The insurance markets regulator has put three companies on notice for involvement in practices that undercut rivals on the pricing of premiums, exposing the extent of the vice, which pushed 12 insurers into undewriting losses last year.
In a report released early this month, the Insurance Regulatory Authority (IRA) has directed Corporate Insurance, First Assurance and Monarch Insurance to stop charging lower than the approved minimum premiums for insurance policies or face action.
IRA chief executive Sammy Makove says in the 2013 annual report that the agency has written to the three firms warning them against undercutting.
The IRA says the practice of undercutting – charging lower than set premiums – is becoming rampant and poses a serious threat to the profitability and attractiveness of Kenya’s insurance sector.
Increased competition in the industry has forced some insurance companies to resort to undercutting as a strategy to woo customers and increase the uptake of their products.
Premium undercutting results in revenue loss that weakens the insurers’ ability to settle claims promptly, ultimately eroding business confidence and entrenching negative perception of the insurance industry among consumers.
The three insurance firms Tuesday denied involvement in undercutting and maintained that the regulator had not communicated the finding to them.
Mark Obuya, the chief executive of Corporate Insurance, defended his company from any claims of undercutting, insisting that the underwriter plays by industry rules.
“We have not engaged in undercutting. We did not win any new accounts last year so I don’t understand how we would have engaged in undercutting,” Mr Obuya said.
Stephen Githiga, the managing director of First Assurance, said he was not aware of any allegations of undercutting while the general manager at Monarch David Maranga said the IRA report was not correct, terming the listing as an error.
A study by the IRA ranks premium rate undercutting as posing the highest risk to the insurance industry followed by claims settlement, delays in premium collection, lack of qualified staff such as actuaries and fraud investigators.
The IRA polled 34 chief executives of insurance firms who placed undercutting as the most serious concern for the industry at 23 per cent ahead of claims settlement (nine per cent), premium collection (nine per cent), staffing (seven per cent), fraud (seven per cent) and inadequate intermediary services (seven per cent).
“Price undercutting was explained in terms of stiff competition leading to predatory pricing. This can threaten the stability of the industry if the prices go below the optimum level,” says the IRA study titled 2013 Kenya Insurance Industry Outlook.
The IRA has set the minimum premium rate for private motor vehicles at four per cent while that for public service vehicles such as matatus and buses is fixed at 7.5 per cent of the car’s value.
The regulator allows companies to practise ‘no claims bonus’ where motorists receive discounts on their car insurance premiums for not making any claims over a period of time.
For burglary and house breaking, the premium rate is 0.1 per cent of the total value, plus 0.5 per cent without first loss while that with first loss has to add one per cent on top of 0.1 per cent.
In case of fire in boarding schools and hostels as well as airports, airfields and hangers the minimum premium rate is 0.25 per cent, clubs and discotheques is 0.3 per cent while grass, papyrus, makuti and banana fibre-thatched buildings is set at 0.6 per cent.
“Setting minimum premiums chargeable for certain classes of business reduces undercutting and unfair competition,” says a brief by analysts at Standard Investment Bank on Kenya’s insurance industry.
However, there are no prescribed penalties for those engaging in the unfair business practice of undercutting.
The Association of Kenya Insurers (AKI) – the industry lobby for Kenya’s 48 insurance companies – said the proposed shift to a risk-based capital regime for underwriters will help curb the practice.
“The new regime will be self-regulating as players with loss-making classes will be forced to inject more capital to cover such risks. This will curb undercutting as companies will have to competitively price their products,” said Tom Gichuhi, executive director at AKI.
The planned changes are contained in a new Bill meant to overhaul the Insurance Act and protect consumers against adverse developments. A key plank of the Bill is the proposal to tie capital requirements of insurance companies to the risks underwritten.
The widespread practice of quoting policies below market prices saw the number of insurance firms recording losses from policies grow by a third to 12 compared to nine companies in 2012.
The dozen insurance firms made underwriting losses totalling Sh721.0 million – meaning they paid out more in claims and expenses than premiums collected.
This means the insurance companies relied on income from investments in the stock market, bonds, unit-linked funds and pension funds to offset the underwriting losses and generate profits to shareholders.
Interestingly, the three insurers accused of pricing their premiums below set minimum rates posted underwriting profits as well as growth in overall earnings.
First Assurance earned an underwriting income of Sh160 million, Corporate Insurance Sh9.6 million and Monarch Insurance Sh82,000 in the year to December 2013, according to data from the IRA.
Directline Assurance posted the largest underwriting loss at Sh158.8 million followed by Cannon Assurance (Sh126.4 million), AMACO (Sh76.9 million), Invesco (Sh74.8 million) and Phoenix of East Africa Assurance (Sh57.1 million).
Other insurance firms which found themselves in the red were Trident with Sh50.2 million underwriting loss, Saham Assurance (Sh47.1 million), Takaful (Sh44.8 million), AAR (Sh31.3 million), Gateway (Sh23.7 million), Intra Africa Assurance (Sh18.6 million) and Madison (Sh11.4 million).
These companies were largely weighed down by losses in the private motor insurance category totalling Sh693.8 million last year — the second year running after returning an underwriting profit in 2011.