Jubilee, ATI in $384m political cover deal

Businesses in the East Africa Community and the Common Market for Eastern and Southern Africa will soon enjoy political risk cover traditionally shunned by insurance companies.

Jubilee Insurance and the African Trade Insurance Agency (ATI) have partnered to cover businesses against political violence, terrorism and sabotage risks. Today, South Africa is the only country in Africa where political risks are covered.

In a landmark deal worth Ksh30 billion ($384.6 million), the two companies will initially cover businesses in Kenya, Uganda, Tanzania, Mauritius, Burundi and Rwanda. Kenya is expected to take the lion’s share of more than Ksh10 billion ($128.2 million) from the kitty “since almost 80 per cent of Jubilee’s cover is in the country.”

“Under the facility for political violence, terrorism and sabotage protection that was signed earlier in the year, Jubilee Insurance has expanded its product line by retaining these specialist political risks, which it previously passed onto reinsurers outside the Kenyan market,” said Patrick Tumbo Nyamemba, general manager and principal officer at Jubilee.

According to Mr Nyamemba, the new cover will help protect the overall economy of the region, which is frequently hit by political unrest.

“Political risk cover will cushion the region’s vast agricultural resources, the energy sector as well as the financial sector. With this cover, our clients will get a favourable rating by lending institutions and as a result, they can negotiate for better financing terms,” he said.

The move comes at a time when the Organisation of Eastern and Southern Africa Insurers has been encouraging insurance companies in the region to implement a policy that allows insurers to cover risks emanating from political-related violence.

This is not the first time that the Kenya insurance sector is engaging in political risk cover.

In 2008, a local insurer introduced such a cover just after the post-election violence. The move came after the insurance industry discovered that there existed a gap in the market where billions of shillings worth of goods were being damaged but could not be covered with existing insurance and reinsurance products.

“It is not clear what the economic climate in the region will look like once the current financial crisis passes. All that we can focus on is our preparedness as a region to meet the future challenges. We project that the demand from companies for insurance protection will increase,” Mr Nyamemba said.

Though a lucrative field to ex-ploit, insurance companies have shied away from covering political risks, with some arguing that it cannot be reasonably foreseen.

A common argument has been that political risks are “hard to quantify” due to lack of past experience and samples.

“These risks are highly unpredictable and when they occur they can be catastrophic. This may result in large accumulated losses that have the potential to even cripple the whole insurance industry,” says Stewart Kinloch, the acting chief executive officer of ATI.

“They therefore require reinsurance support, which in the case of Kenya and the region, the reinsurers have excluded.”

“The insurance industry’s inability to underwrite this type of risk led ATI to provide resinsurance to the market with the backing of local and international partners,” said Mr Kinloch.

Currently, ATI is in partnership with Africa Reinsurance, the East African Re-insurance Company and Lloyd’s of London.

“The affiliation has enabled ATI to create a unique product that local East African insurers can access and then pass on to their customers alongside their existing policies,” Mr Kinloch said.

He added that the East African insurance market is characterised by high fragmentation, relatively low penetration and significant concentration in short-term business. “This adds up to the intense competition as insurance companies run for the same market,” he said.

So far, the demand for the product has grown tremendously, especially after the impact of the economic slump.

“We expect the demand to continue appreciating as investors and local insurance companies seek options to cushion themselves against these types of risks. In the next three years, we expect that all insurers will be offering this cover.” Mr Kinloch said.

Despite a school of thought that corruption risk falls under a political risk cover, analysts say the risk is a fidelity guarantee that only covers the integrity of people. In fact, they argue that corruption cases should not be insured as it will encourage the vice in public office.

Sammy Makove, the chief executive officer of Kenya’s Insurance Regulatory Authority, says the insurance industry in the region should consider developing a product that will offer a solution instead of running away from the risk of corruption.

“While not judging or at the least condemning the industry, the question we should all ask is whether there is a solution to this risk which seems phenomenal in Africa,” said Mr Makove.