Insurers between a rock and a Covid hard place

As governments begin to ease restrictions put in place to contain the spread of Covid-19 pandemic and revive economies, the insurance industry continue to be battered by the resultant effects of the pandemic due to uncertainties in the market and increased claims that have for a long time relegated insurance to a nice-to-have as opposed to a must-have.

Insurers in Kenya are grappling with effects of the disease amid new capital adequacy requirements by the Insurance Regulatory Authority (IRA).

The IRA requires companies to meet 200 percent (previously 100 percent) of the Prescribed Capital Ratio (PCR). And while a good number of insurers were compliant by the effective date of June 30, 2020, others had not met this requirement.

The current market turmoil puts pressure on insurers to remain sufficiently capitalised and others to navigate the new challenges and comply. The IRA is also closely monitoring the liquidity of insurers in Kenya. In a directive to all insurers, the IRA has required submission of stress and scenario tests, including capital adequacy calculations and liquidity strains to determine the impact of Covid-19.

There has been a decline in the gross written premiums during the pandemic as insurers experience reduced insurance uptake in retail and consumer sectors, due to response measures taken by various entities. Brokers are also struggling and bringing in considerably reduced number of policies.

Insurers have faced more cancellations and non-renewal of covers during this period more than any other time in recent history.

For example, private medical policyholders are reassessing and terminating non-critical policies such as medical cover that allows access to elective surgery or other ancillary services like dental care. Additionally, and due to liquidity issues presented by Covid-19, there are increased cases of late payment and non-payment of premiums.

This is largely due to the premium grace periods and moratoriums offered by the IRA as part of Covid-19 reliefs. There is, however, an expectation for increased interest in covers around critical illness, disability, life and business disruption.

Due to changing financial behaviour in response to uncertainty, policyholders are likely to take up policies that offer savings and investment options such as annuities offered by insurers.

Insurers are also considering innovative products that respond to current market needs, with a good number rolling out income protection covers in addition to reassessing their pricing in light of current market conditions. For example, there are conversations around usage-based insurance, where the pricing of a motor cover is based on distance covered as opposed to payments of fixed premiums, given reduced policyholders’ mobility.

As Covid-19 cases rise, there is an expected upsurge in health-related and death claims. Despite most insurers and reinsurers not covering pandemics, the IRA issued a directive in April compelling insurers to promptly process and settle all claims relating to the disease, including last expense claims or death benefits.

This directive will have far reaching implications and has been compounded further by the fact that it is difficult to predict how long the pandemic will last, and the impact it will have on insurers in the long term.

The pandemic has led to massive job losses and pay cuts. As a result, claim pay-outs are expected to rise in classes like worker compensation, employer’s liability and credit insurance that covers banks against loans that customers cannot pay.

Additionally, insurers will have to contend with claims related to business disruption. This will likely expose insurers to litigations considering that such covers are not priced to cover against communicable diseases.

There are potential disputes between insurers and reinsurers, arising from loss exposure by Covid-19 claims. Policies on life covers, for instance when reinsured did not include the coverage of a pandemic. The IRA requirement for insurers to settle claims related to the virus will disadvantage insurers as reimbursements are not guaranteed for covers which do not contain a pandemic or virus exclusion. As such reinsurers may be reluctant to pay for these claims as they seek to protect their balance sheets.

During this period, there has been an increase in disputes between policyholders and insurers over claim pay-outs that ended on IRA’s table. As a result, the IRA has tightened its scrutiny in protecting policy holders and beneficiaries.

The effects of the pandemic will vary, but insurers need to insulate themselves by reducing discretionary expenditure, diversifying the risk portfolio of their businesses, assessing profitability of classes, and investing in reliable technologies.

Ms Mwangi is an audit associate with KPMG Kenya. The views are her own. ([email protected])