurance companies reviewed their premiums, especially car insurance. And so did the reinsurance counterparts. But do insurance companies have a choice? The costs of reinsurance do not supersede the cost of losing the entire company in case of overwhelming claims. Therefore, the answer is that reinsurance is the way to go for insurance companies and other businesses.
As we assess the dynamics in the insurance industry, it is important to understand the significance of reinsurance to insurance companies and businesses. Businesses can use this knowledge to kick-start a reinsurance premium purchase process or seek more advice on reinsurance from professionals. The most important thing is that we need consumer confidence in the insurance and reinsurance subsectors.
Kenya’s insurance industry is robust, but still relatively small compared to other markets. The country has 49 registered insurance companies providing general and life insurance, with three locally incorporated and two regional reinsurers in Kenya.
Data from the country’s Insurance Regulatory Authority (IRA) shows that towards the end of 2020, the gross written premium for Kenya’s insurance industry stood at KES 232.95 billion, representing an increase of 1.8% from KES 228.80 billion in Q4 of 2019. General insurance business underwriting results improved from a loss of Kes 2.97 billion in Q4 2019 to a loss of Kes 1.18 million in Q4 2020.
In Africa, the value of insurance reached USD 70 billion in 2020 with targeted market growth of about 7% between 2021 and 2026. Analysis by both McKinsey and World Economic Forum confirms the high potential Africa has in the world economy. Such potential portends huge opportunities for the growth of the insurance market in the region.
Globally, non-life insurance premiums grew by 1.2% as life insurance premiums declined by 2.2% in 2020 as shown in a report by the Organisation for Economic Co-operation and Development (OECD). The impact of COVID-19 was a major key influencer in the trend and performance.
Today, however, the leading transformative agenda in the industry is on technology adoption. For example, in 2020 investment in technology reached USD 7.1 billion. Companies invested in automation targeting claims, underwriting, and other customer service products. Emphasis is also being made on migration to the cloud as an efficient and cost-reduction strategy.
By Mr. Michael Mbeshi is the Acting Managing Director of Kenya Reinsurance Corporation