Elevated interest rates in 2024 lifted investments income for insurance companies to Sh124.87 billion from Sh69.67 billion, at a time growth in profit from the underwriting business was largely modest.
Liberty Kenya Holdings Plc was amongst leading insurers, whose profitability surged on the back of increased earnings from investment of premiums in government securities and fixed deposit assets.
Liberty’s net investment income surged 3.3 times to Sh4.74 billion from Sh1.4 billion, while insurance service result—premiums received less claims payment and expenses incurred— increased a modest 5.6 percent to Sh1 billion.
The firm’s Group CEO Kieran Godden spoke to Business Daily on balancing underwriting business and investment for returns.
Profitability of insurance firms, including Liberty, has largely been driven by investment income in recent years, but particularly last year. One would think that investment is gradually replacing managing of risks as the core business of insurance firms?
These are two sides of the same coin. But ultimately, underwriting is what we do. Our job is to manage risks. And there are ways to do this, one of which is investing money that we receive.
But I think in Kenya —which is different to a lot of places in the world—investment offering in life insurance business is far more popular than pure risk offering. So people tend to buy products that they can use for saving rather than products to protect themselves.
Why do people see life insurance more through the lens of savings than protection against future risks?
It is a function of economy. I think for far too long, the insurers are happy to take your cash, but then you feel like you are not getting anything back. And with life insurance—because it is a long-term commitment—there’s a problem.
For the industry, we have to make sure we can show value maybe on a more immediate basis.
How do you tilt that?
We want to try and shift that dynamic in the market, so that people understand the value of protecting themselves as well.
I think they understand it [buying insurance for protection] on the general insurance side, because when people are buying health insurance, car insurance and insurance to protect their house, it is all protection.
So it is for us to shift that balance [in the generation insurance business] to the life insurance side, so there is understanding that there’s value in buying life insurance for protection.
But there has to be a balance between underwriting of risks to protect against future financial loss from unseen events and investing the premiums to generate returns for shareholders?
Underwriting is a risk function— it is what risk we take on and what price we charge. Ultimately, no risk is uninsurable.
It is just about the price. The underwriting piece is to help customers see and feel there is value for money. We have got to work out how we make sure the customer will get value, so that when you give me Sh10,000, you are going to get Sh1 million if something happens. There’s a lot of skills involved.
What you do with the money is you have to invest. So we collect huge amount of cash, and that is capital formation which is great for economy.
It is good for government, infrastructure projects and businesses, and we plough back that money into the economy by lending it to government and businesses, and asking for a return. But I see investment as secondary piece of insurance value chain.
You have already warned your shareholders that the super returns on investment last year won’t be repeated this year, because interest rates are coming down. What does that say about sustainability of growth in profitability for insurance companies?
We know that the investment returns on assets we are holding is going to come down, and that will be the same for everybody. Investment returns is great and decent to shareholders, but the real returns is added to shareholders in underwriting result.
In both our [general and life insurance] businesses, the insurance services result was up decently last year, and we are focused on maintaining that momentum because that is the sustainable core of our earnings.
We know we have got work to do, to make it properly sustainable, particularly in our life business.
How do you plan to sustain growth in your bottom-line in an environment of falling interest rates?
We are embracing advanced risk analytics and scenario modelling to stress-test our portfolios. We are also strengthening our reinsurance programmes and investing in upskilling our teams to better assess emerging and systemic risks.
A more agile claims management process, powered by data, is helping us reduce fraud and improve operational inefficiencies. Our shareholders can also expect targeted investments in technology and product innovation, to drive efficiency and customer growth. We are also exploring partnerships in areas like health and life insurance, which offer strong growth potential.
There are a raft of reasons which have been cited for stubbornly low insurance penetration at below three percent of gross domestic product. From affordability issues to mistrust, lack of awareness, name them. What do you think are the main factors holding back uptake of insurance policies?
It is largely a combination of two factors. It is lack of trust coupled with lack of understanding. Why do you need it and what difference does it make in your life. If you don’t understand what this thing is and why you are buying it, then you don’t have faith that you will get your money back or the cover will be there when you need it.
How can that be fixed first at industry level and secondly, at policy level?
At an industry level, we need to simplify our products, digitise access, and invest collectively in public education campaigns. The more we make insurance accessible, transparent, and relatable, the more the public will engage with it.
Cross-industry collaboration to share data and improve underwriting efficiency will also help build trust and reduce costs.
On the policy front, the government can support the industry by offering tax incentives for insurance uptake, integrating insurance into social protection schemes, and fast-tracking regulations that support microinsurance and digital onboarding. Strong enforcement of compliance standards across all players will also boost public confidence.
What are some of insurance policies which are showing increased demand and potential for growth in the near future?
We are seeing growing interest in marine and cyber insurance as digitalisation accelerates across sectors. Similarly, health and wellness-related covers, including mental health, are gaining traction, especially in the post-Covid period.
Agricultural insurance, especially for smallholder farmers facing climate-related risks, is also beginning to grow, supported by both public and private sector initiatives.
Fraud is rife especially in the health and motor insurance. How are you staying ahead of fraudsters?
Fraud is evolving, with more syndicates using digital manipulation and false documentation, particularly in motor and health claims. To stay ahead, we have invested in data analytics and machine learning tools to detect anomalies and patterns.
We have also enhanced collaboration with other insurers and regulators to share intelligence and blacklist fraudulent actors.
