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Shortage of risk assessors hits insurance industry
Insurance sector faces an acute shortage of risk assessors. Photo/FAITH NJUGUNA
An acute shortage of qualified risk assessors in the insurance sector has put the industry in danger of under-estimating liabilities facing the businesses, consulting firm PricewaterhouseCoopers (PwC) has warned.
The firm said in a new report that some insurance companies had cut premiums to unsustainable levels to gain market share to the extent that their revenues might not compensate for the risk assumed.
“Outdated actuarial assumptions in regulations, a shortage of qualified actuaries and the use of inaccurate data in the actuarial processes contribute to the perception of risk,” said the PwC report.
An under-assessment of risk puts insurance firms in the danger of collapsing under the weight of customer claims, which in turn dents public confidence in the sector.
Chief executives in the insurance industry said East Africa has very few qualified actuaries.
Most firms requiring actuarial services have to rely on external actuarial companies.
“We don’t have many actuaries. The few that are there act as consultants for many companies and therefore don’t have time to delve into the details of each client,” said Nelson Kuria, CEO of Corporate Insurance Company.
He said the skills shortage for actuarial work had led to many companies being unable to determine their real risks.
“What we are trying to do is to have in-house risks analysts and only go to the consulting firms at the very end of the analysis process,” said Mr Kuria.
The PwC report says an over-reliance on external actuarial expertise could result in in-appropriate pricing strategies based on incorrect assumptions in the valuation of policy holder contracts.
It added that the East Africa insurance market suffers not only from a lack of actuarial expertise but also from factors like demographic shifts, climate change and political volatility that further complicate actuarial modelling.
The report said that external actuaries, while qualified, may not have sufficient internal knowledge of working companies.
The assessment of the risks was done from late last year on 12 insurance firms in Kenya, Uganda and Rwanda.
“The process of training to be an actuary is very vigorous and that is why there are still very few actuaries. Many are based out of the country,” said Diana Muriuki, an investment analyst with Actuarial Services East Africa.
Ms Muriuki holds a bachelor’s degree in Actuarial Science, but says that she is not yet an actuary in the professional sense though she plans to be one.
A professional actuary must undergo a series of exams and experience for a number of years over and above the university degree.
In Kenya she explained, there are about five actuaries practising as consultants but a large number is in the diaspora.
She said the reason for the high concentration of actuaries overseas has to do with the higher pay and the fact that the professionals are able to fully use their skills unlike in Kenya where the market is still growing.
The shortage appears to be a global given that there are firms such as DW Simpson in Chicago, US dedicated to recruiting actuaries at what appears to be relatively high compensation even for the lowest trained workers.
The payments scales of actuaries are close to those of holders of the Chartered Financial Analyst (CFA) qualification based on remuneration data given by DW Simpson on actuaries and by PayScale, which provides data on salary trends for various professions.
According to the DW Simpson data, the US national median salary for a actuary professional who has passed the first exam in the route to be an actuary (but has up to six months experience) is $46,000 annually or Sh310,000 monthly while the one with median for the medium-level grade with up to six month experience starts off at annual pay of $57,000 or an equivalent of Sh380,000 monthly.
However, top level certificate holders as an actuary start at $122,000 annually (Sh820,000 monthly) in the US but requires an addition minimum of seven years of experience to achieve the certification.
The highest paying firms are Metropolitan Life Insurance Company with national pay of between $89,000 and $154,000 and Deloitte Consulting LLP with pay of between $88,437 and $122,084.
Some firms use CFA holders as their top professional risk analysts, Ms Muriuki noted, saying this is because of their financial analysts background.
In Kenya, the US-based CFA Institute show that there are only 29 CFA charterholders, showing there is a still a deficiency.
Mr Kuria lamented the hurdles facing the industry had led to a situation where even the large Kenyan banks are bigger than the entire insurance industry.
While banks hold deposits of over Sh1.3 trillion, premiums are only Sh70 billion.
The cut-throat competition, incognisant of the risks, has led to undercutting, the PwC report noted.
“Even for products with wider (or compulsory) coverage, like motor insurance, cut-throat competition and price under-cutting eat into insurers’ profits. There is a general view that the number of insurers is disproportionate to the size of the market, particularly in Kenya which has over 40 insurers,” said the report.
