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Can the Insurers Insure Themselves?

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Two stories about the insurance industry and the trouble it finds itself in today. The first, in Business Daily Africa, is about the collapse of Standard Assurance, brought down by claims from matatu operators. The second, from the Nation, concerns a ruling by Mr Justice Jacktone Ojwang on the Work Injury Benefits Act 2007, parts of which he was declared unconstitutional.

What links the two stories is the impression given of an industry in disarray, with few coherent strategies to weather the current economic storm. The High Court Ruling will dry up a valuable revenue stream for insurers, according to Tom Gichuhi of the Association of Kenya Insurers (AKI), while his colleague Nelson Kuria has made discouraging noises about industry profits, which has yet to be announced:

Banks have been announcing their results and it has been celebrations all over. Wait until the insurance industry starts announcing their results and you will see how bad the situation is.

Losses have been blamed on rampant fraud in the PSV sector and on reduced investment income. What strikes me as odd, however, is the fact that firms have been registering losses from their underwriting operations for some time now. This suggests that premiums for those insured are too low. Any acturial department worth its salt would have factored in the potential number of claims and putative value of those claims before setting a price for coverage.

Of course, maybe, in their haste to sign up as many customers as possible, the insurers overlooked such petty matters and began a race to the bottom, hoping that their investment income would cover the cost of paying claims. That’s a tricky strategy at the best of times, and it looks downright foolish given the stock market’s recent performance.

With Standard Assurance having collapsed for want of Ksh100 million, the AIK, as the industry body, must increase the capital requirements for its members. This, however, could be difficult in the current circumstances, unless any of the insurers happen to be on friendly terms with a Sheikh. What would be totally unacceptable, on the other hand, would be for industry players to do nothing and leave thousands more people with worthless insurance policies.

[Image by Sam the Sham]


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