Kenya’s insurance regulator wants to conduct an actuarial study to determine appropriate premium rates for the sector amid persistently lower penetration levels.
The Insurance Regulatory Authority (IRA), which regulates insurance and reinsurance practices in the east African country, said there is a strong evidence that premiums paid by different customers currently vary with the cost of providing the cover.
“Although there has been a host of new and somewhat radical products, overall the premium rating environment has remained relatively dull especially in the last couple of years as concerns remain about insurance uptake, usage, value, quality, availability and affordability for many consumers,” said the IRA.
The regulator therefore wants to hire a consultant to review the existing legal and regulatory framework, policies and practices used by Kenyan insurers in rating premiums. The consultant will engage insurers and customers in identifying gaps in current laws and recommend areas to overhaul.
The study will also conduct scenario analysis to understand the extend by which the current premiums consumers pay are above or below their risk profile.
“The analysis should further consider how the market is working currently, how it should develop and the measures to be put in place to ensure that the premium is commensurate to the risk exposure,” said the IRA.
The end game will be to develop insurance premium rating policy for insurance products to guide in what IRA calls “streamlining the management and administration of benefits”.
Insurance penetration in Kenya stands at 2.46% in an economy of 46 million people with an expanding middle class.
Premium setting for insurance products in Kenya is currently based on specific personal characteristics and history of consumers. But many customers end up paying a different premium at renewal, mostly above the original one, and this has influence on uptake, usage and quality of insurance products.
The IRA reckons that customers’ behaviour for insurance is changing rapidly especially with the youthful population and new approaches and technological solutions will be required to meet their ever-evolving expectations.
Covid-19 induced shocks resulted in economic contraction and expansion of exclusion gap for insurance services, according to the IRA.
“In light of this dynamic, pricing of insurance products and the insurance premiums paid by consumers need to adopt a framework for dealing with questions about how fairness of premium rates can stimulate uptake and usage of insurance products,” said the regulator.
Different underwriters in Kenya have been using different business models in setting premium rates. Most models depend on specific personal characteristics of customers including age and behaviour, as well as other considerations like customer acquisition costs, commissions and marketing expenditure.
But customers in Kenya have shown high levels of premium pricing sensitivity, triggering cut-throat competition that has sometimes ended in price undercutting.
The IRA said the current premium rating and risk classification is facing challenges and require overhaul.
“Besides a competitive market environment, various risk- rating factors commonly used are being questioned,” said the regulator. “Supply-side players must find risk-rating factors that can be determined as accurately as possible and also earn social acceptance.”
The IRA further wants insurers’ premium rating to be based on the comprehensive knowledge of individual customer’s needs.
Intensified application of what the regulator called “customer-oriented risk-based premiums” is seen as the key to opening doors for more customers to sign up for underwriting products. Sticking to the current premium ratings, IRA cautioned, may distort competition, increase cost for underwriters and consumers and therefore result in higher prices.
The planned premium ratings review comes at a time Kenyan insurers are in a legal battle with customers over premiums for motor vehicles. Many insurers had from January raised their premiums in bid to shield themselves from rising underwriting losses in motor insurance.
General insurance makes up more than 60% of annual gross written premiums in Kenya, with motor and medical being the largest classes of insurance. Apart from premium pricing challenges, the Kenyan insurance market also suffers from fraud and dissatisfied customers over disputes or delays in processing claims.