Market News

New insurance capital to end undercutting


Guests during an insurance regualtion forum. PHOTO | DIANA NGILA | NMG

Kenya’s plan to shift to a regime where insurers’ capital is tied to the amount of risk underwritten will weed out premium undercutting in the industry, analysts at Dyer & Blair Investment Bank say.

The researchers say the capital regime, expected to come into force in June 2021, will force Kenyan underwriters to adequately price their products according to risks, hence stamping out the practice of underpricing.

“Insurers will now have to price risk appropriately or use their own capital to cover risk charges,” said Kasee Mbao, a research analyst at Dyer and Blair.

“Premium growth in the sector slowed down due to price undercutting in order to gain market share. Consequently, insurers end up receiving premiums that do not adequately cover the risk attached to the business underwritten,” Mr Mbao said.

Under the risk-based regime, insurance companies do not hold a standard capital, but match risk.

A 2013 study by the Insurance Regulatory Authority (IRA) ranks premium rate undercutting as the highest risk to the industry, followed by claims settlement, delays in premium collection, lack of qualified staff such as actuaries and fraud.

Premium undercutting partly pushed 21 general insurance firms to post underwriting losses in 2016 totalling Sh2.12 billion, with six classes in the red: medical, motor private, aviation, engineering, private accident and workmen compensation, IRA data shows.

It means the insurers paid out more in claims and expenses than premiums collected.

The regulator sought to cure this malaise by setting minimum premium rate for various classes such as private motor at four per cent, public service vehicles (7.5 per cent) of the car’s value.

However, the High Court in April stopped IRA from setting price floors on motor insurance premiums, following a petition by the Ombudsman.

For burglary and house breaking, the premium rate is 0.1 per cent of the total value, plus 0.5 per cent without first loss while that with first loss has to add 1 per cent on top of 0.1 per cent.

In case of fire in boarding schools and hostels as well as airports, airfields and hangers the minimum premium rate is 0.25 per cent, clubs and discotheques is 0.3 per cent while grass, papyrus, makuti and banana fibre thatched buildings is set at 0.6 per cent.

The risk-based capital model was to be effected in 2015 but was relaxed in 2016 to give insurance companies more time to comply.