A romance of two disasters: Demand surge and inflation put insurers in a quandary

By Steve UMIDHA

Kenya’s inflationary concerns dominated the airwaves for larger parts of 2022 rising to a fever pitch in October 2022 when the overall inflation rate reached 9.6 percent, before cooling off in November of the same year.

That momentum seemed to have carried on into the year 2023 if the numbers are anything to go by, wreaking havoc across major sectors of the economy including the insurance industry which was not immune to rising costs.

In fact, the sustained impact of inflation on insurance rates, remains a topic of increasing concern for insurance companies and consumers alike even as majority of Kenyans continue to grapple with sky inflation in the middle of a sluggish economy with reduced cash flow circulation that has forced many workers to cut demand for non-essential items – indemnity included.

Inflation is simply defined as a sustained increase in the price level of goods and services across the economy, and it has sweeping effects on various industries, including insurance.

Periods of high inflation, as has been witnessed before, can result in insurance companies experiencing higher claims payouts and operating costs, leading to more expensive premiums for the consumer. As a result, some customers may have to drop their coverage or switch policies to save on costs.

This can be seen in the latest numbers released by the industry supervisory body, Insurance Regulatory Authority (IRA) which show that general insurance business paid claims worth KES 60.50 billion between July and September 2023, a 6.4% increase compared to KES 56.85 billion paid in the same period a year before.

IRA’s Quarter 3 statistics report further indicates that medical, motor private and motor commercial had the highest amounts of paid claims at 45.7%, 22.6% and 20.8% respectively of total industry paid claims under general insurance business.

The three classes jointly constituted 89.1% of all claims paid by general insurers.

The high premium volume classes of general insurance business contributed the largest proportions of incurred claims, that is, medical KES 29.14 billion (44.6%), motor private KES 15.03 billion (23.0%) and motor commercial KES 14.70 billion (22.5%).

Motor classes of insurance business incurred claims contributed 45.5% of total claims incurred compared to their business contribution of 27.8% of the total premium under general insurance business. This percentage of business contribution to total premiums was a reduction from 29.4 % reported in Q3 2022.

Insurance industry premiums increased by 13.2% to hit KES 269.30 billion in the third quarter of 2023, from KES 237.90 billion in Q3 2022.

The general insurance business continued to lead in industry premiums contribution attributed to KES 153.72 billion; 57.1% of the industry’s gross premium income.

While long term insurance business premiums stood at KES 115.58 billion accounting for 42.9% of the total industry premium.

So how does inflation lead to a surge in billed claims?

Inflation will typically increase the cost to the reinsurer of the excess of loss claims by a large multiplier than the increase in the total original claims.

The effect of 10% inflation on a claim outstanding for six years for instance, increases the insurer’s retained liability by 61.1% and the XOL reinsurer’s liability by 611%. XoL is defined as a credit risk management solution designed to help companies mitigate significant losses, therefore improving balance sheet efficiency.

And so, usually, during periods of high inflation, insurance companies tend to face rising costs for claims payouts and increased operating costs. For insurance firms to offset these rising costs, they typically raise premiums, impacting consumers negatively.

In some cases, consumers may be forced to drop their coverage altogether due to the increased cost. In addition, inflation can also reduce the value of investments held by insurance companies, impacting the insurer’s creditworthiness.

Higher inflation period damagingly impacts non-life insurers through the increase in the expected cost of the claims and the costs of activities needed to service them. Higher anticipated costs lead to the increase of technical provisions such as claims reserves.

However, there are several ways insurers can try to protect themselves from the impact of inflation. For example, they may choose to increase the length of time policies are in effect or raise the deductible amount a customer must pay before coverage begins. They may also reduce benefits or exclude specific perils from policies altogether.

Inflation in numbers

The overall year on year inflation rate as measured by the Consumer Price Index (CPI) was 7.3 per cent, in July 2023, according to data by the Kenya National Bureau of Statistics (Knbs).

That figure stood at 6.7 per cent, in August 2023 and 6.8 percent a month later and during the reference periods, all sectors including the insurance industry continued to record general increase in prices and charges.

But the year 2022 was probably one of the worst years Kenya has had since in which the inflation figures recorded a five year high in August, primarily driven by an increase in food prices hitting 9.2 percent in September of the same year.

Monthly inflation data by the national statistics office, Kenya National Bureau of Statistics (KNBS) further showed that the country’s overall rate of inflation in October stood at 9.6 per cent compared to 9.2 per cent in September 2022.

The last time the country witnessed such kind of inflation was in June 2017 when it hit 9.21 per cent.

The country’s inflation rate rose by 30 basis points in January this year to stand at 6.9pc on account of higher transport, food and electricity costs, according to measurements by KNBS which showed that year-on-year price of commodities under transport index surged by 10.6pc, housing, Water, electricity, gas and other fuels by 9.7pc while Food and Non-Alcoholic Beverages went up by 7.9pc between January 2023 and January 2024.