CHAPTER ONE: INTRODUCTION
1.1 Background of the Study
Performance can be defined as a set of non-financial and financial indicators which offer information on the degree of achievement of results and aims (Lebans&Euske 2006 after Kaplan & Norton, 1992).Performance of a firm is defined as a measure of the degree to which a firm has attained its set goals and objectives and it is given by three components that are: firm financial performance, product market performance and shareholder return (Richard et al., 2009).Insurance is a form of risk transfer mechanism(Muriithi Kogi&Onuong’aMaragia). According to Kogi and Maragia, insurance is the most superior method used in handling risks as individuals and organizations transfer risks to those with the financial ability and technical know-how to handle them. Challenges facing organizations are difficulties which hinder its growth and expansion. Organizations are faced with different challenges which depend on the environment they operate in. Some of the general challenges includes; changes in technology, competition and regulatory and compliance.
This research will be based on three theories; Economic Theory of Insurance by Willett’s (1865) which proposes that inequities in the level of risk involved in different investments of capital bring about inequities in productivity hence performance. Second is Wernerfelt’s (1984) Resource Based View which suggests that firms with more resources can invest in reducing or eliminating the challenges they are exposed to thus enhancing their performance unlike firms with little resources which only focus on surviving. Gerber’s (1979)Ruin Theory of insurance on the other hand suggests that insurers are vulnerable to aggregate loss or ruin in the insurance business which may sometime be so large as to deplete the insurance fund. The hope of increasing the level of insurance growth and penetration in the country at least to be at par with the highest ranked countries in Africa has been the effort behind this study. By studying the performance of marine insurance companies and the challenges affecting their performance, the study aims to ascertain the level of penetration and growth in the country as well as curbing the challenges involved through identifying them and providing solutions to mitigate them so as to better performance.
Insurance is a contract represented by a policy in which an individual or entity receives financial protection or reimbursement against loss from an insurance company. Insurance companies are sellers of insurance products in the insurance industry. Insurance companies are grouped into Long Term business and Short Term business based on the products they sell; short term business are usually arranged for one year whereas long term business run for longer periods and are mostly life policies. Marine insurance is an insurance contract whereby the insurer offers to indemnify the assured against marine losses / losses caused by maritime perils / losses incident to marine adventure. Marine insurance falls under Short Term insurance business. Marine insurance is divided into two branches which are; cargo insurance covering cargo and hull insurance covering the sea vessels. Marine insurance industry in Kenya was boosted by the announcement by the Treasury Cabinet Secretary Henry Rotich in June 8, 2016 budget speech that the Kenya Revenue Authority (KRA) will require importers to use the local insurers for marine insurance (Shah, 2016).
1.1.1 Concept of Performance
Performance is the fulfillment of a task against preset known standards of accuracy, cost and speed realized through various teams or involvement of an individual to the organizational strategic goal. It can also be defined as a set of non-financial and financial indicators which offer information on the degree of achievement of results and aims (Lebans & Euske 2006 after Kaplan & Norton, 1992). Financial performance is based on variables that involve financial activities. Performance comprises both a behavioral and an outcome aspect. It is a multi-dimensional and dynamic concept. Performance is not defined by actions itself but by judgmental and evaluative processes (cf.Ilgen& Schneider, 1991; Motowidlo, Borman, & Schmit,1997).
Organizations need highly performing individuals in order to meet their goals, to deliver the products and services they are specialized in and to achieve competitive advantage. Preforming at a high level can be a source of satisfaction. Low performance and not reaching their goals might be experienced as a personal failure. Besides performance when recognized by others within an organization is often rewarded by financial and other benefits. Performance is among the major prerequisite for the future success in the market. Individual performance measures is a key variable in work and organizational psychology. Outcome aspect of performance is described as actions relevant for organizational goals which constitute performance. One need criteria for evaluating the degree to which an individual’s performance meets the organizational goals.
1.1.2 Challenges in Insurance
Although this area of knowledge has limited literature, various scholars have come up with challenges affecting insurance both local and globally. Insurers are thus required to better understand these challenges for their firms to survive. According to Bester (2017), today, the biggest challenge that the insurance industry faces is lack of skills. He suggests that in the insurance industry, there is a shortage of skilled staff which raises concern. According to IRA the insurance industry in Kenya as a whole continued to face a number of challenges which had an influence on attainment of further gains in growth. Some of the challenges include;
Premium rate undercutting; due to the high competition in the market most insurance companies have started charging premium below the market rate to attract clients to the company. This issue was addressed by the IRA which is the regulatory body whereby they appointed a committee to look various products in the market and to come up with the appropriate rate for each. This was to prevent underpricing which has caused most of the companies to be liquidated. Despite this some insurance companies has gone ahead and charged premium below the recommended rate.
