Implementation of the risk-based capital (RBC) requirements, which set guidelines for how much capital an insurance company in Kenya has to have to be in business, is underway.
APA Insurance CEO Ashok Shah discusses how the new rules will affect his and other companies, why they are pushing for higher premiums and suggestions for banking-type consolidation in the insurance industry.
Do you think there is a race to the bottom in the insurance industry that has pushed a lot of companies into losses?
Like all businesses, market share is important. The insurance industry is no different. All of us want to have a larger market share. Unlike many industries, where you have dominant players, the insurance industry is very fragmented. For this reason all want to get a higher market share and try to become a dominant player. The easiest way to do this is to write more premium. Since all of us are trying to get a larger top line, we are busy undercutting our competitors. Who then, to conserve their business, reduce the premiums further. The premiums get lower and unecnomical, so most of us have big underwriting losses.
Why are insurers so desperate to increase premiums for motor vehicles?
It is not desperation, we are now trying to come to reality. We have reduced motor premiums to the bare minimum. Due to this, almost all of us are showing large losses. The whole industry had a loss of over Sh6 billion in 2021. We cannot keep on losing money. Thus many of us have increased the rates and others are following. At APA we are rewarding good drivers and offering budgeted premiums for all through our Bima Bamba cover.
Is that the reason some cars now attract higher premium than other cars?
Not really! Every company has its 'no list'. The reason some are rated higher are many, but the main one is the cost of repairs. When a model or brand has expensive repair cost or is being used for other purposes than it was insured for we go for stricter underwriting. You may have seen the vehicles carrying miraa going at break-neck speed. They get into more accidents.
Another phenomenon is that a lot of customers insure a vehicle as a private car for own personal use. However, they then hire the car out to others when they don't use it. When an accident happens in such circumstances, insurers will decline a claim as the use was different. We, therefore, stop insuring these or charge higher rates. Our clients are encouraged to insure properly and declare the actual use.
How do you see the risk-based capital requirements affecting you as a company?
Risk-based capital (RBC) is a very important aspect of how the capital requirement of every company is determined. It should put every company on a level playing field. The RBC sets guidelines of how much capital each company has to have to be in business and safeguard their clients. It takes into account, the type of business an insurer does, its investments, the reinsurance arrangement, the outstanding premiums and claims and other measurable parameters. The regulations require that once this is worked out, you must have 200 percent of the assets above the minimum capital required (MCR). Our boards require that we must meet these requirements fully. Our MCR is well above the 200 percent.
How is the industry responding to the poor performance of the stock market?
I am not sure if all companies do invest in the equities quoted on the stock exchange. For those who do, the fall in the stock prices will create some strain. We have a portfolio and we are constantly monitoring it. We have seen some gains recently and this has improved the position.
A lot of insurance companies are unable to pay claims, do you think it is time for a forced consolidation like it happened in the banking sector?
We hear that many companies are delaying paying claims. There may be others who may not be paying the claims. Fortunately, we at APA take pride in paying our claims as soon as all required documentation is finalised. On the matter of consolidation, as happened in the banking sector, that may be a difficult step, as the companies may be carrying unknown liabilities. In the banks, it was depositors who benefited from some security of their depositors. In insurance the liabilities are from third parties who have been affected by negligent action of an insured. Many will be subject to court actions. So the liabilities are not always known. Therefore a consolidation of insurance companies is not as easy.
There have been delays in fully implementing new risk-based capital adequacy requirements, do you think now that we have a new government that will be enforced?
This is an area that is handled by the IRA [Insurance Regulatory Authority] board. It's a major requirement for managing the insurance sector and indeed becomes the strongest measure for a strong insurance sector. This area, hopefully, will be supported fully by the current government.
Is APA Insurance interested in mergers and acquisition opportunities once the new regulations on capital are enforced?
We are very interested in looking at good opportunities that may be available. If such opportunities come across, we will be looking at them seriously.