Insurers’ risk to credit exposure hits Sh40bn

credit risk

Credit risk is the possibility of either party to a contract being unable to fulfil its financial obligation under the agreement.

Photo credit: Pool


The credit risk exposure from outstanding insurance premiums and reinsurance recoveries jumped 5.2 per cent to 40.1 billion as of December, a new report by the Central Bank of Kenya (CBK) shows, raising dangers for the sector already exposed to investment volatility on the Nairobi Securities Exchange (NSE).

Credit risk is the possibility of either party to a contract being unable to fulfil  its financial obligation under the agreement.

In the insurance sector, such a risk may arise from the fact that a counterparty is unable to repay loans when due, including; amounts due from reinsurers in respect of claims already paid, amounts due from insurance intermediaries, amounts due from corporate bond issuers, cash, and deposits held in banks, reinsurers’ share of insurance liabilities and reserves, retrocession assets for reinsurers and loans and mortgages advanced to various counterparties.

CBK told insurers and reinsurers “to constantly monitor the risk profile of their creditors and make sufficient provisions and write-offs to ensure the adequate valuation of debtors”.

Three-year high

This came as investments in government securities by insurance firms hit a three-year high last year, the CBK report shows, fanned by a flight from the volatility of the NSE. The apex bank said the insurers’ share of investment in government securities rose to 71.7 per cent by December 2021 from the 67.1 per cent the previous year—the highest mark since 2019.

“Increased share of government securities to 71.7 percent in 2021 from 67.1 percent of income generating assets in 2020 may indicate flight to quality and safety by insurers but raises sovereign exposure risk,” CBK said.

Government securities, which include Treasury bonds, bills, and notes, are popular with many investors because they come with a promise of the full repayment of invested principal at maturity of the security.

Some government securities may also pay periodic coupon or interest payments. These securities are considered conservative investments with low risk since they have the backing of the government that issued them.

Despite the flight from the NSE, the insurance sector still held securities valued at Sh35.9 billion on the securities market as of December 2021, a 15.3 per cent increase from 2020.

“The growth in the value of equities was mainly attributed to the increase in equity prices as economic prospects improved on diminishing Covid-19 pandemic effects,” CBK said.

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