Unpaid claims land insurer class action court battle

Policyholders have filed a multi-million shilling class action suit against an insurer they accuse of refusing to pay claims in time, opening a new battlefront in an industry where growth has remained flat in the past 24 months.

The suit against motor vehicle underwriter Blue Shield is the first of its kind in Kenya and opens a new chapter in a fragile market that has recently been hit by stagnation and a steep rise in the number of claims.

People familiar with the industry said failure to settle claims is symptomatic of the liquidity crisis that the underwriters have been facing since the stock market crashed in early 2008 closing an important revenue artery that kept them afloat.

In a suit filed through Nairobi law firm, Ahmednasir, Abdikadir & Company Advocates, Blue Shield’s clients want the company wound up on grounds that it cannot meet its obligations in the marketplace.

When the case goes before court on May 21, Blue Shield is expected to face hundreds of plaintiffs who have been building up their numbers by inviting more of the company’s disgruntled customers to join the suit.

Industry players say the suit, filed by Samuel Otieno, risks eroding public confidence in insurance firms that have been struggling to shrug off the negative image left by the recent collapse of some players in a row.

The action reflects the challenge insurance companies are facing in settling their claims, especially after the stock market was hit by a prolonged bear run that wiped out the value of equity investments tacked away for such eventualities.

The suit against Blue Shield marks yet another signal of the level of risk that motor insurers face in the Kenyan market coming after last year’s collapse of Standard Assurance.

Other insurers in the same line of business — Access, Stallion, Lakestar and United have collapsed with billions of shillings in unpaid claims that the underwriters blame on high level fraud.

Two weeks ago Invesco Insurance was lifted from receivership after Matatu Owners Association acquired an 80 per cent stake in the company.

Invesco has more than 4,000 unpaid claims it wants vetted for fraud before payments are made.

Sector regulator, the Insurance Regulatory Authority (IRA), says the suit reflects the steep rise in the number of consumer complaints it has received on delayed settlement of claims.

Last month, IRA confirmed that complaints over delayed payment of claims had shot up sharply in the past six months, but fell short of publishing the figures.

The Insurance Act law requires that all approved insurance claims be paid within three months, and empowers the IRA to charge underwriters a penalty of five per cent on the outstanding amounts.

Inability to pay claims and accrued interest are among the grounds that can be used to petition the courts to wind up an insurance company.

“There has been an increase in the number of complaints in the last six months,” said Noella Mutanda, the head of corporate communications at IRA.

Closely monitoring

Ms Mutanda said the authority was closely monitoring the worsening claims payment position in the industry and will act “to protect policy holders.”

Kennedy Gichimu, who heads the Association of Kenya Independent Insurance Agents, the group that makes the first line of contact between underwriters and clients, said settlement of claims has become an industry problem that needs to be resolved.

“The liquidity problem is huge for some companies. It has forced a number of underwriters to send agents to scout for premiums at matatu termini for money to settle the claims,” he said.

Mr Otieno, represented by Ahmednasir, Abdikadir & Company Advocates, alleges Blue Shield has been unable to pay him claims arising from a motor vehicle related issue.

The law firm admits that the amount involved is modest but insists inability to settle the claim signals the gravity of the situation.

“It is a serious issue because it means the company is bankrupt,” said a lawyer with the company who is handling the matter. “Blue Shield refused to respond to our demand note to pay claims and ignored us when we told them we were planning to take this action,” he said.

Blue Shield is listed as the fifth largest insurer in Kenya based on gross premiums of Sh2.2 billion and an asset base of Sh3.1 billion in 2008.

It made an underwriting profit of Sh188 million in the same year even as the gross written premiums declined from Sh2.27 billion 2007, eroding its market share from 6.9 per cent to 5.9 per cent.

Blue Shield managing director, Patrick Wanjala, was said to be in meetings and could not be reached for comment.

Some insurers say the pile up in the number of claims is already building up pressure for higher commissions and larger discounts on policies to attract new customers for improved cash flows.

That money from new premiums is being used to settle claims puts the insurers in a vicious cycle that only parallels the recent on-goings in the stock market where a liquidity crunch forced stockbrokers to trade in client’s money leading to their collapse.

Some analysts attribute the liquidity problems facing insurers to their dependence on investment income to pay their claims rather than using their net premium income to do so.

Insurers fear that the suit could strike a major confidence blow on Kenya’s nascent insurance industry that remains small compared to other facets of the financial sector such as banking, micro finance and the capital markets.

Industry’s profit

The entire industry’s profit before taxation in 2008 was Sh1.6 billion compared to pre-tax profit of the Kenya Commercial Bank for the first nine months of 2009 of Sh4.9 billion.

The surge in unpaid claims also undermines the positive outlook for the industry that the sector’s lobby has been pitching since the year began.

“We see 2010 as the beginning of a defining decade in terms of the development and strengthening of the insurance industry,” said Association of Kenya Insurers chairman Nelson Kuria.

High risk and delays in settlement of claims that Kenyans associate with the insurance industry has been blamed for the slow uptake of policies in the country.

IRA said it has started scrutinising insurance companies for their ability to pay claims -- a move that represents a big win for consumers frustrated by delayed payments.

Last week, the authority formed two supervision teams with the mandate of ensuring that insurers keep up to speed with claims settlement.