A wave of mergers and acquisitions in the insurance sector is expected to continue as firms attempt to meet a solvency requirement deadline in June 2020, a new outlook report by Cytonn has said.
The 2019 Insurance Report on listed insurers notes that the move to a risk based capital adequacy framework is likely to lead to capital raising initiatives by a section of players in the sector.
The report shows that solvency margins on the listed insurance companies fell to 26.9 per cent during the period under review compared to 27.9 per cent the same period last year. This reveals that assets have been growing faster than shareholder funds.
“With the new capital adequacy assessment framework, capital is likely to be critical to ensuring stability and solvency of the sector,” says the report released on Monday.
The regulation on capital has made it difficult for smaller insurance companies to continue operating without increasing their capital or merging in order to raise their capital base.
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The report explains that the mergers boom is a result of an aggressive drive by the companies to protect market share in a competitive environment.
Some of the deals include the acquisition of a 13.8 per cent stake in Britam by Swiss Re. Though the parties did not disclose the value of the transaction, Cytonn put its market value at Sh425 million.
"While the sector remains attractive with vast potential, we have witnessed the insurance sector grappling with low penetration, increased cases of fraudulent claims and the required increase in capital following adoption of a risk-based capital adequacy framework," said Arora.
Reacting to the report, Association of Kenya Professional Insurance Agents (AKPIA) Clifford Ochieng said that the mergers would be good for the industry with most underwriters struggling now.