Ombudsman now takes on insurance cartel in court

Commission on Administrative Justice chairperson Otiende Amollo. PHOTO | FILE 

By BRIAN WASUNA, bwasuna@ke.nationmedia.com

In Summary

• Ombudsman Otiende Amollo has filed an anti-trust suit at the High Court against the Insurance Regulatory Authority (IRA), seeking to quash a 2009 directive which he says has paved the way for a few insurance companies to control the majority share of clients.
• The IRA effected the new prices in March 2011 through a circular that prescribed a minimum amount that firms can charge clients seeking vehicle cover.
• The Ombudsman holds that the price cap has given an unfair advantage to the bigger market players.

The Office of the Ombudsman has accused the insurance watchdog of illegally fixing motor vehicle cover prices and restricting the lion’s share of the industry pie to a cartel of big firms.

Ombudsman Otiende Amollo has filed an anti-trust suit at the High Court against the Insurance Regulatory Authority (IRA), seeking to quash a 2009 directive which he says has paved the way for a few insurance companies to control the majority share of clients.

The case is expected to test the consumer rights’ principles under Article 43 of the Constitution.

The IRA effected the new prices in March 2011 through a circular that prescribed a minimum amount that firms can charge clients seeking vehicle cover.

The Ombudsman holds that the price cap has given an unfair advantage to the bigger market players.

“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,” Mr Amollo said.

The Ombudsman’s office, also known as the Commission on Administrative Justice, is lawfully mandated to address all forms of maladministration, and investigate abuse of power by both public and private entities.

While Mr Amollo claims a cartel is running the industry, he has not named the companies suspected to be pulling the strings behind the scenes. But in the suit papers, he holds that the model adopted by IRA does not create a level playing field for all players in the insurance industry.

The Commission has enjoined Attorney- General Githu Muigai in the suit in his role as government advisor.

The IRA and Prof Muigai are yet to respond to the suit, but Justice Mumbi Ngugi last week granted the parties time to file their responses.

“The respondents are to file and serve their responses within 21 days. The Ombudsman is to file a subsequent response, if any, within 14 days of being served with the respondents’ documents. The matter will be mentioned on May 15 for further directions,” she said.

The Ombudsman 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.

He adds that the IRA’s role in the insurance industry is restricted to discipline, quality, prevention of dishonest practices and professionalism – hence the regulator acted outside its mandate in setting price caps. Leonard Ngaluma, the Office of the Ombudsman CEO, adds that the guidelines were never gazetted hence they have no standing in law.

“The Ombudsman pleads that the statutory powers of the IRA do not and cannot include the prescription of mandatory prices and underwriting price guidelines for the insurance industry. For this reason we pray for a declaration that the guidelines are null and void,” Mr Ngaluma said.

IRA’s guidelines also provided that insurers must inform the regulator of any new products before launching them. The new rules also specify when excess fees should be charged and what percentage of it the policy holder will be required to pay. Excess fee is a percentage of the claim that the policy holder pays or the percentage claim that is withheld by the insurance company.

READ: Higher motor insurance costs loom in change of market rules

The regulator’s guidelines benefit motorists who make no claims as they pay 10 per cent less for their premium in the second year (from 7.5 per cent of the value of the vehicle in the first year), 20 per cent less in the third year and 30 per cent less in the fourth year.

The regulator, while effecting the new rules, claimed they were aimed at preventing insurers from charging premiums that cannot support the risks involved.

The IRA argued that several firms had gone under because of selling policies at rock bottom prices thus incurring higher bills than they could pay for.

The Ombudsman now says the price caps have killed competition in the industry, as the regulator has interfered with market forces that promote competition like pricing. Mr Ngaluma says this has also interfered with consumers’ rights as their options have been reduced.

“Upon its own investigations, the petitioner established that the guidelines outlaw competition and the free interplay of market forces thereby eliminating choice thereby violating the consumer rights of Kenyans,” the Ombudsman said.

Motor insurance has maintained its position as the industry’s backbone as it generates the highest gross revenue. Its position has been partly helped by the fact that the law demands that every motor vehicle owner must have an insurance cover.

The Kenya Transport Association Mombasa sued the regulator in 2010 in a bid to fight the enforcement of the price caps, but the court ruled in the IRA’s favour