Stringent capital adequacy requirements set by the Insurance Regulatory Authority (IRA) are likely to drive mergers in Kenya’s insurance sector, with smaller players struggling to meet the new standards.

The IRA mandates insurers to maintain a capital adequacy ratio of at least 200 per cent of the minimum capital, a regulation that has left only four out of 43 insurers compliant.

Insurers must also monitor their capital adequacy and solvency margins quarterly to ensure financial stability and provide adequate returns to shareholders.

Analysts at Cytonn Investments predict that the tougher requirements may overwhelm smaller insurers, leading to increased financial pressure, higher operational costs, and competitive disadvantages. This could prompt more mergers as smaller companies struggle to comply.

They also expect insurers to adopt better risk management practices and reduce premium undercutting, which will help insurers price risks more accurately.

“We expect more mergers within the industry as smaller companies struggle to meet the minimum capital adequacy ratios. We also expect insurance companies to adopt prudential practices in managing and taking on risk and reduction of premium undercutting in the industry as insurers will now have to price risk appropriately,” they now say.

According to a recent report by KPMG, the majority of CEOs in the East Africa region anticipate growth through organic expansion and strategic alliances with third parties over the next three years.
These alliances will allow companies to capitalize on local market opportunities and maintain long-term profitability.

However, most captains of industry are likely to approach mergers and acquisitions (M&As) cautiously due to economic volatility and currency risk, with only 26 percent expecting growth through M&A activities.

In the insurance sector, the shift to a risk-based capital adequacy framework has led to capital-raising initiatives, especially among smaller insurers, as they strive to meet compliance standards. This framework aims to strengthen the sector’s stability and solvency.

Financial services group
For instance, Sanlam Limited, in partnership with Allianz SE, entered a 10-year joint venture to create a leading Pan-African financial services group, while Britam Holdings raised Sh9.2 billion in a 2021 rights issue to reinforce its capital base. CIC Insurance Group has also been active in capital-raising efforts.

Despite these developments, insurance penetration in Kenya remains low, hindered by limited household disposable income, lack of awareness, and consumer mistrust.

As of 2023, insurance penetration stood at 2.4 percent, a slight increase from 2.3 percent in 2022, driven by economic recovery and an improved business environment.

However, this figure remains significantly below the global average of 7 percent.

In the first half of 2024, Kenya’s economic environment improved, with inflation easing to 5.6 percent, down from 8.5 percent the previous year, and the shilling appreciating slightly against the US dollar. Despite these positive trends, GDP growth slowed to 4.6 percent from 5.6 percent in the same period in 2023.

The insurance sector demonstrated resilience, with gross premiums increasing by 16.7 percent to Sh361.4 billion in 2023, up from Sh309.8 billion the previous year. Insurance claims also rose by 13.3 percent to Sh94 billion. General insurance contributed 52.9 percent of premium income, while long-term insurance accounted for 47.1 percent.

Motor and medical insurance dominated general insurance, making up 63.5 percent of premiums, while deposit administration and life assurance represented 59.8 percent of long-term insurance premiums.