Kenyans insurance firms have for long had a healthy appetite for investment risks in property and shares.

But as the share prices on the Nairobi Stock Exchange (NSE) fell drastically last year - and the broader market is yet to recover- the insurers are grappling with a lot of pain, as financial results from the current quarterly earnings season show.

These firms face a tough year ahead as pressure builds to grow underwriting income, even as claims and fraud from customers continue to rise and a depressed equity market eats into the value of their assets.

Insurance firms typically make money by investing the difference between the premiums they receive from clients and claims paid out when risks occur. This is known as float in the business.

The larger the float, the higher the investment income and the lower the expenses of running the business and commissions paid, the fatter the profits. At the end of 2006, Kenyan insurance had invested Sh25 billion, which represents seven per cent of their total assets in quoted shares.

For the last five years in Kenya, insurance firms have been relying heaving on investments in shares and underwriting income continued to be depressed by rising claims and pricing pressures from growing competition.

As long as share prices and dividend payments continued to rise, the profits have been flowing, but all this changed in the first quarter of 2007 when the NSE share price boom burst.

Between 2002 and 2006, the NSE 20 Index more than tripled, translating into huge investment incomes for the growing number of insurers who had turned to the stock market to invest their float, the

excess cash generated from premiums after claims have been settled.

"You can't really hope to consistently outperform the market," says Mr Paul Sigsworth, the managing director at ICEA Asset, adding that insurers will have to improve their underwriting income and the quality of their core businesses to improve on bottomline earnings.

In 2006, insurance companies recorded underwriting losses of Sh1.23 billion, which was offset by earnings from investment income of Sh14 billion as overall gross profit for the industry averaged Sh5.8 billion in 2006 compared to 4.3 billion in 2005.

But last year, the bull run at the NSE, ran out of steam as a market correction driven by euphoria and speculation marked a lacklustre year at the bourse. According to the report of the Commissioner of Insurance, in 2006 investments in ordinary shares and government securities accounted for 57 per cent of the industry's investment portfolio.

This came as a picture emerged of growth in the insurance industry's core business being largely overshadowed by huge gains on the insurer's investment in listed shares and properties as players raced to cushion themselves from lower underwriting margins.

With more than 40 insurance companies in the country fighting for a piece of Sh36 billion-a-year premium market, firms have had to diversify and improve their business retention strategies such as quick responses to premium rates and claim processing.

The overall gross insurance premium income increased to Sh41.68 billion in 2006 from Sh36.4 billion in 2005, representing a growth of 14.5 per cent. Across the industry, underwriting profits, while still moving forward, continued to dwarf the sectors growing investment gains.

The industry's average stands at between 30 and 40 per cent. At the end of 2006, it had invested Sh25 billion on the stock exchange compared to Sh15.8 billion in 2005.

The heavy leaning towards investment income and the decline in underwriting income across the industry has been largely attributed to price undercutting and an increase in claims especially in the motor insurance business.

The increasing rate of accidents had led to a spike in motor vehicle claims even as inflation continues to eat into premium income and reduce the amount of new business.