They may be gurus at covering people and businesses against risks, but for many Kenyan insurers, greed is the only danger they are struggling to cover themselves against.
Price undercutting and offshore ceding of premiums for short-term benefits is putting at risk the existence of the very industry that runs on insuring other businesses and people against anticipated perils.
“The fortunate thing is that we know what we are supposed to do. The unfortunate thing is that we are not doing it,” Kenya Association of Insurers (AKI) chief executive Tom Gichuhi says of the alarming predatory pricing in the market.
“The number of insurable risks in this market is increasing yet premium growth is going down because of poor pricing.”
This has been instrumental in pushing down the combined profit of the 54 insurance firms operating in Kenya.
In the year ended December 2018, net profits dwindled by 61.56 percent from Sh9.21 billion to Sh3.54 billion — the lowest in 12 years.
Reinsurers say the declining performance of insurers is also their point of concern even as a section of companies call on them to slam doors on companies offering very low premiums.
Kenya Re chief executive Jadiah Mwarania says the undercutting practice can only be best addressed if insurers start sharing the base rates for each year.
“The experience of reinsurers is actually worse than that of insurers. We are taking a big brunt of it and we are actually worried. We can cooperate by sharing the applied premium rates,” said Mr Mwarania.
The cut-throat competition in an environment of poor underwriting practices has left many insurers in underwriting losses. Yet, insurance penetration has dropped to the lowest level in 15 years-2.43 percent of GDP.
Investment income from property and the stock market has been masking the falling margins from the core business of insurance. But the depressed property prices and bear run on the Nairobi Securities Exchange has exposed their business risk.
Mary Nduta, a resident of Nairobi, where 80.67 percent of the country’s premiums are concentrated, is beginning to mind about price undercutting.
“There are all sorts of quotations you will get from insurance companies and premiums are two worlds apart. You can’t tell the difference until the risk you insured against materialises,” she says.
She is careful not to fall for insurers who offer very low premium charges. But for many of the potential customers facing competing needs, low premiums are irresistible and make them oblivious of the tragic drama that comes with settling claims by such insurers.
That is the cost of predatory pricing, also known as undercutting. It occurs when an insurer sets very low premiums with the intention of winning customers. This heightens the risk of delayed or dishonoured payment of claims as capital wears out.
For instance, motor vehicle insurance premiums have been declining every year since 2010 yet insurable risks have been growing.
Last year, insurance for private vehicles recorded the highest loss at Sh2.7 billion while commercial vehicles returned a Sh1.1 billion loss.
Almost a similar scenario is replicated in life insurance for group life premiums, the amounts paid by employers to cover staff in case of death while in service.
George Nyakundi, ICEA Lion Life assurance general manager, clarified that the decline in group life premiums is due to undercutting by insurance companies.
“Continued undercutting of premiums by insurance companies for group life is not sustainable and that is why AKI is also calling on reinsurers in pricing risks appropriately. If this practice continues, it will lead to erosion of shareholder capital,” said Mr Nyakundi.
This may, however, be reversed if the risk-based capital (RBC), which comes into effect in June 2020, is implemented appropriately.
RBC will require businesses insurers to underwrite risks that are commensurate with the capital they hold.
In addition, International Financial Reporting Standards 16 and 17 will force insurers to report appropriately on the risks they are taking and how much capital they have put in their ventures.
Every year, insurers will be filing their premium rates with the regulator. This could see IRA stop them from sticking with rates that deliver continuous underwriting losses.
But before this, Mr Gichuhi says, AKI has been engaging leading insurers in classes such as motor to lead the way in best practice by shunning undercutting.
Reinsures are worried that by the time risks are being passed to them, the “horse has already bolted,” and are equally calling for more information sharing with the insurers.
They want insurers to share with them the historical premium rates they apply on risks so as to detect any undercutting. This will mean reinsurers rejecting lowly priced risks, which AKI says are well known.
“We have big risks in this market and we get to know when they are being undercut. Reinsurers should refuse to support such risks so as to bring price stability,” says Mr Gichuhi.
But they will have to tread carefully not to be accused of price-fixing.
Previous attempts to set minimum premiums for different risks was thwarted by the Competition Authority of Kenya (CAK), which fined them and said the country was wedded to market-determined prices.
AKI wants to engage CAK afresh through IRA with the hope that the competition watchdog will “see more sense” now, according to Mr Gichuki.
The sector is also being troubled by over-ceding of premiums to foreign insurers. Crafty local insurers are bypassing their local counterparts and ceding out premiums to foreign insurance firms at a commission.
“That amounts to taking out a significant portion of premium that would have been generated in this market had they have not been driven by greed,” Mr Gichuhi reckons.
This has contributed to the slowed growth in premiums. In 2018, premium growth was at 2.22 percent, marking the fifth straight year of slumping compared with 21.3 per cent growth pace in 2013.
Kenya’s Insurance Act requires that before placing a risk outside Kenya, an insurer seek regulatory approval by demonstrating that the entire local market is unable to take the risk.
“No insurer, broker, agent or other person shall directly or indirectly place any Kenya business other than reinsurance business with an insurer not registered under this Act without the prior approval, whether individually or generally, in writing of the commissioner,” states the Act.
However, the regulator has not had a mechanism for checking whether it is true that insurers passing Kenyan business to offshore firms first circulate the risk to local insurers and fail to get takers.
The impact is that instead of ceding out risks such as cyber-risks and oil and gas where capacity for local insurance is still low, traditional risks such as fire and motor vehicle are being surrendered to offshore firms.
For instance, data from the Kenya National Bureau of Statistics shows that new motor vehicle registration has been rising, growing 12 pecent to 102,036 last year but premium growth surprisingly slowed.
“It can only be because of poor pricing. Members know this is not sustainable,” laments Mr Gichuhi.
AKI has now agreed with the sector regulator that any risk sent for approval should be shared with the association, which will in turn circulate the risk to the market and give feedback on whether it cannot be covered locally.
Away from the insurers’ own-made challenges, the industry is grappling with fraud, low levels of disclosures from the insured and failure to deepen insurance uptake across the 47 counties.
In an economy where staff turnover has increased in the last three years and contract jobs risen, it has not been easy to sell declaration policies.
Declaration policies take care of the frequent fluctuations in staff numbers or stock values that a company may want insured during the year.
Insurers say most of the time, they only receive 75 percent of the premiums received at the point of arranging the policy.
This is because many firms are not transparent enough to declare when staff numbers or stock levels increase during the year.
Fraud, especially in medical insurance, also continues to condemn insurers into losses. In the year ended December 2018, 21 medical insurers returned underwriting losses.