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Kenyan Insurance’s Blind Item

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Do you read gossip websites? Every so often, they will have a “blind item” post where they will detail the scurrilous goings-on in a celebrity’s life, but will not name the star for fear of being sued. That could be the same reasoning behind an article that appeared in the Daily Nation over the weekend.

Apparently, yet another insurer is going to go bust, but the Nation is being very coy over which it might be. Maybe one of the NMG directors has shares in the failing business or something. The identity of the firm is an open secret to those in the know, but for ordinary consumers, the next few months could bring a unwelcome surprise, and the premiums they have been paying may all be for naught.

Not very long ago, I said that the Kenyan insurance sector gave me “the impression of an industry in disarray,” and these latests developments don’t give me much incentive to change my opinion. The Insurance REgulatory Authority (IRA) may be monitoring the situation, but as it has not taken action to suspend the company’s licence or to force it into administration, one can only guess that they are happy – for the moment – to let the company continue signing up new customers, regardless of future consequences.

And this is another reason why I don’t believe that confidence will be restored to the Kenyan market any time soon. One of the first things a business student learns is the law of supply and demand. At its most basic, the perfect market is assumed to be entirely logical, with all parties having the same information. It is only later that uncertainties are introduced to economic theory. In reality, there is asymmetic information, usually in a seller’s favour: they will know more about the state of the market and the cost of production than any buyer.

While it is understandable that other insurers do not want to cause a panic in their industry sector, it could be argued that the refusal to name the struggling firm is a form of market manipulation. All the other insurers know the identity of the struggling company; they are receiving job applications from the firm’s employees, they know their competitor is bouncing cheques. The industry regulator is apparently keeping an eye on things, but does nothing. Were customers to be similarly informed, they could take action to protect themselves. As it is, they can merely sit and wait.

I can only contrast this with the events in the UK that lead to the eventual government-sanctioned takeover of the Halifax Bank of Scotland (HBOS) by Lloyds TSB. Rumours had been flying for weeks that the bank was in trouble. This was reported not just amongst FTSE firms and investors by the national press. Eventually, forced to confront reality, the HBOS board admitted they were done for and agreed to take whatever action necessary to save themselves and their shareholders. Yes, it was very messy; yes, it disrupted the London stock market; and yes, perhaps they could have agreed better terms in private. The fact reamins though, that they were forced into action by a vibrant and open market that refused to be taken for a fool.

In dealing with the newest intensive-care victim of Kenya’s financial crisis, we can only hope that the insurance industry and its regulator do not take so long in rectifying the situation that they cause more harm than they hope to prevent.

[Image by Ptufts]


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