Insurers dilemma as underwriting losses now surge to Sh2.7 billion

The insurance sector seems headed for tougher times after reports showed that underwriting business is no longer lucrative.

Data from the sector watchdog - the Insurance Regulatory Authority (IRA) - shows that insurance firms have been making huge losses in recent years.

According to the report released last week, the industry saw the highest underwriting loss of Sh2.7 billion by the end of the second quarter (Q2) on June 31, 2018.

This is compared to another loss of Sh879.4 million during the same period last year. Reinsurance companies also experienced the worst underwriting performance in the same period.

The three reinsurance companies under IRA’s watch are Kenya Reinsurance Corporation, East African Reinsurance, and Continental Reinsurance. The firms experienced a 97.3 per cent drop in underwriting profits, down from Sh522 million to Sh13 million in the period under review.

The reinsurers’ business volume declined by 5.1 per cent to 9.6 billion in quarter two of 2018, compared to Sh10.1 billion that was posted in the same period last year.

“The industry’s trend of underwriting results has experienced a continued decline over the last three years, which has become a matter of concern,” the IRA noted in its report.

Reported claims

The losses have been driven by a burdgeoning portfolio of claims that have gone through the roof in recent years.

The insurers reported claims incurred amounting to Sh29.2 billion during the period under review. This was an increase of two per cent from Sh28.6 billion reported in the previous year’s second quarter.

The claims are majorly pegged on medical and private motor sector policy. According to the report, the medical cover attracted Sh9.8 billion in claims, while private motor sector attracted Sh7.5 billion.

The report also revealed that the insurers have been unable to control their costs with management spending remaining high in Q2 of 2018 with a management expense ratio of 33 per cent.

According to IRA Chief Executive Officer Godfrey Kiptum, poor pricing and underwriting practices are the main causes of the losses being witnessed.

“The authority has introduced a risk-based model of supervision and insurance companies are expected to fully comply by 2020. With this model, companies will be compelled to price their products appropriately,” Kiptum told the Financial Standard in an interview recently.

“Insurers will be expected to hold capital that is commensurate to their risks and this will call for prudence on pricing.”

Mr James Musau, an actuary blames the losses and the increase in claims to fraud and poor guidelines from IRA as well as the insurance firms in combating the vice.

“When you look at the private motor and medical cover, there is a lot of fraud there. It is something that has been known for quite a while but it has been difficult to fight. As long as that is not looked at, the fake claims will keep eating into the underwriters’ profits,” said Musau.

“I have heard there is a law that is coming soon to handle that. I hope it works.” Musau is talking about some new amendments to the Principal Insurance Act that is geared toward combating fraud.

Posing penalties

The review dubbed Insurance Act (amendments) 2018 are revising the law to accommodate a new section (256) that is proposing penalties of up to Sh5 million for fraud.

A popular notion from observers is that the industry has stagnated, with the penetration rate perching at 2.9 per cent for a while.

The industry is also controlled by a few firms with the top seven firms controlling 77 per cent of the market share according to the regulator. There are about 50 insurance firms in Kenya.

The top seven are Britam Life Assurance, Jubilee Insurance Company, ICEA Lion Life Assurance, CIC Life Assurance Company, and Kenindia Assurance Company. Others are Liberty Life Assurance Company and Sanlam Life Assurance.

Mr Kiptum fought of the allegations of industry stagnation, noting that it is lack of innovation to tap to a larger segment of the population.

“The uninsured population and potential market remain larger than the insured. The industry, though, needs to be more inclusive and innovative to bring many people under the insurance bracket,” said Kiptum.

“The claims have not become too much. The root cause is poor pricing. Arising from this, the premiums paid are not sufficient to compensate the risks underwritten.”

While the industry has been performing poorly in its traditional underwriting business, it has been doing impressive investments in other portfolios that have enabled it to turn in a profit and assuage shareholders for the time being.

According to IRA, as of June 31, 2018, insurance firms invested 63 per cent of their wealth in Government Securities, having dumped there Sh216 billion.

They have put Sh42 billion in property, Sh37 billion in quoted ordinary shares, Sh5.7 billion in unquoted ordinary shares, Sh7.7 billion in loans and mortgages. Over Sh14.6 billion has been invested in term deposits, Sh10 billion in other securities and Sh5.8 billion as investments in subsidiaries - with total industry investments standing at Sh339 billion.