What should we expect from regulation of Index Insurance in Kenya?

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Interview with Adriaan Rowan – Main author of policy framework for Index Insurance in Kenya

Can you give us some examples of key trade-offs that you have faced when providing technical support to the overarching policy discussion on regulation of index insurance in Kenya?

  • The first trade-off that we have faced was in the definition of insurable interest. In the law of insurance, the insured must have an interest in the subject matter of his or her policy, or such policy will be regarded as a form of gambling. However, in Kenya most farmers do not own their land as they work on communal farms or as wage laborers. We therefore decided in our policy framework to define the insurable interest as wide as possible, and indicated that in order to be eligible, policyholders should only have to show that the occurrence of the risk would be “adverse to their interest”. This is probably the best way to avoid gambling while at the same time allowing landless farmers to have access to insurance.
  • The other key trade-off is between market development and consumer protection. We have thought about including in the regulation a requirement for insurers to compensate farmers for basis risk, which is when they incur agriculture losses without receiving payouts. However, we have decided against such regulations for now as we have considered that this could expose insurers to significant unexpected expenses and would hinder market development. Alternatively, we have decided to introduce strong customer protection safeguards to make sure that clients are fully informed of product features.

What is the impact that we should expect from the regulation of index insurance in Kenya?

  • First of all let me state that one should not expect regulation to solve index insurance challenges overnight! Index insurance development currently faces a variety of demand-side challenges - such as lack of understanding, lack of insurance culture, lack of trust and lack of liquidity -  and also some supply-side challenges such as the lack of data and capacity for insurers to develop products in a profitable way. I believe that adequate regulation can solve some of these issues.
  • On the demand-side, I believe that index insurance regulation will help create trust between insurance companies and customers.
  • On the supply-side, I believe that once index insurance is officially allowed – and not only tolerated on an exemption basis for donor-supported projects – insurance companies will have the ability to develop index insurance products for large scale commercial farmers. Once market is developed for large scale farmers, it will be easier for insurance companies to target subsistence farmers.

Also read, An Interview with Michael Mbaka – Senior Project Manager, Financial Sector Deepening Trust