Fraud hurts local insurers in global efficiency ranking

Money Markets

Insurance Regulatory Authority (IRA) chief executive Sammy Makove. PHOTO | FILE 

By JOHN GACHIRI, jgachiri@ke.nationmedia.com

In Summary

• The Nairobi Securities Exchange firms have an average loss ratio — the percentage of collected premiums paid claimants — that is also higher than that of peers in the continent.
• The high loss ratios indicate local firms may be less profitable than their peers in other regions. Insurance players said undercutting and fraud are the main reasons for the high loss ratio.
• Cytonn, however, expects there is room for expansion due to the low penetration rate which stands at 2.9 per cent against South Africa’s 14 per cent. Other analysts say the mergers and acquisitions (M&A) in the industry may be the silver bullet in regard to pricing of insurance policies.

Kenyan insurance companies have some of the worst loss ratios globally, a sector report by Cytonn Investments says.

Despite recent interest by international players in the local sector, the report shows the six listed underwriters have an average loss ratio of 73.9 per cent against a global average of 64.2 per cent.

The Nairobi Securities Exchange firms have an average loss ratio — the percentage of collected premiums paid claimants — that is also higher than that of peers in the continent. According to the report, Morocco’s Wafa Assurance for instance has a loss ratio of just 57.1 per cent.

The high loss ratios indicate local firms may be less profitable than their peers in other regions. Insurance players said undercutting and fraud are the main reasons for the high loss ratio.

“Some of our pricing (especially in classes such as motor and medical) is below what it ought to be courtesy of undercutting. Second, there is a growing element of fraudulent claims, which is further worsening our loss ratios,” CIC Insurance chief executive Tom Gitogo told the Business Daily.

The industry regulator has also cited motor vehicle as an area where there is widespread fraud. The Insurance Regulatory Authority (IRA) annual report for 2014 says fraud in this class of insurance was the highest amongst all types of covers.

The annual report says that 27 out of the 87 fraud cases that were reported to the IRA in 2014 involved fraudulent accident claims, forged car insurance certificates and fraudulent theft insurance claims.

The regulator added that losses from motor vehicle insurance have in the last decade been a major cause of collapse of firms in the industry.

“Motor class of insurance business has continued to register high loss ratios. This has been one of the major causes of failure of insurance companies witnessed in the last 10 years,” said the IRA annual report.

Insurance companies made a combined operating profit of Sh17 billion in 2014, a 15 per cent drop from Sh20 billion a year earlier. This was despite premiums increasing by 17 per cent to stand at Sh157 billion from Sh135 million over the same period.

Cytonn, however, expects there is room for expansion due to the low penetration rate which stands at 2.9 per cent against South Africa’s 14 per cent. Other analysts say the mergers and acquisitions (M&A) in the industry may be the silver bullet in regard to pricing of insurance policies.

“Going forward, we expect consolidation and increased M&A activity to gradually correct the existing market failures. Insolvent underwriters will be acquired by their relatively solvent peers and the enforcement of a risk-based model should go some way to ensure only sustainable rates apply,” says an insurance sector report by Exotix.

Prudential Plc of the UK bought Shield Assurance — the long-term arm of the troubled Blue Shield — Britam acquired Real Insurance while Cannon Assurance was bought out by Metropolitan Group. Old Mutual Group merged with UAP Group after buying out its major shareholders.

Private equity (PE) firms and other foreign insurers are also eyeing stakes in local firms. PE firm LeapFrog bought a majority stake in Resolution Health while German insurance conglomerate, Allianz, recently opened a Nairobi office.