WHAT PULLS INVESTORS TO INSURANCE

Last month's takeover of Uganda's oldest and privately owned insurance firm, United Assurance by UAP Insurance of Kenya further strengthens foreign investor's hold onto the industry previously dominated by locals.

This is the second biggest takeover in the recent past after 60% of the former state-owned National Insurance Corporation (NIC) was sold to Industrial and General Insurance Company Limited of Nigeria in June 2005.

Financial analysts say there is growing foreign interest in Uganda’s insurance industry largely driven by prospects for future growth in terms of new products and “a good growth rate” of 12% per annum.
Currently, 11 of the 19 insurance companies in the country are foreign-owned after UAP acquired a controlling stake in United Assurance.

United Assurance was the oldest locally-owned insurance company.
Under the deal, UAP Insurance now owns 53% in the company it first bought into in 2005.

This has meant that the company is re-named and re-branded. Solomon Rubondo, the chairman Uganda Insurers Association (UIA) told The Weekly Observer that foreign interest in Uganda’s insurance sector is increasing largely because of the impressive 12% annual insurance industry growth and a big untapped potential.

This growth rate has suddenly made the Ugandan market “lucrative” with profit margins growing every year as a result of new business opportunities. For example, the industry collected $51 billion (about Shs 87 billion) in premium in 2005, up from Shs 80 billion of the previous year.

And although the 2006 figures are officially not yet out, Alexander Wanjohi, the Managing Director of America Insurance Group (AIG) estimates total premium for that year at about Shs 100 billion.

The local market has been made even more lucrative by the low compensations claim rates that have ensured that companies return huge profits. For example, out of the Shs 87 billion collected by insurance companies in premium during 2005, total compensation claims amounted to just Shs 44 billion. This means that more than half of the money remained with insurers and their brokers.

Indeed, figures for 2005 show that AIG settled the largest amount of claims totaling Shs 6.6 billion—less than half of its gross premium of Shs 19.9 billion.


Formerly United Assurance, UAP Insurance plans to invest in the lucrative real estate business and launch new products
United Assurance, the company taken over last month by UAP paid claims of Shs 5.3 billion also less than half of its gross premium of Shs 12.7 billion.

According to Rubondo, the low claims rate is because clients insured in Uganda rarely suffer major losses like; buildings catching fire or even natural disasters like earthquakes. In most cases, claims are paid on a few motor accidents.

Figures by the Uganda Insurance Commission (UIC) show that the single biggest claim to be settled by the local insurance industry in the last three years has been the Shs 12 billion compensation by NIC for the presidential helicopter that crashed and 13 people who died in the crash including the vice president of Sudan Gen. John Garang.

Third party

Motor vehicle third party and comprehensive insurance are some of the most liked products by insurers because of the low claim rate. For example, out of the Shs 29.5 billion in premiums from comprehensive and third party in 2005, only Shs 14.9 billion went to settle claims, according to figures from UIC—the industry regulator.

It has been noted that a number of local companies virtually survive on these two products in this market where life, fire, burglary and other policies not enforced by the law are very hard to market.
Motor third party (MTP) is enforced by the law and rates range from about Shs 35,000 for saloon cars to Shs 400,000 for buses.

Interestingly, if a taxi that pays Shs 90,000 for MTP, a saloon car and bus with 14, 5 and 65 passengers respectively were involved in an accident, all would receive Shs 10m in claims according to David Kigongo of SWICO.

This is in spite of the fact that only about half the privately owned vehicles on the road have comprehensive insurance. According to Rubondo, this means that the market for motor third party is still largely untapped and that is one of the reason the local insurance industry is attractive to new investors, most of them foreign.
With banks financing vehicle acquisition schemes, insurers anticipate a business boom.

The local market average for comprehensive insurance is about 5% of the total value of the vehicle for cars and 6% for commercial vehicles.
There have also been reports of high default rate for third party insurance and insurance companies hope that the police will be vigilant enough to enforce the law.

Pension sector

It is believed that many of the insurance companies are positioning themselves for a share of the multi-million shilling social security sector that is expected to be liberalized.

The National Social Security Fund is currently the sole custodian of the workers savings now at about Shs 1,000 billion.
“The UIA wrote a proposal to government requesting for an opportunity to handle pensions. We have not been granted the chance yet, but we continue to hope,” said Rubondo.

David Kigongo, Marketing Manager State-wide Insurance Company Limited (SWICO) told The Weekly Observer that such funds would enable insurance companies access a wider cash base for more business activities.

“Of course, even the prospect of the Commonwealth Heads of Government Meeting (Chogm) attracted more interest in the Ugandan Insurance market,” said Rubondo. However, the Chogm pendulum did not swing in the UIA’s favour.

“Government preferred bank guarantees to insurance bonds when contracts were being given. So insurance companies did not win deals but banks did. Such deals would have earned the insurance industry $1m [about Shs 1.7 billion]. We don’t know why the government did not show more trust,” he said.

UAP in Uganda

UAP bought into United Assurance in 2005, but faced a challenging year when the company suffered a Shs 1.1 billion loss.
The company re-emerged with Shs 2.1 billion profit before tax in 2006.
UAP now wants to expand into real estate business, according to the Managing Director Mathew Koech.

While foreign companies are perceived by the market to be financially stronger, their presence has forced local insurers to fight for their own survival by being innovative.

UAP Uganda’s total assets as of the end of 2006 stood at Shs 19.4 billion against total liabilities of Shs 12.2 billion. Overall, the company is worth Shs 112 billion.

The company is now looking to introducing new products to strengthen its position in the Ugandan market now dominated by AIG with a market share of 22.7%.

“In Kenya, we have a World Cup 2010 saving plan, which may be introduced here too. It is to enable people who love football to start saving now so that by 2010 they can go and watch the World Cup live in South Africa. More products like Agriculture insurance and travel insurance will slowly come into play to cover risks that farmers suffer due to climate changes and pests,” Koech said.

Despite these prospects, Uganda’s insurance industry is still small compared with one East African Community member—Kenya.
The most recent statistics show that Kenya’s total premiums topped $501 million, which is over five times more than Uganda’s.
jovi@ugandaobserver.com

SOURCE: UG WEEKLY OBSERVER