Delays in premium collection and non compliance with cash and carry; before the introduction of this law in the market, service providers i.e. Brokers and Agents were not required to pay the premiums immediately upon issuance of the policy cover. They even had 90 days credit period upon which they were required to remit the premium. This was abused by some of the service providers which led to its review. Some service provided only used to remit the premium upon occurrence of the claim and others used to request the insurance companies to offset it from the claimed amount. This denied the company funds for investments and some companies collapsing e.g.United since the outflow exceeds the inflow.
Inappropriate staff skills; the industry lacks the adequate skilled personnel to run the industry. Most of those selling the insurance products lack the knowledge of what they are selling thus giving the prospect wrong information. This normally comes to be known when the client suffers a loss and they are either advised that the product they purchased is not adequate to compensate them. Since the members of the public cannot draw the line between the agents / brokers and insurance companies they ended up laying blame to the insurance company. This is a major contributor to low penetration of insurance in the country leading to low revenue collection.
Fraud has led to collapse of the some of the insurance companies. This is either perpetrated by both the employees and clients. This led to formation of a department by the IRA known as The Insurance Fraud Investigation Unit (IFIU) to tackle the vice. In 2015 the body reported that in the insurance firms lost Shs.324 million to fraud. They also indicated that since its formation 3 years ago 392 fraud cases had been recorded. In the same year, the motor insurance was hit hard with fraud in the sector amounting to Shs.43 million. Fraudulent by the policy holder was the highest at Shs.239 million followed by companies’ employees at Shs.20 million while the agents at Shs.18 million.
1.1.3 Concept of Insurance
Insurance works on the theory that a few of those exposed to the risk will suffer loss; the working of insurance is based on the creation of a common pool to which the many exposed to the risk contribute a small amount of money called premium and from which the few who suffer losses are compensated.( Murithi Kogi & Onuong’aMaragia).Insurance is a form of risk management which is used to protect against the risk of uncertainty of a loss occurring. An insurance policy is a contract between two parties (insurer and insured) where the insured transfers risks of financial loss to the insurer in exchange of them paying an undertaking in form of a premium to the insurer. When the contract is concluded, the insured receives a contract called an insurance policy which details the conditions and circumstances under which the insured will be financially compensated.
The money which is charged by the insurer to the insured for the coverage granted in the insurance policy is called the premium. If the insured suffers a loss which is covered under the insurance policy, the insured submits a claim to the insurer for dealing. An entity which provides insurance / sells insurance products is known as an insurer, insurance company, or insurance carrier. A person or entity who buys insurance products is known as an insured or policyholder. Insurance is governed by six principles; Principle of Insurable Interest, Principle of Utmost Good Faith, Principle of Proximate Cause, Principle of Indemnity, Principle of Contribution and Principle of Subrogation.
1.1.4 Insurance Companies in Kenya
Insurance companies are sellers off insurance policies in Kenya. There are 55 registered insurance companies in Kenya (ira.go.ke) The Kenyan insurance industry is regulated and supervised by the Insurance Regulatory Authority (IRA) which in its execution of mandate, should adhere to the core principles of objectivity, accountability and transparency. The IRA is called upon to promote not only compliance with the insurance Act and other legal requirements by insurance/ reinsurance companies and intermediaries but also to encourage sound business practices in the insurance business (IRA, 2014). Insurance companies are regulated in accordance with Insurance Act Cap 487 Laws of Kenya which was enacted to amend and consolidate the law relating to insurance, and to regulate the business of insurance and for connected purposes (kenyalaw.org)
Insurance companies in Kenya may be broadly categorized as specialist and composite companies. Specialist companies transact only one class of insurance business. For example Old Mutual and Pan Africa which transact only life / long term business. Composite companies are companies which sell several classes of insurance business. Most of the insurance companies in Kenya fall under this category. For example Jubilee Insurance Company and Kenindia Assurance Company sells General insurance business such as Fire, Theft, Marine, Motor as well as Health insurance.
1.1.5 Marine Insurance in Kenya
Globally, marine insurance is the oldest form of insurance. Marine insurance is described in the Insurance Act Cap 487 laws of Kenya as the business of effecting and carrying out contracts of insurance upon; hull, goods / merchandise on board the hull and liability arising out of the use of the vessels against maritime perils. A contract of marine insurance is defined as a contract whereby the insurer undertakes to indemnify the assured in manner and to the extent thereby agreed against marine losses (UK Marine Insurance Act, 1906). According to the Marine Cargo Surveillance 2nd Quarter Report of 2016 carried out by Oceanic Marine Surveyors Kenya Ltd, there were at least 35 insurance companies licensed to transact marine insurance business in Kenya.
