The decrease in insurance penetration rate in Kenya to a low of 2.4 per cent last year is not that mysterious. It simply shows the economy grew but not the premiums. Ideally, the growth in the economy should go hand in hand with growth in insurance.
Increased wealth leads to higher demand for insurance. That is why wealthy South Africa had such a high penetration rate of 14 per cent in 2017, according to a report by the Association of Kenya Insurers. Nigeria had about 0.25 per cent.
The formula used in calculating the penetration rate sheds more light on the low rate. If the economy grows and the premiums remain the same, the rate goes down. Last year the Kenyan economy grew by about six per cent, why didn’t the premiums grow?
Two weeks ago we blamed fraud for the losses and slow growth in the insurance industry. The fact that this industry gets “free money” makes it very lucrative for fraudsters. Free money in that I pay for insurance whose benefits I may never get beyond peace of mind.
But one could easily argue that money is possibly paid out to someone who had the misfortune of an accident or sickness.
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The low rate could also mean lots of premiums shifting from one firm to the other, through predatory pricing.
Enough lamentation: How do we grow the industry?
One is to let the client enjoy the benefits of insurance beyond the peace of the mind. Suppose buying an insurance cover would entitle me to some equity and returns from the insurance company? We could all drive very well and be health-conscious to get the best returns!
If I drive a car for 50 years, assuming I drive from age 20 to 70, and I pay a premium of 50,000 per year for comprehensive insurance, I would have paid Sh2.5 million with nothing to show for it. If that is an investment, the returns would be very good.
It is no wonder most people keep off insurance. Without mandatory insurance the penetration rate would be even lower.
Two is to shake up industry; disrupt it, more like the way Equity Bank changed banking. The industry needs “Equitilisation.” Some lessons from Coca Cola and Safaricom would also help.
Coca Cola nurtures you through life - from Fanta as a baby, you grow to Sprite, Stoney, Krest, Coke and eventually soda water, or just plain water. The drinks are taken by the poor and the rich and have appealed to every generation.
Can the insurance industry come up with products that take us through life, not just when we buy cars or get sick? The Coca Cola approach would bring lots of business. What do we value at each stage of our lives, so much that we can ensure it?
Insurance can learn from Safaricom too. Though seen as dominant, Safaricom has understood our behaviour very well. Think of Fuliza and Okoa Jahazi, of Kochokocho. Does Safaricom have a resident psychologist or behavioural economist?
Our behaviour comes in handy in insurance. No wonder the 2017 economics Nobel Prize was in behavioural economics. Why do I pay for insurance up front? Why not weekly or quarterly? Of course giving insurance firms money in advance gives them time to invest, and hopefully makes it easier to settle your claim.
Why not pay premiums more regularly to make it appear cheap? A good example is adding insurance to matatu fare, say by a shilling. That is why paying fare using cards was such a great idea.
Payment has another interesting dynamic: you pay higher prices for medical services if insured. Yet this sector, just like auto insurance, has been reporting losses. This again gives the industry a bad image, benefiting from misfortune.
What of the method of paying premiums and claims? How automated is it? Why can’t I get all the information about my insurance on my phone, the same way I get on my bank accounts? Should paying for insurance not be the easiest thing to do with online platforms?
How did betting companies get it right? They just got insights into our behaviour. In fact, insurance firms could randomly pick their customers for a jackpot at the end of the year. That would make the ordinary Kenyan feel the benefits of insurance without a misfortune. Do we complain about the premiums we pay for betting?
I have asked often if insurers understand the role of religion and our traditional beliefs play in stymieing the growth of the industry. Behaviour, again. Add the fact that many misfortunes, from accidents to sickness, have explanations beyond science. Witchcraft is one popular cause of misfortunes. Does religion explain the low penetration rate in Nigeria?
We can’t escape behaviour. What is a no-claim discount? Why assume we are all guilty till proved innocent? Insurance should start with low premium rates, say three per cent, then raise for risky drivers. And why don’t married men and women get lower premiums, a ‘marriage discount’? They are usually less risky drivers, thinking about the next generation.
Some firms are raising the rates to keep off ‘hustlers’ and their jalopies. Older cars are attracting a higher premium irrespective of their value. Maybe that is a coded message that we should buy new cars.
The low penetration rate goes beyond behaviour. On the surface the industry is competitive, going by the number of insurance firms. But scratch deeper and only a few firms dominate the market. Add the fact that 80 per cent of the insurance market is in Nairobi.
The lack of competition is most noticeable in the medical segment. Why are patients restricted to some hospitals? Assured of patients, collusion and low standards are assured. Medical insurance should allow you to go to any accredited hospital, raising competition and standard among the service providers. Zero-grazing should not be allowed.
Why do we treat insurance cover as an expense? This gives firms an incentive to reduce the cover as much as possible. Suppose we reclassified it?
The low penetration could also mean that the industry does not obey the laws of supply and demand. Has the regulator ensured optimal competition? Who demands insurance, who supplies it? What are market distortions? What would happen if we abolished all the mandatory insurance?
Economics now: are the premiums channelled into the best investments? Why so much money in government paper? It could be a lack of innovation or suboptimal regulation. Is the industry future-oriented? How much of AI, big data and analytics is being used in the industry?
Finally, in university schools of business, insurance is not popular, attracting only a handful of students. It does not have the glamour of finance or strategy. It only got a flicker of glamour with actuarial science - a flicker because I checked the content of the course. Could that explain the genesis of slow growth in the sector? When will it enjoy its golden age?
- The writer teaches at the University of Nairobi