Kenya’s motor insurance faces uncertain future

Kenya’s insurance companies that rely on motor insurance for the bulk of their revenue face an uncertain future, following a court action by a state agency to have the minimum capping of the price of the covers removed, claiming that it disadvantages consumers. But the Insurance Regulatory Authority (IRA) has warned that if the minimum price cap is removed, several insurance companies in Kenya may collapse, as happened before, because of the high loss ratio, especially in the private motor class. Most insurance companies price their motor covers at a minimum of 4% of the cost of the vehicle and as high as 7.5%. The capping was introduced in 2011 by the IRA, after strong lobbying by the Association of Kenya Insurers. Before the capping, the premium rates were more competitive – as low as 2.5%. “This is price fixing, which has restricted business to a small number of players and is a disadvantage to consumers,” said Leonard Ngaluma, chief executive of the Office of the Ombudsman, the complainant. In court filings in Nairobi, IRA said the price capping was introduced after several motor vehicle insurers faced collapse because of price undercutting in the industry, in the motor insurance class of business. “Other challenges included fraudulent claims that accounted for about 40% of all claims, gross underreserving for incurred but not reported claims leading to accumulation of liabilities in the long run, and increasing the risk of insolvency,” said the IRA. The IRA added that evidence shows the guidelines have stabilised the insurance industry by significantly reducing the risk of collapse, and that they have improved the performance of insurance companies, therefore enabling insurers to pay claims as contracted. But the Office of the Ombudsman disagrees, based on the ongoing court case, which was first filed in 2015. “The effect of this directive was to make the pricing of insurance motor cover a monopoly and convert this aspect of the industry into a cartel. The Ombudsman’s office received complaints from motorists and the general public about the motor insurance underwriting guidelines,” said Mr Ngaluma. The commission insists that the circular in which the pricing directive was issued must be declared null and void, as the regulator does not have the power to set premium prices. “The regulator acted outside its mandate in setting price caps. The guidelines were never gazette, hence they have no standing in law,” added Mr Ngaluma. IRA statistics for the first quarter of 2016 indicate that while average industry loss ratio was 49.9%, that of private and commercial motor vehicle classes was 72.6%, indicating higher revenue leakage. When the guidelines were being introduced, the argument was that the capping would enable insurers to recover revenue lost through fraud, careless driving and an inefficient courts system that drags motor insurance disputes on for years. Insurers also hoped that the cap would mitigate against the massive price undercutting experienced in the private and commercial motor classes then. The hearing continues.

Kenya’s motor insurance faces uncertain future

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