20 August 2009
Jubilee Insurance broke new grounds in the insurance industry last week when it added political riots, terrorism and economic sabotage to the list of risks it underwrites.
The package, to be supported by a Sh30 billion reinsurance policy that the company has signed with a consortium of firms led by the African Trade Insurance (ATI) will also be extended to cover farmers against produce losses that normally results from erratic weather patterns.
While UAP Insurance may have led the way in breaking the glass ceiling last year when it ventured into the same waters, its protection was limited to motor vehicles industry.
With the backing of Africa Re, the East African Reinsurance Company and Lloyd's of London, ATI is exuding confidence that other Kenyan insurance companies will roll out such products this year.
On the face of it, the decision by the insurance firms to bring such high profile risks under their ambits is set to end a longstanding debate on the role that policy underwriters should play in the aftermath of such eventualities -- whether to dismiss such claims an uninsurable or offer ex-gratia payments (proportion of the value destroyed based on compassion rather than actual assessment)
But some analysts reckon that such risks appear too imminent to underwrite in the region. Kenya's proximity to the lawless Somalia, a fragile coalition government that has heightened political risk profile and the country's dependence on rainfed agriculture are some of the grounds that critics have used to question the new insurance policy.
This is because in theory, insurance firms offer promise of compensation on assumption that only a small portion of the policy holders who have pooled their premiums will ever incur the eventual risk.
Yet this is not true of last year's post-election violence when in just one month of destructions, policy holders lodged claims totalling Sh1.2 billion with the country's 43 firms. Crop failure can also trigger mass compensation claims from policy holders. So is this policy tenable?
The Business Daily team sought the views of policy holders and insurance industry players.
Patrick Tumbo Nyamemba, General Manager and principal officer, Jubilee Insurance
"We discovered a gap in our policies when after the post-election violence, some of our customers approached us with losses as huge as Sh110 million.We did not have this kind of cover, but still refunded up to 40 per cent of their losses in ex-gratia payments. I wish we could do more to SMEs who contribute 50 per cent of the country's total wealth.
With this kind of cover, our customers in Kenya, Uganda, Tanzania, Mauritius, Burundi and Rwanda will now be protected against politically motivated damage to their property
We are the largest composite in the EA region and we expect this new product to drive our foray into Central and West Africa. Our interest in insuring agriculture is because it accounts for 30 per cent of the Comesa region's economy. We'll just have to keep track of weather index and use it in pricing our premiums.
Stewart Kinloch, Acting CEO, African Trade Insurance
"Time is ripe for this kind of policy, not only in Kenya but in Africa. It will help to improve the investment climate and companies that do not have it will soon find themselves irrelevant in the market.
Here in Kenya, it will open up a new line of business for the insurance companies in the region to attract new customers and retain old ones. But because of its higher risk profile, its premiums will have to be charged at higher levels compared to the conventional policies.
Underwriters will also be free to adjust their premium rates upwards as the country moves towards the election time.
We have already seen noticeable demand for this product and with the losses linked to the global financial downturn; we expect this increase as businesses seek to cushion themselves from these types of risks
Steven Oundo, Chairman, Architectural Association of Kenya
"Obviously, this product is a direct result of the destruction of property and loss of lives witnessed during last year's post-election mayhem.
As Architectural Association of Kenya, we are studying the pros and cons of this new insurance product and the impact it will have on both the built and natural environment.
For those who invest in real estate, they will now have an avenue to seek compensation for losses incurred during political strife.
This is because investment in the real estate industry normally involves huge amounts of money while a lot of time is also spent on its planning.
It therefore makes sense that such huge investments should be protected against destruction resulting from political unrest and terrorism.
On the other hand, however, having this kind of cover will portray the country negatively in the eyes of external investors as a business destination that is prone to political instability.
It could also discourage investment in real estate in case the increased premiums have a material impact on the final cost of housing units.
Haroon Motara, Managing director, East Africa Reinsurance Company
"In East Africa, we are actively trying to come up with products for terrorism, political and related reinsurance policies. At the Association of Kenya Reinsurers, we recognise that there is demand for these products, but there are few suppliers.
We need the government's support to fix the supply side of the insurance. The State can make the product compulsory and also give guarantees to improve the take-up.
We need to have all stakeholders like insurers, reinsurers, policyholders, the State and retrocession firms to be partners in coming up with the products.
The frequency of, for example, terrorism occurrences is low but when it happens it is huge.
The disturbances in Kenya following the 2007 elections may have caused damage of $20-25 million but had it gone to the central business district, the damage would have been bigger.
These are occurrences that need to be insured and re-insured.
Jonathan Ciano,CEO, Uchumi Supermarkets
"I do not advocate for political risk insurance in my own country. Insurance cover is not the only way that a company can handle risks. In such a case, any of the four terms of enterprise risk management, that is take, terminate, transfer or treat can apply.
Transferring political risk to an insurance is not feasible for local companies. First it would be too expensive for individual companies. What is political risk anyway? Is it riots or lawlessness?
Take the case of Zimbabwe, can the country's insurance companies cover risks associated with the actions of their president? Terminating is also not an option so the best way would be to take or treat the risk.
The Kenya Private Sector Alliance is helping the local companies to treat risk. But of course this also means we need the right environment such as electing good leaders who understand and appreciate diversity of the Kenyans.
Lucas Otieno,
CEO, African Alliance Kenya Securities Ltd
"Going by last year's post- election turmoil, many businesses suffered huge losses due to destruction of property or loss of revenue. If the Government is not stable it drives businesses into some risks which can either be like the violence witnessed last year or policy risks.
Africa is considered as an unstable environment because of the political uncertainty. The political insurance might shield companies from the risk related to the violence but also the change in different government policies which affect the business environment.
Insurance companies need to make business owners more aware of these risks and tailor insurance products that address the need for cover.