The insurance industry regulator says that several motor vehicle underwriters could collapse if minimum customer premium charges are removed.
The Insurance Regulatory Authority (IRA), in court filings intended to defend price fixing in the industry, says the price floors were introduced after several motor vehicle insurers faced collapse after undercutting competitors without considering that insuring some classes of vehicles is riskier than others, or that their premiums were not commensurate with the risks covered.
The IRA is responding to a suit filed by the Office of the Ombudsman challenging a set of guidelines published by the regulator that fixed minimum premium charges.
The Ombudsman argues that the price fixing has restricted the lion’s share of business to a small cartel of big industry players.
“IRA identified other challenges bedeviling the motor vehicle insurance industry to include fraudulent claims that accounted for about 40 per cent of all claims lodged, gross under-reserving for incurred but not reported claims leading to accumulation of liabilities in the long-run and increasing the risk of insolvency.”
“In 2008 private motor vehicle insurance business ran into an underwriting loss Sh1.161 billion. IRA as a regulator became greatly concerned and this formed the basis and rationale to introduce measures to stabilise the motor insurance sector,” the IRA says.
The regulator effected the new prices in March 2011 through a circular that prescribed a minimum amount that firms can charge clients seeking vehicle cover.
Commission on Administrative Justice holds that the price cap has given an unfair advantage to the bigger market players.
While the Ombudsman claims a cartel is running the industry, he has not named the companies suspected to be pulling the strings behind the scenes.
But in the suit papers he holds that the model adopted by the IRA did not create a level playing field for all players in the insurance industry.
The Ombudsman has enjoined Attorney- General Githu Muigai in the suit in his role as government adviser.
The commission insists that the circular in which the pricing directive was issued must be declared null and void, as the regulator does not have the power to set premium prices.
But the IRA holds that it acted within its constitutional mandate in fixing the prices, and that the move has boosted strength of players in the motor vehicle insurance sector who, the regulator holds, now stand a lower risk of going under.
“The guidelines have stabilised the insurance industry by significantly reducing the risk of collapse of companies in the industry as had been happening in the past by ensuring proper underwriting of risks. The guidelines have increased business and the performance of insurance companies thus enabling insurers to pay claims as contracted,” the industry regulator adds.
The Ombudsman adds that the IRA’s role in the insurance industry is restricted to discipline, quality, prevention of dishonest practices and professionalism – hence the regulator acted outside its mandate in setting price caps. Leonard Ngaluma, the Office of the Ombudsman CEO, adds that the guidelines were never gazetted hence they have no standing in law.