Businesses & Financial News

Premium undercutting spells bleak future for insurance industry

B8y Steve Umidha

Insurance industry analysts are warning risk managers to brace for sharply increased premiums in the post pandemic year as insurers try to adjust to years of underpricing their products.

With insurers now rushing to make up for losses paid in claims, predictions by Cytonn investments and the Association of Kenya Insurers (AKI) now foresee a bleak future, maybe worse with fears that industry malpractice among players could escalate.

What’s worse, the investment firm for instance, says that there is no solution in sight, at least not just yet.

“The battle for market share has seen some insurers resort to underhand methods of gaining competitive advantage, such as premium undercutting …and some industry players have argued price fixing will kill innovation and that the industry players should be left free to set their own prices,” Cytonn noted in its weekly report on the sector.

Premium undercutting is the practice where an insurance company secretly offers clients unrealistically low premiums in order to gain a competitive advantage and protect their market share.

The inability to pay claimants has largely been linked to undercutting of premiums among players who now feel the effects of years of price competition that has left many unprepared for the cost of claims.

Also known as predatory pricing – the strategy is largely used by dominant firms who deliberately reduce their policy prices to loss-making levels in the short-term with the sole intention to push out potential competitors out of the market.

Such companies then raise their prices to control levels in the long-term to recoup their losses

“Presently our hands are tied, we cannot play our advisory role nor enforce it. It is a free market as things stand,” admitted AKI’s Chief executive Tom Gichuhi in a telephone interview Monday, further forecasting increased premium rates by insurers whose profit margins were affected due to the effects of Covid-19.

“Companies that made losses last year will look to revise their premium rates upwards in order to make up for higher claims they paid last year, and this is legal, provided it is done after the lapse of existing policy duration signed between the policy holder and the insurer,” noted Gichuhi.

According to the association, some unidentified have already revised their rates from the standard rate of 4 percent for a motor policy cover to 6 percent.

Premium undercutting, according to Cytonn was the main cause for low underwriting losses the industry suffered last year, which also comes on the back drop of declining insurance penetration which the firm said, “could be worsened by increased premiums pricing.”

Previous attempts by the industry regulator, Insurance Regulatory Authority (IRA) also seem to have hit a snag in its efforts to address the premium undercutting practice.

In March this year, announced of plans to engage a consultant to relook at the industry pricing, but has remained mum since.

Marine industry is one of the affected sectors hurting from the vice, with estimates showing that Kenya has been losing between Sh20 million and Sh25 billion annually in marine insurance premiums ceded to foreign off-shore companies – the figure could be more.

In three months to June 2021, medical, motor private and motor commercial had the highest amounts of paid claims at 39.3 per cent, 26.9 per cent and 21.5 per cent of total industry paid claims under general insurance business, according to IRA figures.

The underwriting performance of the general insurance business equally registered a loss of Sh1.46 billion compared to a profit of Sh 62.45 million reported in a similar period last year.

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