CONTRIBUTIONS OF THE KENYAN INSURANCE INDUSTRY TO THE COUNTRY'S ECONOMIC GROWTH AND DEVELOPMENT

Declaration

I hereby declare that this project is an original work by me without any outside assistance with citations from various articles as highlighted.

????????????????????????????????????????????????????Charles Tanu May 2015

"Abstract

There has been great debate among industry players on what roles the insurance industry actually plays in the country’s economic growth and development. Further it has also proven to be a major challenge to change the negative perception held by the common mwananchi that insurance people are “fraudsters” which would greatly help to improve insurance uptake. Added to this is the need to come up with better and stricter regulations but at the same time more flexible so as not to stifle the growing industry which is still in its infancy stage"

Chapter One

1.1 Background to the study

From my own the personal on job experience with insured’s, different organizations and previous studies done I have been able to ascertain that yes there are major challenges facing our insurance industry but at the same time the potential for great economic growth from insurance is as evidenced by the financial contributions from the few insurance companies already running, if penetration were to be improved major growth would be witnessed.

1.2 Statement of the problem

There is a need to properly establish the actual role played by the insurance industry in our country’s economy and its contribution to the national GDP and to find ways to improve this by improving insurance uptake among the population.

1.3 Objectives of the study

The objective of the study was to establish the correlation between the rapidly growing insurance industry and its role in the creation of employment and overall impact on the Kenyan economy.

1.4 Research Questions/Hypothesis

How best do we improve the uptake of insurance among the Kenyan public? As Insurance penetration is still very low and a lot of work has to be done to remedy this as it is quite evident that insurance can play a bigger part in the country’s overall economic development.

1.5 Significance of the study

The study brought to light the very important role that the insurance industry plays in our economic growth and development. It also showed that it is plagued by a number of problems which range from poor management, poor market practices and the major one being the bad reputation it has among the common citizens and if it is to reach its true potential all these concerns will have to be addressed.

1.6 Scope of the study

The study was mainly conducted through the study of previous publications, current market developments and most importantly my daily interactions with clients, colleague’s, bosses and persons who do not have any inkling on how insurance operates. All these have guided me on my interpretation on how the market dynamics operate.

1.7 Definition of Terms

Disability: is the result of an impairment that may be physical, mental, sensory, emotional, and developmental or some combination of them. A disability may be present from birth, or occur during a person's lifetime.

GDP: Gross Domestic Product is the aggregate measure of production equal to the sum of the gross values added of all resident, institutional units engaged in production (plus any taxes, and minus any subsidies, on products not included in the value of their outputs.

Indemnity: To place a person in the exact financial position they were in immediately before the loss occurred.

Investments: is time, energy, or matter spent in the hope of future benefits actualized within a specified date or time frame. Investment has different meanings in economics and finance.

Mwananchi: A citizen in the Swahili language/The common man

Premium: The amount of money to be charged for a certain amount of insurance coverage. Risk management, the practice of appraising and controlling.

Stakeholder: Are persons who have interests in a certain asset (an accountant, group, organization, member, or system that affects or can be affected by an organization's actions)

Undercutting: This is a marketing strategy where insurance companies try to attract clients by offering premium rates that are lower than those of their competitors

?Chapter Two

?2.1 Introduction

?The objective of chapter two is to show how our insurance industry is performing compared to previous years and to give a brief of history of the insurance i.e. that a major calamity always leads to developments in the insurance industry as such calamities always expose a need that is not being met by the existing insurance and reinsurance arrangements.

2.2 Current Market Trends and Practices

Insurance firms and generally the insurance industry as a whole has always played an important role in our country’s economic growth and development. Since the days of our colonial masters when the very first company started its operations the contribution of these firms to the country’s GDP has been steadily rising from their contributions to the real estate sectors investment markets which is made possible by the funds that the firms are able to raise from their premium collections.

In terms of the countries industrialization goals insurance has played a major role in the country’s economic development. With insurance a person may decide to invest more capital in a certain venture as they will protected from potential losses by the insurance covers effected (indemnity principle) in the same vein foreign investors are also encouraged to invest in our economy. Developments in our local insurance industry have also ensured that the premiums are invested within the country rather than being sent out to foreign companies and being invested in these foreign economies.

The number of Kenyans taking insurance covers/policies is rapidly growing meaning that the general public is fast gaining confidence in the local providers which is an indicator of the positive gains being made in the industry.

This increased uptake is as a result of improved literacy levels, legislation such as the road traffic Act or the Work Injury Benefits Act (WIBA) which make certain insurances mandatory added to this is the need to invest and accumulate wealth among the emerging middle class especially the upwardly mobile young adults. Financial institutions have also played a role in promoting growth in the insurance industry i.e. currently it is mandatory for one to have some form of insurance before one can access these facilities for example Mortgage protection insurance covers which are designed to protect these financial institutions against the risk of loan defaulters.

