Kenyan insurers post 45% growth in profit

Kenya's insurance sector reported a significant 45% growth in profit to $63.8 billion in the first nine months of 2016, according to the Insurance Regulatory Authority. This growth comes amidst other news of penalties imposed by the Central Bank of Kenya on commercial banks doubling to $0.4 million in 2015 as regulators aimed to tighten oversight of the sector. To delve deeper into these market developments, Caleb Mugendi, an Investment Analyst with Cytonn Investments, provided insights on the implications of these trends. Kenya's Central Bank's increasingly stringent regulatory approach has seen penalties soar, signaling a new normal in the financial sector. The tightening regulatory environment is aimed at curtailing illicit activities within the banking industry, particularly related to illegal NISC funds. By imposing substantial fines on banks, the Central Bank aims to deter fraudulent behavior and ensure sound financial practices, such as accurate reporting of bad loans. Notably, the impact of these penalties has been more pronounced on tier two and three banks, which often have less rigorous risk assessment frameworks compared to listed banks. Following recent industry challenges faced by banks like Imperial Bank and Chase Bank, the Central Bank is mandating all banks to establish internal policies on capital adequacy by April next year. This move aims to enhance risk management and financial stability across the banking sector. Shifting focus to the insurance sector, while there has been a remarkable 45% increase in profit, reaching $63.8 billion, there are concerns about rising losses due to fraud and escalating claims. Despite the impressive profit growth driven largely by investment returns, insurers are experiencing underwriting losses, with a combined ratio of around 120%. Some insurers, however, are diversifying their investment portfolios by increasing holdings in real estate to boost returns. The sector's potential for growth remains substantial, considering the low insurance penetration level of around 3% of GDP. To capitalize on this growth opportunity, insurers need to enhance distribution networks, collaborate with banks through bank assurance schemes, and improve consumer awareness about insurance products. By mitigating risks, combating fraudulent claims, and driving up insurance penetration, insurers can steer towards sustainable profitability in the future. Despite the challenges faced by the insurance sector and the broader financial industry, strategic measures and prudent risk management can pave the way for robust growth and profitability.