The Treasury is considering compensating victims of collapsed insurance companies based on the classes of insurance policies that they have taken, marking a departure from the current system which caps the payout on a single claim at Sh500,000.
For some policyholders, particularly businesses, the Sh500,000 maximum compensation is less than the premiums they pay to insurers per year. This means that they face major losses when their insurance service provider goes under.
Treasury Cabinet Secretary John Mbadi said the differentiated compensation plan is informed by the different risks, claim patterns and policies offered in various classes of insurance business. The Policyholder Compensation Fund (PCF) collects more than Sh1.3 billion annually from insurers which pay 0.5 percent of their total premiums. The fund had accumulated a surplus of Sh4.36 billion as of June 2025.
“As we celebrate this milestone, it's also important to recognise the insurance market is diverse with different classes of insurance, presenting varying risks, profiles, claim patterns, and policy all the needs,” Mr Mbadi told chief executives of insurance companies and other industry stakeholders during the official launch of the revised policyholder compensation threshold of Sh500,000 per claim in Nairobi on Tuesday.
The maximum payout per claim was raised from the previous Sh250,000, with the government saying there are plans to introduce a dynamic compensation system in the future.
“Going forward, the National Treasury will work closely with the policyholder compensation fund, the IRA to explore whether this compensation framework should evolve to effect these differences," Mr Mbadi said in the speech read on his behalf by the Insurance Regulatory Authority (IRA) chief executive Godfrey Kiptum.
According to the Treasury the proposed payment plan would ensure that the compensation framework remains balanced, sustainable and responsive to market realities.
“In particular, we wish to consider the appropriateness of applying the contractual compensation limits across various classes of insurance. Such an approach should ensure that the compensation framework remains balanced, sustainable and responsive to the market realities while continuing to uphold the fundamental objective of protecting policy holders and maintaining confidence in the sector,” Mr Mbadi said.
PCF revised the maximum compensation limit for policyholders of failed insurance from Sh250,000 to Sh500,000 effective January 23, 2026 to instill confidence in the insurance industry rocked by a rising wave of corporate failures.
The enhanced compensation threshold will apply to policyholders and claimants of insurers that are placed under statutory management or whose licences are cancelled under the Insurance Act.
“This adjustment represents a deliberate policy intervention to strengthen the statutory safety net for insurance consumers in circumstances where insurers are unable to meet their obligations,” said PCF.
Insurance businesses are primarily divided into long-term (life) insurance and short term (general) insurance. Long-term insurance covers life-related risks, while the general business covers assets and liability.
Key covers in the two insurance businesses include motor, fire, marine, medical/health, life assurance, and personal accident.
The National Treasury and Economic Planning Cabinet Secretary John Mbadi.
Photo credit: Francis Nderitu | Nation Media Group
Mr Mbadi said the government remains committed to strengthening the ecosystem and will continue to support reforms aimed at deepening insurance penetration, leveraging digital technologies to reach the underserved population.
The insurance industry in Kenya is characterised by a low penetration rate and numerous providers, making it highly competitive.
The penetration rate has however stuck below three percent which is significantly below the global average of 7.2 percent.
IRA attributes the low penetration rate to various factors including, a poor saving culture, low levels of disposable income and negative perception towards insurance.
The negative perception particularly has led to many Kenyans viewing insurance as a non-essential thus allocating negligible amounts of their income to insurance and pension schemes, according to a report by NCBA Bank.
Kenya's population is estimated at 56.4 million, with a median age of 19.8 years and by 2050, it is projected to reach 85 million, with the demographic shift presenting significant growth opportunities for insurance providers, particularly in life insurance and savings plans.
