Homes pay Sh38bn for non-existent insurance policies

Businesses, individuals and households have spent Sh38.1 billion on non-existent insurance covers following delays in remitting premiums to insurers, exposing the customers to heavy losses when they make compensation claims.

The delays have resulted from brokers, agents and banks failing to wire premiums to insurance firms covering the risks.

Latest data from the Insurance Regulatory Authority (IRA) shows outstanding premiums increased 6.7 percent to Sh38.1 billion last year as the coronavirus pandemic affected cash flows of insurance intermediaries.

Insurance firms have also been blamed for delaying payments to reinsurance firms, who assist in settling a share of larger and riskier claims.

This means that the risks worth hundreds of billions of shillings are not recognised under the “cash and carry” principle, which stipulates that if an insured party suffers loss before the premium is remitted to the insurer then the insured cannot be compensated.

The unremitted premiums had dropped from Sh44.3 billion in 2018 to Sh35.7 billion in 2019 amid threats from the IRA to deny market players operating permits for breach.

The insurance regulator raised the red flag at the height of the Covid-19 crisis, fearing a rise in delays by the intermediaries in submitting premiums.

“Insurers are advised to set measures to support insurance agents and brokers in the current difficult business conditions brought about by the Covid-19 pandemic by paying commissions immediately the business is transacted and in accordance with the provisions of the insurance act,” Godfrey Kiptum, the IRA chief executive, said in a public notice last year.

The Sh38.1 billion is equivalent to 16.3 percent of the Sh232.9 billion gross premiums that Kenya’s insurance firms underwrote last year.

Outstanding premiums have escalated over the years from Sh26 billion in 2014, Sh29 billion in 2015, Sh34.5 billion in 2016, Sh37 billon in 2017 and Sh43 billion in 2018.

In 2019 the regulator warned brokers that it would not renew licences for failure to remit premiums, which helped cut delayed submissions to Sh35.7 billion.

At the beginning of last year, the regulator denied more than a third of insurance brokerage firms or 80 companies operating licences for failing to remit outstanding premiums owed to underwriters.

The economic fallout that followed the pandemic seems to have escalated delays while exposing policy holders to risks.

Industry players have been trading accusations over who is to blame even when businesses, individuals and households are making timely premium payments.

The regulator said in previous disclosures that brokers were holding Sh14.8 billion, insurance agents Sh11.8 billion, insurers Sh8.1 billion and reinsurers Sh9.4 billion of the outstanding premiums in 2018.

The Insurance Act was amended effective July last year, barring brokers from handling cash on behalf of insurers.

However, the brokers received a temporary court injunction allowing them to continue receiving the premiums until the dispute is determined.

Defending the law change, the sector regulator says brokers were exposing customers to heavy losses besides weakening the financial stability of insurers by failing to remit the premiums collected.

Mr Kiptum argues that brokers should only earn commissions for their work and drop their interest in premiums collection.

The brokers say the law empowers the regulator to deregister and cancel licences for errant brokers, and that IRA is at fault over the mounting unpaid premiums.

The Association of Insurance Brokers Kenya (AIBK) chief executive Eliud Adiedo said there was no justification for punishing all brokers for the fault of a few rogue players.