Competition in the Financial Services Sector: A Case of Kenyan Annuities Market

Abstract

Competition in the financial services sector influences information, allocation and cost efficiency. The annuity market segment of insurance companies is particularly important as it is characterized by “entry and permanent lock in” of consumers to the firms thus creating permanent contractual claims. This study examines the annuity industry in Kenya using the Structure Conduct Performance (SCP) paradigm and sought to determine the market concentration, provide a behavioral explanation of how firms acquire and sustain market power and establish how the concentration affects conduct and performance of the annuity providers in Kenya. A mixed design is applied where secondary data is collected from the 8 firms offering annuity products in Kenya between 2009 and 2011. Focus group discussions are then conducted with key industry informants to explain the results. Market concentration is measured using the concentration ratio (C4) and the Herfindahl-Hirschman Index (HHI). An SCP model for the annuity market segment is then conceptualized. The findings point to a highly concentrated industry with HHI indices averaging 98% in the three years to 2011. Evidence generated shows that market power in the market is enabled by regulation, irreversible long term nature of the products, collusion between pension administrators and the players, lack of close substitutes to annuities and absence of differentiation – factors which have led to tendency for mergers and strategic partnerships, low returns for the annuitants, information asymmetry, low bargaining power of the consumers, diseconomies of scale and lack of innovation. The study recommends some policy implications to minimize the abuse of dominant positions by firms.