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Policy underpricing drives insurance firms into losses

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Association of Kenya Insurers Executive Director Tom Gichuhi. FILE PHOTO | NMG

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Summary

  • AKI says undercutting rife in industry hits earnings harder than fraud.

Premium undercutting by firms in a race to protect their market share is the primary driver of underwriting losses suffered by the industry in three of the four years through 2018, the umbrella body of insurers has said.

The Association of Kenya Insurers (AKI) says undercutting in the pricing of insurance policies has hit the industry’s revenue hardest, plunging the majority of Kenya’s 37 underwriters in general business (non-life) into losses last year.

“We (AKI) are analysing the audited books (for 2018) and the numbers are worrying because they are all moving down south.

“The major reason for this decline in numbers is the underpricing aspect. It has not been very good,” AKI executive director Tom Gichuhi told the Business Daily in an interview.

Insurers in general business slipped into a Sh1.65 billion underwriting loss of Sh1.65 billion last year, Insurance Regulatory Authority (IRA) unaudited financial performance statements show, after a short-lived underwriting profit of Sh556.18 million in 2017 from Sh2.12 billion loss in 2016.

Five of the 14 insurance classes, including motor and medical, which accounted for 67.08 percent of gross premiums in general business, returned a loss.

Underwriters of risks in motor private incurred the largest loss of nearly Sh2.12 billion followed by public service vehicles (Sh1.33 billion), medical (Sh1.1 billion), aviation (Sh98 million) and fire industrial (Sh896,000).

Underwriting income is the difference between premiums the insurer collects on insurance policies and expenses incurred including claims paid out.

Gross premiums rose 3.46 percent to Sh129.03 billion, the IRA data shows, while claims paid increased 8.30 percent to Sh56.37 billion.

Some insurance chiefs have largely linked dipping underwriting income to elevated fraudulent claims, especially in motor and medical classes, but the industry spokesperson appeared to differ.

“Fraud has contributed substantially to the losses, but the underpricing is the main factor particularly in motor insurance.

“Fraud has just come in to make an already bad situation worse because there can never be fraud unless there’s a business you are doing,” Mr Gichuhi said.

“If in the first place you are not doing your business well and the little that is coming is also subjected to fraud, you can only imagine you are making a very bad situation worse.”

The High Court stopped the industry regulator’s (IRA) attempt to cap premium rate for various classes such as private motor at four per cent and public service vehicles at 7.5 per cent of the value of the vehicle.