Insurance regulator tightens rules to stem collapses

National Bank of Kenya headquarters in Nairobi. Photo/FILE 

In Summary

• The Insurance Regulatory Authority has published guidelines requiring firms in the sector to submit proposals on pricing of new products.
• Insurers will be required to test the product price and profitability margins, monitor the effect of business volumes and price movements and check responsiveness of the product to external pressures.

 

Insurance firms will face sharper scrutiny by the regulator following passage of new rules that give the industry watchdog authority to approve the cost of premiums.

The Insurance Regulatory Authority (IRA) has published guidelines that will require firms in the sector to submit proposals on pricing of new products beginning end of next month.

In the past, insurers have been giving a blanket premium rate that was not product specific, exposing them to losses due to poor pricing of some policies, especially short-term business.

“Pricing involves estimation of claim costs, business expenses and investment income arising from the investment of premium income from the products.

Risks may occur where the costs and income are inaccurately estimated,” said the industry regulator in the new guidelines.

Insurers will be required to test the product price and profitability margins, monitor the effect of business volumes and price movements and check responsiveness of the product to competitive and other external environmental pressures.

The insurer will also have to put a business case for new products, a cost-benefit analysis, an implementation plan for channelling the products into the market and conduct a pilot.

Under-cutting of prices and copying of products from competitors without research on their risk exposure has been blamed for poor performance and collapse of some companies.

“IRA is seeking more control than in the past because there are products that are not appropriate for the market in the way they are administered,” said Isaac Ngaru, managing partner of insurance consultancy firm Ngaru and Partners.

Mr Ngaru gave an example of unit-linked investment products sold by insurance companies which have an investment element but were being endorsed as endowment policies.

While pricing, insurers will have to consider honouring claims, the expenses involved in administering the policy and profit aspect. This will require the use of actuarial estimates, whose expertise has been limited to life business.

In the past, IRA has been approving products but did not require them to be tested, some of which exposed the insurers to losses. Competition in the industry has seen companies start price wars that have been blamed for the collapse of some companies.

In February, this year, Concord Insurance was placed under statutory management.

As at the end of September 2012 gross written premiums stood at Sh83.56 billion, with the premium income recorded under life insurance and general business amounting to Sh27.58 billion and Sh55.99 billion respectively.

A series of collapse of insurance firms has hurt public confidence in the sector, which the regulator is seeking to restore by gaining more oversight on the companies’ activities.