Insurance companies announced an increment of 73 per cent for mandatory motor third-party insurance premium that was implemented effective January 1, 2018 for both public and private vehicles.
The move has angered many motorists, who are now accusing the Association of Insurers in Rwanda (ASSAR) of working like a cartel. They also fault the central bank for sanctioning the new prices, where motor third-party insurance rates were almost doubled. Rates for comprehensive insurance were also raised by a percentage point.
In an interview with Business Times’ Peterson Tumwebaze, the Association of Insurers Rwanda president, Gaudens Kanamugire, said the move is the “best alternative at hand” to safeguard insurance businesses in the country.
The recent decision by insurers to increase premiums for motor vehicle policies by 73 per cent has angered the public, who are now calling the association a cartel bent on fleecing car owners. What do you have to say about this?
First of all, the public needs to understand that, like any other local industry association, our task is to ensure that players adhere to high level of professionalism and international standards to be able to offer quality services to the public.
These standards are not unique to Rwanda, but rather are accepted both at regional and international level. This is why we often spread the risks we cover across local and international markets. And we have always been blamed for not following these standards.
Secondly, our market given the historical financial situation, especially for motor vehicle insurance has been doing poorly for the past five years. In fact, if you examined most members’ books, you will discover that we are making losses of more than Rwf6 billion per year, mainly on this particular product.
Therefore, the association has an obligation to find ways to address this challenge, which we have done in this case.
It is also important to understand that, if everyone is making losses, then the problem is most probably the market and not individual companies.
The National Bank of Rwanda, which is the sector regulator, seems to be suggesting that the increment should have been done gradually…
We commissioned a study on pricing with the help of the central bank five years ago. We procured consultants to conduct the study through BNR, which also supervised the study.
To answer your question, the idea was to increase the prices gradually by a proportion of 60-20-20 per cent over three years. However, central bank did not authorise this increase but rather requested us to first fix the other challenges and loopholes for at least the first year after the study.
It is not until recently that we realised that a failure to implement the study recommendations has worsened the situation. So, we had no choice but to implement these recommendations, which had been on hold for five years, immediately to support the sector and save players from possible collapse.
You know the some insurers were either delaying to pay claims, or not paying at all. This is because contributions are not adequate to pay off all the claims.
What has been happening is that some firms are often forced to pay using their capital, which has meant that most companies have had to recapitalise, with some recapitalising three times in the last five years. In fact, some investors closed shop.
We are expected to provide high quality service, but how do you do that when you are running broke? In the last five years, management of most insurance companies has been changed without any positive results. This means that the issue is not about management, but rather the market pricing.
Even when you compare with players in the region, Rwanda’s insurance cover premiums are the lowest and yet we are a landlocked country which makes it again difficult, especially when you are to buy these car spare parts.
What has been the response from the public so far in regard to new prices?
People have started to understand and appreciate the reasons behind this increase and are paying for the insurance cover accordingly.
The regulator has already been informed about the adjustment. Though the regulator’s concern was that prices be based on the actuarial study for as long we don’t create a cartel.
What we did was to fix the minimum and not maximum. That’s not how cartels operate. In addition, much as we appreciate the fact that this was an abrupt move, customers need to understand that the increase is not designed to harm them.
It is important for the public to understand that the rise in rates is geared at addressing the existing imbalance between what is collected as contributions and what is paid out in claims. Addressing this imbalance requires that we offer products at the right prices, which will also make it possible for insurers to offer better and high quality service, especially in payment of compensation claims.
More so, insurance is a delicate business where you collect Rwf1,000 to pay millions in claims. So where do you get these millions from? This is obviously through pooling funds and at the right rates.
Some people are saying that you are unfair to those with good loss ratio?
This issue has been take care of and we are working on the plan that will see whoever has a very good loss ratio get discounts and those with bad loss ratio the prices will go up. We are trying to come up with a central data history that will compel drivers to pay according to what they represent to the pool.
You claim you have so far made losses amounting to Rwf30 billion on this product in the past six years. Why did you take long to make these adjustments?
This price was not determined randomly but rather through a scientific study (actuarial mathematics). This study indicated that for us to be able to pay these millions in claims, a minimum price had to be set on premium. This was to help address the imbalance between contributions and what we are paying in claims from out of the pool.
People need to understand that insurance works in reverse cycle. It is therefore very wrong to compare insurance with other sector businesses.
Experts say that insurers are not innovative to bring more products on the market instead of relying on motor vehicle insurance...
We are aware of that and know that there is room for improvement. However, we are consistently developing new products as per the market needs.
The problem is with products that are not mandatory; the uptake of such non-mandatory products is very poor as it only depends on other factors.
In addition, it is also important to note that each product has to be sustainable and profitable as a standalone. You can’t mix products. So, it is very wrong to assume that if firms are making money on say, property or fire insurance, they should use that money to finance motor vehicle insurance.
So should the public expect more price adjustments on some other products?
There could be other changes, depending on the prevailing market conditions and due to the fact that third party insurance represents more than 60 per cent of our business. However, this will not be the case for comprehensive insurance.
Besides, other products don’t present any threat to the stability of the insurance business in the country. Therefore, you may not see further adjustments going forward.
What will happen to those who already had long-term contracts?
The new prices will not affect the already existing contracts. Clients will continue to pay according to these contracts until they expire.
Apart from delays to pay claims, the sector lacks professionalism. What are you doing to address these challenges?
It is true the market still lacks professional skills, but we are working on that. However, low financial capacity has meant that firms don’t have funds to settle claims, which has created a crisis in the sector that required appropriate intervention to address it. This problem was also caused by some insurers that have been selling policies on credit. In addition, lack of awareness, especially on claim procedures, sometimes causes delays. We are working on strategies that we believe will help streamline the compensation process. We also have a challenge on minimum wage which is very disastrous for the industry.
Why has the sector not embraced micro-insurance?
It is one of the segments where we see a lot of potential… Presently, most of competition is happening on the high-end market segment and not on the low-end.
We are, therefore, encouraging our members to tap into the opportunities that come with micro-insurance.
This will however require them to be more innovative.