Ideas & Debate

Murky world of brokers and insurance premiums

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Two weeks ago, I purported to give the other side of the story in a series that I started in October this year about the insurance industry and its long-suffering “grudge” consumers.

I had spoken to industry veterans to get their perspective on why the insurance industry is as adored by its clients. Or not. But now it is starting to look like I walked into the wrong ballroom at the InterContinental Hotel and accidentally stumbled into the rumble and tumble of a decades-old family fight.

Let me start from where I left off. Sitting on the sidelines of this theatre, stage left is the insurance industry watchdog known as the Insurance Regulatory Authority (IRA), which is to insurance what the central bank is to banking.

The IRA has periodically waded into the often murky scene featuring underwriters (insurance companies) versus intermediaries (read brokers and agents) versus policy holding customers.

The Insurance (Amendment) Act 2019 inserted a new law that was meant to enhance prompt payment of premiums to underwriters so as to eliminate the perennial problem of outstanding premiums by the insurance intermediaries. [Mark you, those are the verbatim words of the IRA, not mine, before folks start to jump down my throat].

The amendment essentially put in place a globally recognised practice of “cash and carry”, meaning that firstly, no cover shall be in place until the insurance premium is received by the underwriter.

Secondly, no insurance intermediary shall receive a premium on behalf of the underwriter and, thirdly, any contravention by the intermediary shall attract a penalty of 20 percent of the outstanding premium.

It further sought to criminalise the issue by also providing that a director of an intermediary that failed to remit the premium would be guilty of an offence.

And then the fight started. A large number of the intermediaries felt that the regulator was taking sides with the insurance companies.

A key plank of their argument is that by receiving the premiums directly, the insurance company would have details of the clients and could disintermediate them in future by going directly to the clients when it was time for premium renewal.

One can argue that it is a fairly weak argument since the insurance company needs full details of the policyholder in the first place in order to provide cover, for instance, for their motor vehicle or for their domestic residential cover against fire and theft.

Another plank of the intermediary argument was that the same amendment law provided that insurance companies had up to 30 days after receiving the premium to pay the intermediaries their commissions.

This they felt was a double standard as it would be extending a credit period to the intermediaries who needed the cash immediately so as to pay for their operations. It should be noted that the proposed law also provided that an insurance company that failed to pay the intermediary their commission would be liable to a penalty of Sh5 million.

I found that legally embedded payment provision curiously assuring, as the rest of us in small business have to wait for our clients to pay us when they are ready to pay us. In some cases, it can take over 90 days. But we are not the favoured few.

So I decided to speak to a broker about what the real back story was. Just like in any industry, there are the large players and the small players. In the broker industry, the large players are allegedly able to negotiate large commissions from the insurance companies by virtue of the fact that they have excellent relationships with corporate customers.

The corporates rely heavily on their brokers to first understand their risks, determine how to mitigate them and then identify which is the most secure insurer to carry those risks.

Consequently, these brokers can allegedly dictate the commissions due to them which in some cases are higher than what the industry standard provides. As such, the payments are then remitted to the insurance companies less the commission deducted in advance.

The insurance companies are therefore allegedly held to ransom in such cases as the eyewatering size of premium makes them willing, in such cases, to take what’s been put on the table.

It was no surprise then when the Association of Insurance Brokers went to court and put a stop to the coming into force of the Insurance Amendment Act in August 2019 pending a substantive hearing of the case. Look, every industry has its dirty linen and the insurance industry is no different.

With over 40 insurance companies in a medium-sized economy like ours, it’s no wonder that price undercutting occurs even where the risk by far outweighs the premium-priced for the same, particularly in the motor vehicle insurance class.

The industry is long overdue for rationalisation through consolidation, which best occurs when capital requirements are significantly ramped up and the risk-based capital model is applied judiciously to ensure that only the strong survive.

Maybe then the strong insurance companies will stop focusing on old legacy systems and move to tech-driven reliable solutions.

All right, that’s it. I’m done talking about this industry. Best wishes for the holiday season and see you in 2022!

[email protected] Twitter: @carolmusyoka