Insurance uptake to rise with the entry of banks

Kenya Bankers Association (KBA) CEO Habil Olaka during the peace pledge campaign by the banker's association on February 13, 2013. 

By JOHN NJIRU

In Summary

• CBK guidelines offer commercial banks leeway to sell insurance products, shares, and broker bonds from May 2013 under regulated policies.

Penetration of insurance in the local market is expected to go up significantly following the legalisation of banking halls as channels to sell cover products.

The Central Bank of Kenya has introduced policies that will allow the spreading of bancassurance, which has been touted as one of the best tools to increase coverage given the expansive branch networks Kenyan banks enjoy.

“The current insurance penetration has been very low and one of the challenges the insurance industry was experiencing was lack of adequate distribution channels.

Bancassurance was an attractive and viable form of distribution but there was no framework to realise it,” said Mr Habil Olaka, the Kenya Bankers Association chief executive, in a phone interview.

Market analysts have attributed the low insurance cover in the country to ignorance and negative attitude on underwriting.

Failure to adopt bancassuarance — use of commercial banks by insurance companies to distribute cover products — has also been blamed for the slow uptake of insurance.

While both deal with money, differences between banks and insurance firms are distinct; banks have always exerted control in the area of delivering means of payment while underwriters have concentrated their efforts on offering products linked to a contingency — likelihood of a risk occurring.

This makes banks look, in the public eye, as if they are dealers in short-term and medium-term funds while insurers are risk takers and work on long-term funds.

But the two financiers enjoy similarities which bancassuarance can ride on, including operating with reserves, creating liquidity in the market, and ensuring a risk-spreading function through re-insurance and funding.

Most importantly, they rely on the law of large number, which is the current headache of insurance firms because of the low numbers of the insured.

The 44 banks in Kenya have experienced growth, with major firms expanding their operations locally and regionally. Also, they have aligned themselves with products similar to those offered by insurance companies.

However, the same cannot be said of the insurance industry, which still employs traditional distribution channels of products, including being tied to insurance agents.

Mr Olaka has attributed the need for insurers to employ banking services to the fact that the sector touches large numbers in the population, which is an ideal source for creating awareness and education in personal finance and risk management.

“Bancassurance services transform a bank from a mere depository of funds and facilitator of financial transactions to an educator of financial planning and risk management, creator of wealth and provider of financial protection,” he said.

CBK guidelines offer commercial banks leeway to sell insurance products, shares, and broker bonds from May 2013 under regulated policies.

Known as “Guidelines on Incidental Business Activities”, banks will identify the products they are selling from the actual source to prevent giving the consumers the wrong impression.

“An institution acting as a distribution channel shall not undertake or engage in the actual business of insurance, underwriting, securities, and investment services. The involvement of institutions will be limited to acting as a distribution channel in the provision of these financial services,” noted the CBK draft guidelines.

This means that banks will not be involved in the making of the products; they will only work as distribution partners.

Bancassurance relies on a symbiotic relationship where insurance products will benefit from the sale of their policies to customers while the banks get their cut from commissions after selling the products.

“This will spur better development of bancassurance and increase penetration. The arrangement will broaden the earnings of banks in terms of commission and the big banks’ customer base will reduce transaction costs,” said the CIC Insurance chief executive, mr Nelson Kuria.

There are various ethical issues arising from bancassurance, including data mining where banks use their client’s information to further their own interests

Insurance penetration in Kenya stands at 3.03 per cent to the country’s GDP — indicating poor personal financial capability; transforming the situation into a national economic security since the nation is as healthy as its individual citizen.