Price undercutting eroding gains made by insurance sector -AKI

By Steve Umidha

It won’t be long before the Association of Kenya Insurers (AKI) releases another industry tracker and if it goes to form it will show that consumers more often than not are getting kicked in the teeth.

But more profoundly now is the admission by its Chief executive Tom Gichuhi that the industry is reeling from immense losses due to tenacious price undercutting practices among insurers – an increasing comportment he feels is self-inflicted and one that experts should discontinue debating using the hoary old line about there being an epidemic of dodgy whiplash related claims.

“The industry must act,” he tells me.

He says, the association has found a number of areas of industry breach on general insurance pricing, including rule breaking by a number of firms when it comes to policy renewals – a disturbing pattern – and one that is likely to further erode insurance business as we know it.

Gichuhi simply calls this, ‘greed’ and has challenged his members “to apply common sense,” if the sector is to quickly bounce back from the slackened 2018 performance the industry reported last month of 3 percent growth against 6.5 per cent registered a year before.

In an exclusive interview with Financial Fortune (Media) AKI boss revealed that majority of insurance firms predominantly under-price medical insurance policies to win clients, a vice he says has significantly affected the sector’s performance.

“It is deplorable and should cease…and they know it is wrong,” he says.

Price undercutting occurs when an insurer sets very low premiums with the intention of winning customers. This heightens the risk of delayed or dishonored payment of claims as capital wears out.

It has long been known that insurance companies not only in Kenya but also globally are apt to jack up prices to their existing customers at renewal time, while reserving the sweet deals for new ones. And often such target customers are those with ‘healthy’ balance sheets – the likes of Kenya Ports Authority (KPA), KenGen, Kenya Power and Kenya Pipeline Corporation (KPC) among others that nearly all insurers elbow to secure their ‘prime signatures,’ and are willing to go the ‘extra mile’ including price undercutting.

Gichuhi further acknowledges firms that undercut insurance premiums win clients, but such insurers always end up paying more money in claims, resulting in huge losses by the firms, and noting that while insurance undercutting is yet to be observed in the motor class, it is highly widespread in the medical class.

The practice notwithstanding, industry gross written premium grew to Ksh216.11 billion during that period from Ksh209.70 billion in 2017 while overall insurance penetration plummeted to 2.43 per cent last year from 2.71 a year earlier.

Other than price undercutting Gichuhi believes insurers’ inability to effectually and resourcefully adapt to emerging innovations is also to blame for the sector’s dwindling fortunes and particularly penetration levels that is below 3 per cent way behind markets like South Africa and Mauritius.

Kenya’s insurance penetration dropped to 2.43 per cent in 2018 from 2.71 in 2017, according to figures released last month by the association.

Competition Authority of Kenya (CAK) had in the past thwarted previous attempts to set minimum premiums for different risks.

According Gichuhi, AKI is now determined to ‘fix’ that ‘mess’ and as a result, he says the lobby group had in June this year began serious engagements with the industry’s watchdog Insurance Regulatory Authority (IRA), CAK with the hope that a ‘solution is met.’

The sector is also being troubled by lack of inclusive supervision and fraud among other threats.

Insurance regulations have continued to develop to ensure more robust supervision of players and to cater for the growth of the industry. There has been a global rise in regulatory sandboxes for testing innovative solutions in a controlled environment. In Kenya, the Insurance Regulatory Authority is developing guidelines for sandbox regulation.

In 2018, several legal and regulatory changes were proposed including four regulations on Takaful Insurance, Group Wide Supervision, Bancassurance and Micro Insurance. The regulations are yet to be enacted.

The Insurance (Amendment) Act, No.11 of 2019 amended Section 156 by providing that an intermediary shall not receive any premiums on behalf of an insurer and penalties of contravention of that provision are attached to it. Insurers are in turn expected to pay commissions within 30 days.

IFRS 17 is still work in progress, however, the International Accounting Standards Board postponed the effective date to 2022 to enable it incorporate several amendments to address stakeholder concerns and implementation challenges.

The delay will be helpful to enable insurers implement this complex undertaking that has a global bearing. IFRS 17 aims to increase transparency in the accounting for insurance contracts.

The industry is still working towards complying with the Risk Based Capital requirements as the June 2020 deadline approaches.

The association carried out a second quantitative impact study to assess the industry preparedness to meet the deadline. The industry, through AKI, will engage the regulator to address the challenges so as to ensure compliance within the stipulated time.

“The magnitude of evolving insurance accounting change should not be underestimated, particularly when considering the impact of the new financial instruments and revenue standards. Insurers need to proceed at pace with their plans for implementation. There is much that needs to be done in what is still a relatively short time,” he concludes.