Commission payouts to agents and brokers have burst the set legal limit as Kenyan insurers scrambled to win a larger market share, risking the sustainability of their businesses.
The Insurance Regulatory Authority (IRA) has revealed that several insurers are locked in a costly race to sell general and life insurance covers by offering big commissions to the agents and brokers to take business to their firms.
The practice is in breach of the insurance rules banning such excessive commissions which have the potential to drive up operating expenses and eat into cash reserves, undermining the insurers' ability to make profits.
IRA commissioner Godfrey Kiptum has issued a circular to insurers, warning of penalties to culprits. This is even as the financial results of many insurers showed deteriorating underwriting performance that has left them depending on investment income for profitability.
Mr Kiptum has informed insurers that any secret payment in the form of override commissions, administration fees, profit shares, or under any other name that is in excess of the limits prescribed under the Insurance Act is illegal.
“The Authority has noted with concern that some insurers are still paying commissions in excess of the amounts prescribed under the Insurance Act,” said Mr Kiptum in a circular to insurers and intermediaries dated March 20.
“Any payment to intermediaries in the form of override commissions, administration fees, profit share or under any other name which is in excess of the limits prescribed under the Insurance Act is illegal...Any person found paying commissions above the prescribed limits shall be liable to sanctions as provided for under the Insurance Act.”
Insurance brokers and agents earn income by receiving a commission from the insurance company for each policy they sell or renew.
Excess commissions can be seen as a form of unfair competition or a way to attract business through artificial means, especially when chasing after big business from corporations.
Sections 74 and 75 of the Insurance Act obligate insurers to only charge premium rates as per the manual filed with the IRA. However, many insurers are increasing commission rates beyond the approved rates to outbid rivals.
“No insurer shall, in respect of Kenya business, pay to a broker or agent as brokerage commission, any sum in excess of the amounts prescribed for or in respect of each prescribed class of business placed by that broker or agent with that insurer,” states the Act.
“A person who contravenes any of the provisions of this section shall be guilty of an offence and liable to a fine not exceeding Sh200,000.”
The insurance regulations set a maximum limit of commissions as a percentage of premiums. For example, under short-term insurance, the maximum commission under medical, theft, motor vehicle, and aviation is 10 percent of the premium, and 20 percent under engineering, domestic fire, and personal accident insurance. The highest permissible commission under short-term business is industrial fire (25 percent).
Under the life business, the maximum rates of commission range between one percent and 50 percent in the first year and then fall over time to as low as five percent depending on the type of product.
Commissions under direct insurance business rose by 23 percent to Sh17.03 billion in 2023 from Sh13.84 billion in the previous years, marking a faster rise than the 16.7 percent increase in gross premium income to Sh361.36 billion from Sh309.72 billion.
Some insurers said without wanting to go on record that their rivals are using generous commissions to gain an advantage over them in a market that is also experiencing price undercutting—a practice where insurers offer customers prices that are out of touch with the level of risk.
The regulator is concerned that generous commissions to intermediaries and discounted premiums to customers would compromise the sustainability of industry businesses.
Usually, many insurers spend about three years to recoup the costs of onboarding customers for products such as life covers. However, excessive discounts mean that insurers stand to take a much longer time before starting to generate a return from such covers.
IRA said it will step up investigations, even as it reminded external auditors to check this as part of their audit process and report on the same.
Kenya’s insurance market challenge mirrors what is happening in Tanzania where the regulator in January this year warned of sanctions against insurers paying excess commissions and undercutting premiums.
“The Authority [Tanzania Insurance Regulatory Authority] has observed with great concern that some insurance registrants are exceeding the prescribed commission limits set by the Authority and continue to charge premiums below the minimum rates prescribed,” Tanzania’s insurance regulator said in a January 13, 2025, circular.
