Insurance firms have no right to determine premium prices

For the umpteenth time, I say general insurers have it too easy. The Ombudsman was spot on. In fact, I wasn’t surprised by the High Court’s decision to quash the ‘Motor Insurance Underwriting Guidelines’ of 2009 issued by the Insurance Regulatory Authority (IRA).

It was such a touch-and-go decision for the court. In the defence of its circular, I didn’t think IRA’s arguments would hold. We do have a problem in the general insurance industry — but I don’t think setting premium floors will solve some of those problems.

But why did the IRA just target motor vehicle insurance?

The IRA, in its response to Ombudsman’s suit, cited the fact that private motor vehicle insurers were bleeding money. Please. So then can the same decision premise be extended to other loss-making business classes? For instance, most medical insurers still lost money in 2016.

And since this is another business category that is dotted with poor quality underwriting, shall we say that it also needs a premium pricing floor? Another critical question is: did the premium floors ever deliver the desired results for the motor vehicle business? No they didn’t.

And here’s why: while the regulator was addressing price undercutting, they forgot that underwriting sloppiness was even more ubiquitous. Underwriting sloppiness, which is essentially biting more than the mouth can chew, is quite visible, for instance, in the elevated claims ratios for motor vehicle insurance — which, by the close of 2015, had climbed to 64 per cent.

Essentially, insurance premium ‘stickiness’ has been declining by the day and general insurance is almost like a revolving door. And this decline in premium stickiness (of course occasioned by sloppy underwriting) has proved even more ruinous, in my view.

Motor vehicle insurers are still unable to make money. In fact, between 2009 and 2016, motor vehicle insurance class recorded a net underwriting loss of Sh2.1 billion; with 2015 being the worst year for this business class, when the net underwriting loss stood at Sh2.4 billion.

This is not a typo. If you plug in overheads, the figure is probably uglier. The court, in my view, made the right call in annulling the circular.

Here’s why: first, the circular has failed to achieve the desired result.

Second, the advent of risk-based supervision should be able to take care of industry malpractices, such as price under-cuttings.

Risk-based supervision fills two key holes: first, they ensure that an insurance firm is warehousing capital commensurate with its risk profile. This eliminates unnecessary risk-taking as poor quality underwriting and improper pricings will all be reflected in capital gaps.

Second, the regulator, by setting what it calls the Prescribed Capital Requirement, has the final say on the amount of capital an underwriter should hold. Insurers are already having it too easy by the way: motor vehicle third party liability insurance is mandatory by law, which has continued to ensure they don’t sweat it out.

And now, it is mandatory for importers to buy insurance onshore, which has provided some epiphany moment for insurers—and all over sudden there is a flurry of marine insurance offerings as if they couldn’t do it before the directive.

And then we had the premium floors. What’s next? Maybe we now need to declare personal accident insurance mandatory in Kenya.