3 insurance firms put on notice for undercutting rivals

Politics and policy

Insurance Regulatory Authority (IRA) CEO Sammy Makove says the agency has written to the three firms warning them against undercutting. PHOTO | FILE 

By Herbling David, hdavid@ke.nationmedia.com

In Summary

• The Insurance Regulatory Authority (IRA) directed Corporate Insurance, First Assurance and Monarch Insurance to stop charging lower than the approved minimum premiums for insurance policies or face action.
• IRA says the firms are exposing the industry to systemic risk by charging below market prices.
• Increased competition in the industry has forced some insurance companies to resort to undercutting as a strategy to woo customers and increase the uptake of their products.

The insurance markets regulator has put three companies on notice for involvement in practices that undercut rivals on the pricing of premiums, exposing the extent of the vice, which pushed 12 insurers into undewriting losses last year.

In a report released early this month, the Insurance Regulatory Authority (IRA) has directed Corporate Insurance, First Assurance and Monarch Insurance to stop charging lower than the approved minimum premiums for insurance policies or face action.

IRA chief executive Sammy Makove says in the 2013 annual report that the agency has written to the three firms warning them against undercutting.

The IRA says the practice of undercutting – charging lower than set premiums – is becoming rampant and poses a serious threat to the profitability and attractiveness of Kenya’s insurance sector.

Increased competition in the industry has forced some insurance companies to resort to undercutting as a strategy to woo customers and increase the uptake of their products.

Premium undercutting results in revenue loss that weakens the insurers’ ability to settle claims promptly, ultimately eroding business confidence and entrenching negative perception of the insurance industry among consumers.

The three insurance firms Tuesday denied involvement in undercutting and maintained that the regulator had not communicated the finding to them.

Mark Obuya, the chief executive of Corporate Insurance, defended his company from any claims of undercutting, insisting that the underwriter plays by industry rules.

“We have not engaged in undercutting. We did not win any new accounts last year so I don’t understand how we would have engaged in undercutting,” Mr Obuya said.

Stephen Githiga, the managing director of First Assurance, said he was not aware of any allegations of undercutting while the general manager at Monarch David Maranga said the IRA report was not correct, terming the listing as an error.

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A study by the IRA ranks premium rate undercutting as posing the highest risk to the insurance industry followed by claims settlement, delays in premium collection, lack of qualified staff such as actuaries and fraud investigators.

The IRA polled 34 chief executives of insurance firms who placed undercutting as the most serious concern for the industry at 23 per cent ahead of claims settlement (nine per cent), premium collection (nine per cent), staffing (seven per cent), fraud (seven per cent) and inadequate intermediary services (seven per cent).

“Price undercutting was explained in terms of stiff competition leading to predatory pricing. This can threaten the stability of the industry if the prices go below the optimum level,” says the IRA study titled 2013 Kenya Insurance Industry Outlook.

The IRA has set the minimum premium rate for private motor vehicles at four per cent while that for public service vehicles such as matatus and buses is fixed at 7.5 per cent of the car’s value.