The uptake of marine insurance uptake in Kenya generally low since the uptake of insurance services in the country has remained predominantly in the health and medical, motor insurance and fire classes (PWC Kenya, 2012). According to AKI (2013), the penetration of marine insurance has not only remained low but has recorded an alarming decline over the last five years compared to other classes of non-life insurance in the country. This makes the review of the challenges that affect marine insurance in the country a unique component of review. The marine insurance industry in Kenya was boosted by the announcement by the Treasury Cabinet Secretary Henry Rotich in June 8, 2016 budget speech that the Kenya Revenue Authority (KRA) will require importers to use the local insurers for marine insurance (Shah, 2016).The enactment of the section 20 of the Insurance Act Cap 487 passed beginning of 1st January 2017, requires all importers to have covers underwritten by local insurers which has opened opportunities for marine insurers to increase their revenue.
1.2 Statement of the Problem
The insurance industry globally has continued to face a myriad of challenges as compared to its counterparts, the pension and the banking industries. The sector especially in developing economies is said to be performing poorly due to exposure to many challenges compared to those in the developed economies (Amollo, 2015). Some scholars attribute these challenges to the insurance sector remaining undeveloped in most of these economies (Marsh, 2014). In Kenya, the insurance industry faces challenges such as; low consumer demand for insurance, premium rate undercutting, delays in collecting premiums and non compliance with cash and carry system, high cost and volume of settlement of claims, fraud, unskilled staff in some areas, low quality of intermediary services and customer retention and high competition in the industry all of which have a big influence on the firm’s ability to realize further gains in growth (IRA, 2013). However, literature does not precisely conclude on how these challenges influence the performance of the firms that practice insurance particularly marine insurance which makes the challenges that influence performance of marine insurance a unique component of review by this study.
Several international studies have been reviewed on this area of knowledge for instance; Myola (2008) assessed the factors affecting provision of quality insurance service in Tanzania and found that customers’ delivery, service quality and customer satisfaction affected insurance service in Tanzania. Lester (2011) examined the challenges affecting the insurance sector in the Middle East and North Africa (MENA) region and found that immature legal framework, claims fraud and legal constraints effected insurance penetration the MENA region. Nthenge (2012) evaluated the challenges facing the success of insurance services provision in Tanzania and established that fraud, regulatory factors, lack of strong market led initiatives, and poor insurance market structures are major impediments to insurance penetration.
Locally, Odemba (2013) examined the factors affecting uptake of life insurance in Kenya and established that lack of innovativeness, failure to adopt information technology and poor pricing of products were major impediments of insurance uptake in Kenya. Kiragu (2014) assessed the challenges facing insurance companies in building competitive advantage in Kenya and established that insurance firms were affected mostly by government regulations. Rono (2015) determined the challenges in the uptake of marine cargo insurance in Kenya and found challenges such as lack of knowledge and awareness of the benefits, negative perception, lack of effective regulations and lack of skilled staff.
Most of the studies reviewed above focused on other contexts other than the context of this study which is marine insurance companies in Kenya. In addition, the literature does not precisely conclude on how these challenges influence the performance of the firms that practice insurance particularly marine insurance which makes the challenges that influence performance of marine insurance a unique component of review by this study. This brings a gap in knowledge that this study seeks to bridge through answering the question what are the challenges that influence performance of marine insurance companies in Kenya?
1.3 Research Objectives
i. To determine the challenges affecting the performance of marine insurance in Kenya,
ii. To determine possible solutions to the challenges faced by marine insurance in Kenya.
1.4 Value of the Study
The study findings will be of great significance to researchers and academician, as it will contribute to both theoretical and practical knowledge on the challenges that influence performance of marine insurance. The study will also act as the basis for future research on the challenges that influence performance of marine insurance in Kenya. By this the researchers will be able to come up with new products which will meet needs of customers. For an organization to survive it must ensure that it adopts the current trends in the market as the world is changing very fast due to technology. The study will help in identifying the changes that the customers they want to be incorporated in the marine products.
The study will also be of value to marine insurers in that the findings will shed more light on the challenges that influence performance of marine insurance thus enable firms that practice marine insurance to know the kind of challenges they are likely to experience or are exposed to thus put measures in place measures to reduce or eliminate the challenges which will enhance their survival and growth. In addition, it will help in guiding the customers in areas of weaknesses so that they can make profit. The main purpose of an organization is to make profit for their directors and shareholders.
The findings of the study will also be significant to the regulators and policy makers of the insurance industry through enlightening them to set marine insurance policies that are effective in ensuring the firms that practice marine insurance enhance their performance which will in turn improve the performance of the sector and the economy at large. The regulators will be able to enlighten members of the public on areas which poses many challenges and also be able to simplify its wordings to enhance ease of interpretation of the policy. It may also help in identify the areas which can enhance revenue collection.
CHAPTER ONE: INTRODUCTION