Businesses, individuals and households have in Kenya spent Ksh43 billion ($430 million) in premiums on non-existent insurance covers after agents failed to remit the payments to insurers, exposing the customers to heavy losses when they make compensation claims.
Kenya’s Insurance Regulatory Authority (IRA) has disclosed in court documents that insurance brokers collect billions of shillings from customers but fail to remit the money to insurance companies as required.
This means that the risks covered, which are in excess of Ksh500 billion ($5 billion), are not recognised under the “cash and carry” principle. The principle stipulates that if an insured party suffers loss before the premium is remitted to the insurer then the insured cannot be compensated.
As a result of agent’s failure to meet their statutory obligations, general insurers are owed Ksh42 billion ($420 million) while companies offering life covers are owed Ksh1 billion ($10 million).
Analysts say 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 Ksh43 billion ($430 million) is equivalent to 19.8 percent of the Ksh216.2 billion ($2.16 billion) gross premiums that Kenya’s 37 insurance firms underwrote last year.
Unremitted premiums have piled up over the years from Ksh26 billion ($260 million) in 2014 to Ksh43 billion ($430 million) 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 insurance regulator has disclosed the pile of insurance premiums held by brokers 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 effective July this year, barring brokers from handling cash on behalf of insurers. However, the brokers received a temporary court injunction allowing them 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 regulator cites the example of Online Insurance Brokers Limited which collected premiums from one Eunice Ndathi but failed to remit the money to AIG Kenya Insurance Company Limited. The move resulted in the insurer refusing to pay the customer’s claim, which had been assessed at Ksh14.7 million ($147,000).
The underwriters have been writing off increasingly larger sums, with provisions for the bad debt standing at Ksh3.5 billion ($35 million) 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 Ksh10 billion ($100 million) on capital adequacy for credit risk,” Mr 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 Ksh1.15 billion ($11.5 million) by agents as of last year, followed by East African Reinsurance Company (Ksh1.13 billion) and Jubilee Insurance (Ksh930.8 million). Others are CIC General Insurance (Ksh803 million), APA Insurance (Ksh720.7 million) and ICEA Lion General Insurance (Ksh605.5 million).
Brokers listed as the biggest defaulters are Minet Kenya, which owes underwriters a total of Ksh1.5 billion ($15 million), followed by D&G (Ksh441.5 million) and Zamara Risk & Insurance (Ksh358.5 million).
The Association of Insurance Brokers Kenya (AIBK) — the agents’ lobby group — argues that the ban on cash handling, contained in the Insurance (Amendment) Act No. 11 of 2019 & Regulations, will drive its members out of business.
During the process of changing the law, brokers had last year lobbied Parliament for a compromise, pushing instead for a penalty to be introduced to address the issue of embezzlement of premiums. As a result, MPs approved a Bill that allowed brokers to receive premiums but forward the cash to insurers within 14 days.
However, when the Bill went for presidential assent with the brokers’ recommendations, President Uhuru Kenyatta declined to sign it and sided with the National Treasury, which had sought to lock out the brokers.