Why businesses are not taking political risk cover as Kenya, Rwanda vote
Tuesday May 09 2017
As Kenya and Rwanda go to the polls in August, there is an air of optimism among investors in the region that the elections will be largely peaceful, with very few taking up political risk and violence insurance covers.
Pan-African insurer African Trade Insurance Agency (ATI) says that only a few investors are considering taking up political risk and political violence covers, compared with 2013 when Kenyans last voted.
The pan-African investment and commercial risk insurance provider recorded a large number of investors in Kenya seeking election-related covers during the last electioneering period in Kenya.
The result of the elections in Kenya is important, as it is the gateway to the landlocked East African states.
“Compared with 2013, we are not getting many inquiries on political cover, because investors feel that the elections will be peaceful,” said George Otieno, ATI chief executive officer.
In Rwanda, where President Paul Kagame is likely to be re-elected for a third term, ATI, which offers political risk cover to big clients, anticipates a smooth polling process.
Although ATI is recording subdued interest, Kenyan insurance companies offering political violence, terrorism and sabotage covers are recording increase in uptake.
UAP Insurance, Jubilee Insurance and CIC Insurance have all reported significant interest in the cover.
In the bloody 2007 elections aftermath, the three companies paid in excess of $3 million in claims.
Association of Kenya Insurers chief executive officer Tom Gichuhi told The EastAfrican that this being an election year, the industry has seen more companies take up insurance against political violence, considering that some parts of the country have been declared as hotspots.
He noted that chaos was witnessed in some parts of the country during the political party nominations exercise.
He said that many medium-sized companies that were affected by the 2007 post-election violence are leading in safeguarding their businesses.
The fact that investors are confident that elections in Kenya will be largely peaceful is positive news not only for the country but also the entire East Africa region.
Indeed, the effects of the 2007/8 post-election violence are still being felt by some traders in the region, and Ugandan and Rwandan businesses have been petitioning Kenya to pay $47.5 million in reparations for business disruption in that period.
Last year, Tanzanian company Modern Holdings East Africa (Masafi) won a $9.2 million compensation case against Kenya Ports Authority for a consignment lost during the violence.
According to a report by Citi Research, the election will be entirely peaceful.
“While the possibility of some violence around the August elections seems possible, notably around closely contested county elections, it should not be overplayed and we think it is unlikely that there will be more widespread unrest,” says the report on East Africa economic prospects 2017.
Foreign direct investment
The elections in Kenya and Rwanda are coming at a time when foreign direct investment inflows in East Africa and economic growth are on a decline, blamed on various shocks.
A report by audit and consulting firm Ernst and Young (E&Y) indicates that FDI inflows into the region significantly plunged last year, with Kenya recording the biggest drop.
E&Y’s Africa Attractiveness Report 2017 shows that last year, Kenya experienced an investment flag after a bumper year in 2015, following a 57.9 per cent decline in FDI projects. Capital investment declined by 55.5 per cent.
The report adds that although there were year-on-year declines in FDI flows into East African markets generally, both Tanzania and Uganda are highly placed, ranking fifth and sixth in attractiveness respectively.
According to John Lentaigne, ATI chief underwriting officer, ATI is projecting a record year in underwriting, owing to the economic turmoil being experienced in the majority of sub-Saharan African nations.
Public debt in most countries has skyrocketed to worrying levels and economic growth, particularly in nations that largely depend on commodities, is expected to be depressed. This has created an environment where demand for insurance cover will be significant.
Demand may also be driven by the tough global regulatory environment, which has made it difficult for international financial institutions to lend to a majority of African countries whose ratings are poor.
“The environment is challenging, but investors still want to chase deals. This will lead to a demand in underwriting,” he said.
He added that in the current environment, ATI’s products are being seen as a valuable tool to enable lenders to venture into Africa, thus allowing governments and corporates to access more affordable financing.
Besides being an investment insurer of last resort, ATI is also providing the comfort for investments amid uncertainties on the continent.
Due to the rising demand for its products, which include off-taker guarantees for energy projects, surety bonds and trade credit insurance, ATI expects to maintain a profitable trajectory after posting a 36 per cent increase in net profit to $6.4 million in 2016, compared with $4.7 in 2015.
ATI attributed its steady profit growth to stronger partnerships with African governments that are increasingly seeing the value it offers in driving growth and development.
“We are increasingly viewed as a strategic partner in Africa helping investors and our member countries attract vital foreign investment,” said Mr Otieno.
He said that ATI’s impact is being felt considering it is insuring investments equivalent to approximately one per cent of member country’s gross domestic product every year, something that is helping in attracting new member countries.
The insurer currently has 13 members, with Côte d’Ivoire being the latest member. In 2016, it insured close to $4 billion worth of trade and investments. In the next five years, ATI hopes to increase its membership to 26, and plans are underway to open a West African hub.