Kenyan businesses, individuals, and households are parting with billions of shillings as premiums for insurance cover that is pretty much non-existent.
This exposes customers to huge losses when they make claims for compensation. And that’s because the insurance principle stipulates that if an insured party suffers loss before the premium is remitted to the insurer, then the insured cannot be compensated.
As much as KES 43 Bn paid by businesses, individuals, and households in Kenya as insurance premium to insurance brokers were not remitted to insurance companies. This implies that the risks covered which are in excess of KES 500 Bn are not recognised under the “cash and carry” arrangement.
Due to the failure of agents to live up to their statutory obligations, general insurers are owed KES 42 Bn while companies offering life covers are owed KES 1 Bn.
The view from analysts is that premiums paid to general insurance companies represent between one and five percent of the value of the risks covered, meaning that customers expect to be protected from losses of much higher values.
The KES 43 Bn is equivalent to 19.8 percent of the KES 216.2 Bn gross premiums that Kenya’s 37 insurance firms underwrote last year.
Over the year, there has been a build-up of unremitted premiums from KES 26 Bn in 2014 to KES 43 Bn last year. Policies covering motor vehicles have the highest premiums of between four and five percent of the value of the vehicles. Other policies in the general insurance segment include engineering, domestic fire, industrial fire, medical and theft.
The pile of insurance premiums held by brokers has been disclosed by Kenya’s insurance regulator in a court case where the agents are fighting a law that bars them from receiving customers’ payments on behalf of insurers.
The Insurance Act was amended earlier this year and it took effect from July. The amended act bars brokers from accepting cash on behalf of insurers. But that was before the brokers a temporary court injunction gave brokers the power to continue receiving the premiums until the dispute is determined.
Defending the law change, the sector regulator says brokers were exposing customers to heavy losses besides weakening the financial stability of insurers by failing to remit the premiums collected.
“The intention of the amendments is to enhance liquidity of an insurer and promote payment of claims, while eliminating the perennial problem of outstanding premiums,” IRA chief executive Godfrey Kiptum says in a replying affidavit.
The underwriters have been writing off increasingly larger sums, with provisions for the bad debt standing at KES 3.5 Bn last year alone.
“The writing off as bad debt has an impact on the insurer’s financial position and liquidity. Further, the insurers had to bear the burden of KES 10 Bn on capital adequacy for credit risk,” Kiptum says.
He argues that brokers should only earn commissions for their work and should have no further interest in premiums collected.
Underwriters with the biggest exposure are UAP Insurance which was owed SKES 1.15 Bn by agents as of last year. UAP Insurance is followed by East African Reinsurance Company (KES 1.13 Bn) and Jubilee Insurance (KES 930.8 Mn). Others are CIC General Insurance (KES 803 Mn), APA Insurance (KES 720.7 Mn) and ICEA Lion General Insurance (KES 605.5 Mn).
Brokers listed as the biggest defaulters are Minet Kenya, which owes underwriters a total of KES 1.5 Bn, followed by D&G (KES 441.5 Mn) and Zamara Risk & Insurance (KES 358.5 Mn).
The view from the camp of the agents, under the aegis of the Association of Insurance Brokers Kenya (AIBK), is that the ban on cash handling will drive its members out of business.
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