Medical claims paid out by insurance companies shot up by nearly 45 per cent last year, resulting in the class slipping back to underwriting losses.
Data from the Insurance Regulatory Authority (IRA) shows that Sh12.3 billion was paid out in claims for covers up from Sh9 billion in 2013 in what insiders said was due to fraud and high healthcare costs, with some hospitals reviewing their prices twice last year.
Independent observers also said undercutting or lowering of premiums to increase business was another factor in the losses.
Due to the high claims, the IRA said, the class recorded an underwriting loss of Sh437 million down from a profit of Sh282 million the previous year.
“The losses are contributed by high healthcare costs and medical claims including fraudulent ones. Fraud is a concern,” said Tom Gichuhi, chief executive of industry lobby Association of Kenya Insurers.
Eleven of the 20 companies offering medical insurance recorded losses from the line of business.
Underwriting profits are calculated by deducting claims paid out and administrative expenses incurred to manage a portfolio from the premiums collected.
CIC Insurance recorded the largest loss of Sh620 million. The listed insurer collected premium of Sh3 billion under the medical business and incurred claims of Sh2.9 billion with the other expenses being administrative.
Last year, the firm hired Edward Rukwaro, a doctor, to help it turn around from a Sh294 million loss made by the medical division. Attempts to contact CIC chief executive Tom Gitogo were not successful by press time.
Other insurers who recorded underwriting losses from medical business include Resolution Insurance Kenya and APA Insurance.
“Last year, the hospital rates went up twice and that is a challenge because...we cannot review the premiums twice,” said Peter Nduati, chief executive of Resolution Insurance.
He also noted that there was massive undercutting in the medical business, especially for company covers.
Market observers, however, pointed at the sector’s drive for expansion and lowering of premiums as other causes of problems bedevilling the medical underwriters.
“Because of competition some of them may have lowered the underwriting standards through such things as lowering of premiums and expansion of benefits,” said Isaac Ngaru, managing partner at consultancy firm Ngaru and Associates.
Undercutting or pricing of services at a lower price so as to book business was cited as a major concern by insurers last year, especially in group medical insurance.
An insurance executive confided in the Business Daily that his company had recently lost a client whom it was charging a premium of Sh42 million but a competitor undercut it by quoting Sh34 million.
Mr Ngaru said the medical division was enjoying fast growth which was not being accompanied by equivalent investment in risk management initiatives by the insurance companies.
Medical cover is gaining popularity as employers include it in remuneration packages to retain staff and insurers structure new products that are affordable to persons at the bottom of the pyramid.
According to FinAccess National Survey 2013, the number of people with access to private insurance cover doubled in the four years from 2009 to 1.5 million.
Last year, medical premiums were 25.2 per cent of general insurance up from 24.2 per cent in 2013.
High claims, which constituted a third of the total general business claims, have however cast a dark shadow over the industry.
None of the general insurers have released their full year results for 2014.