Why insurance uptake has stagnated at 2% for years

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A vehicle burns in a Kigali suburb. Some insurers find difficulty in paying compensation because they sell premiums at low prices, weakening their financial positions. / File.

Months after the regulators, National Bank of Rwanda (BNR) raised concerns about unethical practices like price undercutting and selling premiums on credit, the vices are yet to stop. Experts blame unethical practices for the marginal (if any) growth the sector has recorded over the past few years.

In fact, Rwanda insurance industry has stagnated at 2 per cent penetration rate for the past many years. Experts say this unprofessional conduct could continue to weigh heavily on the general performance of the industry if stern measures are not taken urgently to curb the vice as it could have huge impact on the sector if it is not addressed. The problem has largely developed as players fight for customers in an industry that has just over a dozen players.

Commenting on the situation, Alex Bahizi, the BK General Insurance Company chief executive officer, said insurers should instead focus on brining to the market innovative and high quality products that will help boost sustainability and competitiveness of the industry.

“As a new player, we are aware of the challenge of undercutting, but we believe in having right and approved premium rates as the only way of bolstering the sector,” Bahizi said.

With shaky balance sheets, there are concerns that local insurance companies might not be in position to underwrite emerging lucrative sectors such as real estate and construction.

In fact, Bonaventure Sangano, the head of non-financial institutions at BNR, said in a recent interview with the Business Times that about 40 per cent of the sector’s total assets are now held in receivables, stifling the industry’s growth.

1490051459Workers-from-BRD-irrigating-swamp-in-Rwinkwavu-sector(Appolonia-Uwanziga)
Insurers have failed to design products for sectors like agriculture and small-and-medium businesses to drive growth. / File.  

ASSAR to act

Jean Pierre Majoro, the executive secretary of the Rwanda Insurers Association (ASSAR), said the association promotes professionalism and would investigate the matter.

He, however, said vices such as price undercutting are detrimental to the industry, whose penetration rate has stagnated at below the regional average of 3 per cent.

The official challenged players to be innovative to tap into the vast potential of the sector, especially by developing products for sectors like agriculture and the small businesses.

He said the vice could be partly responsible for the woes that the industry faces presently, including stagnation in growth.

Andrew Lee, the chief executive officer of Mauritius- based Aprica Investments, advised insurers to partner with big international firms to boost their financial standing and, most importantly, ensure best practices instead of ‘competing’ through unethical practices, including price undercutting.

“They should never get involved in price wars unless otherwise,” Lee advised, adding that the vice is a threat to the integrity of underwriters.

“The practice also puts insurers at risk of becoming insolvent or failure to pay customer claims. There is always a challenge of stiff competition, but undercutting premiums to win business does not address this and is also a big threat to the industry,” he noted.

Last month, BNR announced it would not be licensing new players “to give a chance to the sector to stabilise” as well as give insurers time to improve their operations and build public confidence in the sector.

According to a statement signed by BNR Governor John Rwangombwa, the measure is also aimed at improving profitability of the industry.

Central bank officials say unfair and unhealthy competition is among the challenges hurting the sector, which has led to price undercutting.

“This has had an impact on their performance, profitability and capital with most of them having to recapitalise over again. We made a bit of progress by December, as a number of them had been able to recapitalise,” an official of the regulator told reporters recently.

The move is expected to give BNR time to implement some of the changes that it has started, restore confidence and good practices in the sector, going forward.

Sector performance

The number of insurance firms stood at 15 insurers by December 2016, nine of which are non-life underwriters, four offer life policies, while are two others provide public medical insurance cover. The sector has 15 insurance brokers and 415 agents.

The sector’s total assets increased by 13.7 per cent to Rwf346.8 billion over the reporting period, up from 12 per cent growth registered in 2015.

The private insurers assets increased by 16 per cent to Rwf134 billion in December 2016 against 6.5 per cent registered in 2015, thanks to Rwf6.7 billion fresh capital injected by private insures during the period under review.

The insurance sector net profits rose from Rwf24.3 billion in December 2015 to Rwf24.6 billion in December 2016, driven by good performance of public insurers whose profit after tax rose from Rwf26 billion to Rwf29 billion.

Private insurers however recorded a net loss of Rwf4.4 billion as at end December, 2016 as compared to a loss of Rwf2.7 billion the previous year.

The central bank said the negative development was mainly driven by unhealthy competition among private insurers that led to price undercutting and an erosion of premiums underwritten. This was further exacerbated by high claims ratio and management expenses.