Ideas & Debate

The other side of Kenya’s puzzling insurance game

insurance

Kenyan insurance companies are concerned about widespread fraud involving claimants and brokers. PHOTO | SHUTTERSTOCK

carol musyoka

Summary

If GDP grows at a faster rate than the rate at which insurance premiums are being booked then the number will only go south.

A lawyer and an engineer were fishing in Watamu. The lawyer said, “I’m here because my house burned down, and everything I owned was destroyed by the fire. The insurance company paid for everything.”

“That’s quite a coincidence,” said the engineer. “I’m here because my house and all my belongings were destroyed by a flood, and my insurance company also paid for everything.”

The puzzled lawyer asked, “how do you start a flood?”

In October this year, I wrote three opinion pieces about the insurance industry, signing off at the last one by promising to forever hold my peace. Well, that was not to pass as I did get a few nudges in the rib about how extremely one-sided my postulations were.

So I had a couple of very illuminating chats with two industry veterans, who between them have almost 70 years of deep insurance experience. This is the other side of the story that you should know:

Insurance penetration can be misguiding

Straight off the bat I had started by talking about how insurance penetration in Kenya was less than the alcohol by volume level contained in your uncle’s favourite bottle of beer. According to the statistics from the Insurance Regulatory Authority’s 2019 annual report, the insurance penetration in Kenya declined from 2.43 percent in 2018 to 2.34 percent in 2019.

A reader dropped me an email as soon as I published this statistic and corrected my misguided belief that this was a reflection of product penetration in the citizenry. Truth is, this number reflects the level of total insurance premium as a percentage of the gross domestic product (GDP) of a country and is not a percentage of the insured population. So if GDP grows at a faster rate than the rate at which insurance premiums are being booked then the number will only go south.

You're in a pool with a fool

Turns out that we are all just a pool of premium payers, a risk pool as it were. And it’s an actuarial game of probabilities. For instance, say we are a hundred thousand people paying for motor vehicle insurance. We are all thrown into a pool and a person called an actuary (the ultimate mathematical genius, the Lionel Messi of insurance, in summary, that guy!) makes a statistical punt on what percentage of us will have accident or theft claims in that year.

The problem for the actuary actually (couldn’t resist that one) is that once you get fraudsters submitting fake claims, then the fraud risk starts to muddy the pool and that dirt needs to get priced in. Essentially our pool of good risk and bad risk shifts in pricing shape and conditions size depending on which elements form the majority.

Hence the whole drama around medical insurance, which is fraught with fraud risk as there are enough claim creating characters out there, from patients to doctors to hospitals, to form a Kenya National Theatre cast. These foolish characters make life very expensive for the rest of us.

Insurers regularly get thrown under a bus

Yes, I had to sit down for this one. Your insurance broker sends you a reminder that your domestic cover for your house and its contents is due for renewal on January 25. Now we all know the shape of January pockets, as empty as a Nakumatt shelf post receivership.

So you tell your broker that you’re broke. He says “I got you” and gets you the insurance cover on the basis that you will pay him the full premium in 60 days, by March 30. On May 2 your house gets flooded somehow, destroying everything and now it’s time to claim. You talk to the broker and he says, “Ermm, the insurance company has refused to pay.”

First you try and start a Twitter trend of #InsurersAreThugs but some politico has been caught on camera wrapped around some floozie and your trend falls flat on its face.

So you get into a royal hissy fit and stomp your way to the insurance company headquarters where they laugh you out of the building saying, “Ala, you never paid your premium!” You show them the instalment plan you had with your broker, where you slowly but steadily paid in full.

Turns out the broker never sent in the payments to the insurance company, resulting in the insurance cover getting cancelled but the broker never quite got back to you about that tiny detail.

This situation got so endemic that the insurance regulator had to step in to try and sort out the mess that insurance industry intermediaries had created. But was the regulator successful? For these and other stories tune in here same time next week.

[email protected] Twitter: @carolmusyoka