Insurers in Kenya are grappling with effects of Covid-19 amidst new capital adequacy requirements by the Insurance Regulatory Authority (IRA). IRA requires companies to meet 200 per cent (previously 100 per cent) of the Prescribed Capital Ratio (PCR). And while a good number of insurers were compliant by June 30, 2020, others had not. In a directive to all insurers, IRA requires submission of stress and scenario tests, including capital adequacy calculations and liquidity strains to determine the impact of Covid-19.
There has been a decline in the gross written premiums during the pandemic as insurers experience reduced insurance uptake in retail and consumer sectors. Brokers are struggling and bringing in a reduced number of policies. Insurers have faced more cancellations and non-renewal of covers during this period more than at any other time. Private medical policyholders are reassessing and terminating non-critical policies such as medical cover that allows access to elective surgery or other ancillary services like dental care.
Additionally, there are increased cases of late payment and non-payment of premiums. This is largely due to the premium grace periods and moratoriums offered by the IRA as part of Covid-19 reliefs. There is, however, an expectation for increased interest in covers around critical illness, disability, life and business disruption. Due to changing financial behaviour, policyholders are likely to take up policies that offer savings and investment options such as annuities offered by insurers.
Insurers are also considering innovative products that respond to current market needs, with a good number rolling out income protection covers in addition to reassessing their pricing strategies in light of current market conditions. There are conversations around usage-based insurance, where the pricing of a motor cover is based on distance covered as opposed to payments of fixed premiums, given reduced policyholders’ mobility.
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With Covid-19, there is an expected upsurge in health-related and death claims. Despite most insurers and re-insurers not covering pandemics, IRA issued a directive in April compelling insurers to promptly process and settle all claims relating to Covid-19. This directive will have far-reaching implications and has been compounded by the fact that it is difficult to predict how long the pandemic will last, and its impact on insurers in the long term.
By principle, an insurer collects premiums priced based on the risk being underwritten, makes investments and uses the proceeds to make claim pay-outs in the event the risk occurs. Most insurers invest in equity shares, assets and property among other investments whose prices have plummeted due to economic shocks elicited by the Covid-19 pandemic.
As insurance staff and customers work from home, there is reduced physical contact, necessitating the need for insurers to upscale their digital operations. Since the onset of Covid-19, insurers have noted an increase in customer correspondence as customers reach out to inquire on their policies and in some instances, review their savings plans. As such, insurers have had to use online platforms to pitch for business and engage stakeholders through webinars. Though this has come at a cost, it will ultimately reduce the need for intermediaries and the cost of doing business.
The IRA requirement for insurers to settle claims related to Covid-19 will disadvantage insurers as reimbursements are not guaranteed for covers which do not contain a pandemic or virus exclusion. Insurers need to insulate themselves from the adverse effects of the pandemic by reducing discretionary expenditure, diversifying the risk portfolio of their businesses, assessing the profitability of classes of business underwritten, increasing customer touch-points by investing in reliable technologies and a review of contingency plans.
Insurers may also consider re-wording their policy terms to eliminate liabilities not covered, but from which potential legal disputes may arise. Further, there is a need for innovative and fairly priced products that include pandemics and to address resultant challenges. As Winston Churchill famously said, “never let a good crisis go to waste”.
Ms Mwangi is an Audit Associate with KPMG Kenya. [email protected]