Another factor that has increased insurance uptake especially among companies and other business entities is the need to protect their assets. In the Kenyan market this is best illustrated by the upsurge in political violence, terrorism covers after the catastrophic losses that were incurred after the 2007/2008 elections. In the same light it can be argued that the increased incidences of insecurity have also created a need for more innovative and comprehensive covers to cater for this need, a case in point is whereby there was an increased need for terrorism cover in America following the 2001 attack on the twin towers, similarly the Kenyan insurance industry also had a major growth in terrorism covers after the 1997 bombings in Nairobi.

Historically speaking after the Great fire of London in 1666 gutted down the medieval City of London?and?destroyed 13,200 houses, 87 parish churches, St Paul's Cathedral and most of the buildings of the City authorities several?Insurance companies were formed?to protect members of the public against possible future similar events. It has been well documented that tragedies often lead to major developments in the insurance sectors as the event usually exposes a need that is not being met by the current market offerings And since the 2011 Asian tsunami insurance companies in the regions affected came up with more innovative and comprehensive covers to protect against such risks which shows that major developments in the insurance industry have followed major tragedies I.e. the great fire of London 1666 and the 2001 Asian tsunami resulted in developments in the respective insurance and reinsurance sectors. The great fire of London led to the founding of some of the very first major insurance companies and following the Tsunami better and more comprehensive reinsurance arrangements had to be devised as the effects of the tsunami were far reaching and the existing arrangements proved to be inadequate.

With the post-colonial Kenyan economy being relatively young market players have not had much in terms of statistics to go by in terms of how the local industry would behave over a long period of time and have had to rely heavily on the pre-colonial and foreign findings. However this has not been a major handicap as most insurance companies will tend to behave in a similar fashion irrespective of the geographical location.

Globally and locally the insurance industry is moving towards a more customer oriented product where the services offered are geared solely at attracting more customers than ones competitors, this is achieved by enhancing customer experiences, offering simplified products, allowing for flexible premium payment options and the most effective tool being price undercutting (although its sustainability is highly debatable).

Innovation and flexibility is also a hallmark of the modern insurance market where players tend to offer the most extensive cover possible, at the lowest price possible and at the most flexible payment option has been as a result of the ever increasing competition among the industry players.

2.3 Findings from previous studies

Previous studies, such as the “2013 Kenya Insurance Industry Outlook” report by Victor Mose and Robert Kuloba have established that the insurance industry is currently operating at an average capacity indicating that there is room for growth thus showing the need for it to be re-energized to a higher scale of operation. In terms of its impact on the growth of the Kenyan economy the insurance industry has had a major role as it has created a lot of jobs for those tasked with the running and operations of the various insurance firms, with the future being full of opportunities that the industry should exploit, stakeholders are advised to research further on the strategic issues facing them before making major conclusions and decisions that will have a major impact on their bottom lines.

The Kenyan Insurance report published on 30th January, 2015 has also shown that the industry is expected to perform well throughout the remainder of forecast period (up to 2019) with premiums set to increase steadily as the small life and non-life insurance firms continue to consolidate their operations with mergers and as buyouts from larger regional and global firms who need local partners to gain a foothold in Kenya's burgeoning insurance market. Growth in the health insurance sector is also another trend that is becoming increasingly popular as individual wealth and the ability to supplement poor public welfare provisions increase.

Chapter Three

3.1 Introduction

Chapter three is mainly concerned with explaining how the research project was carried out in terms of the techniques used in gathering, analyzing and then compiling the data to arrive at the end product that is “The Kenyan Insurance Industry and its role in the country’s economic growth and development”.

3.2 Research Design

The recent growth in the insurance industry has had a positive impact on the Kenyan economy, not only as a result of the emerging employment opportunities that are as a direct result of the jobs for those who work in these insurance firms but also as a result of the investments of the funds that are raised from the premiums collected.

These funds are normally invested in various sectors of the economy which not only ensures that the assets of the particular firms grow but also the economy benefits as a whole i.e. Investments in real estate will provide revenues to the firms plus affordable housing which will translate to an improved standard of living for the citizens.

From an individual persons perspective the various insurance covers on offer particularly life products have created investment avenues whereby a person can take out a policy purely for investment purposes the advantage with this is that such a saving has the added security of the funds are in-accessible unlike normal bank savings where money can be accessed in the event of an emergency. Another advantage is where a person can protect their dependents against financial hardships in the event of their untimely demise or disability.

The basic principle of indemnity is also Important in economic growth and development as it ensures that businesses resume normal operations as fast as possible once a loss has occurred and thus reducing the number of man hours lost a good illustration would be where a factory that employs five hundred employees were to burn down as a result of a fire then the proprietors will have lost money in terms of their investment while five hundred people would be out of a job but with the availability of insurance the owners would be able to rebuild the factory, recoup their losses and ensure that the livelihood of the workers is guaranteed thus ensuring that the economy will not be adversely affected.

