The bleeding in motor vehicle insurance has to be bandaged

Insurance is a statistical bet. An underwriter selling you an contract or policy is betting that the risk will not occur.

By GEORGE BODO
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Summary

• At the onset, an insurance policy establishes the premiums that a company will receive in exchange for managing the risk(s).
• These premiums are paid by the policyholder prior to a risk occurring. Insurers have to set these rates without the actual knowledge of the extent of claims, which they will be dealing with in future; in other words, the actual costs of a contract are unknown at the inception.
• So they have to rely on historical data in order to estimate what a policyholder should pay in the form of a premium.

You, as the policyholder on the other hand, are betting that the risk could occur at an unknown date in the future. Subtly put, insurance is the management of risk in exchange for a premium.

At the onset, an insurance policy establishes the premiums that a company will receive in exchange for managing the risk(s).

These premiums are paid by the policyholder prior to a risk occurring. Insurers have to set these rates without the actual knowledge of the extent of claims, which they will be dealing with in future; in other words, the actual costs of a contract are unknown at the inception.

So they have to rely on historical data in order to estimate what a policyholder should pay in the form of a premium.

But that’s not the point of today’s instalment. Today is all about how motor vehicle business continues to drag down the general insurance market.

In 2019, general insurance companies combined underwriting loss rose to Sh3.2 billion, out of which motor vehicle business class reported a gaping underwriting loss of Sh6.8 billion (compared to Sh1.6 billion in 2018).

Essentially, if you strip off the motor vehicle business, general insurers made money last year.

Yet it is a big business. In 2019, all the three sub-classes of motor vehicle insurance, namely private, commercial and public service (PSV), accounted for 35 per cent of gross direct premiums under general insurance, which is the highest.

Motor vehicle remains the main driver of general business. This is for the simple reason that motor vehicle third party liability insurance, which requires motorists to have coverage against risks of bodily injuries and deaths on the part of the pedestrians on the public roads or passengers in public vehicles, is mandatory by law in East Africa.

What if the third party liability insurance was not legally mandatory? Would general insurers still be turning over such large volumes?

But back to my concern. Average claims ratio in the motor vehicle business stood at 70 per cent, which was above the industry absolute level of 64 per cent, which makes the business akin to a revolving door.

Practitioners must rethink the motor vehicle business.

There are two issues here. First is the matter of multiple insurance contracts (and claims) on a single vehicle. 

To remedy the malpractice, the industry lobby came up with a platform where players could share data on motor vehicles (by providing validation checks).

While the platform went live sometime in 2018, it appears the uptake of the platform remains low (suggestive of an end-to-end malpractice).

Second is the issue of service points integration. There is a strong case for backward integration with the service points in any form; and if not integration, then a means of having round-the-clock visibility of the entire process.

Perhaps technology can now come in to automate some of the processes. Because the bleeding has to stop, somehow.

@GeorgeBodo