A vibrant insurance industry also acts as an attraction to foreign investors who will be encouraged to invest in the Kenyan economy as their investments will be covered against potential losses.

Another positive in terms of the growth in the insurance industry is that as become more aware and enlightened on the benefits of insurance it means that literacy levels will also have gone up.

On a socioeconomic point of view insurance companies will always play a major role in social welfare both in a direct and in an indirect manner. In a direct manner the companies ensure that the family is taken care of after the death or disability of the bread winner thus ensuring that poverty levels are not increased. Indirectly insurance firms being sponsors of many Corporate Social Responsibility programs they ensure that a social need will be taken care of an example of such an initiative is the annual UAP Ndakaini Dam Half Marathon which has played an important role in conservation of the Ndakaini Dam.

Chapter Four

4.1 Introduction

Chapter four basically deals with how the data was collected & analyzed, the various conclusions that were arrived at and the general composition of the respondents i.e. gender, race, creed and age.

4.2 Demographic Information

The respondents of the study were mainly people whom I interacted with on a daily basis i.e. past and present colleagues and most importantly from insurance agents who normally have the closest interaction with members of the public is it is them that they normally source business from.

These agents are comprised of an equal number of men and women with their ages ranging from mid twenties to late sixties this translated means that I was able to gather on how the insurance industry has been performing in the past to the various changes that are being implemented. In addition some of these agents have worked in insurance companies in various capacities and they have a very clear picture on how the products operate compared to how they have actually been designed and developed.

This great knowledge in insurance has also meant that most of those engaging in fraud are these same agents as they know exactly how the system operates and they have devised ways to circumvent these systems and the best way to counter fraud is to understand their way of thinking so as to come up with the necessary counter measures.

4.3 Challenges

The major challenge was the gathering of accurate information which was a tedious process as information had to be gathered from both the insured and un-insured members of the public so as to get a complete picture on how insurance services are perceived by members of the public as it has always been apparent that a large percentage of the Kenyan society only purchase insurance that is mandatory under our laws i.e. motor insurance leaving other forms of insurance un-utilized.

Another major challenge is on the verification of the information gathered especially from the various publications sampled as it is often difficult to establish the authenticity of this information another point on this is that such information is often old and circumstances may have so drastically changed as to render the information as old and of little relevance to the current situation.

Chapter Five

?5.1 Introduction

The chapter is mainly to analyze the potential of the country’s insurance industry and to come up with the most viable ways of improving its penetration in Kenya society and economy as a whole as it may play a major role in our economic development i.e. Vision 2030.

5.2 Summary of the study

It has been clearly established that the Kenyan insurance industry has great potential for growth and development which if properly managed can have a very positive impact on our country's economic development as more firms will be formed meaning that more jobs will be created as there will be a need to fill these firms with qualified personnel to run them.

The best way to about improving insurance penetration is to improve the country's literacy levels as a more enlightened person is easier to convince on the advantages of insurance in addition to this the negative perception about insurance among the members of the public will have to be eradicated so as to encourage people to take insurance covers this can be done by coming up with stronger legislation's that will ensure that the companies are managed properly and that the premiums collected are not misappropriated since the funds are obtained from members of the general public and the government always has a duty to protect the public.

More innovative products will also have to be developed so as?to ensure that insurance will attract more people this can be achieved by coming up with enhanced covers such as motor insurance with free evacuation benefits or covers that are aimed at farmers i.e. livestock insurance. Micro insurance is also another area that insurance firms can venture into and many have already started this is where companies develop products that allow for flexible and affordable covers that are aimed at low to middle level income earners. The advantages of micro insurance products include, they are simple to understand, are affordable and allow for flexible premium payment.

Improved legislations can also be used to increase insurance penetration. In the same way that the WIBA and Road Traffic Act made motor and employee protection insurance mandatory other laws can be passed to make certain insurances such as public liability policies being made mandatory for business establishments that deal with members of the public for example restaurants.

5.3 Conclusions

There is definitely a correlation between the ever growing insurance industry and the growing Kenyan economy, however a lot still has to be done in terms of educating the general public on the importance of insurance products while at the same time proper regulations have to be put in place so as to ensure that there is equity among the players and that proper procedures are followed to ensure that the monies invested are properly utilized and not embezzled or misappropriated.

5.4 References

Daily interactions with colleagues, potential clients, current clients and those with I have had past dealings with.

Robert Kuloba

The Kenyan Insurance report

Victor Mose

Various news articles from the daily newspapers and other media.

Wikipedia: the free encyclopedia.

Appendix

How best do we convince members of the Kenyan public to take up more insurance cover as this will not only have a positive impact on their individual personal lives but to the Kenyan economy as a whole.