Private insurers in Rwanda have returned to profit, but huge motor vehicle accident claims are pilling pressure on industrial margins, reflecting a tough business environment.
National Bank of Rwanda Governor John Rwangombwa cited a combination of weak underwriting risk assessment, price undercutting and high claims as some of the practices reducing profits.
As such, while the the private insurer’s net profits expanded by 169.4 per cent to reach Rwf3.3 billion ($3.8 million) in between January-December 2017, from negative Rwf4.7 billion ($5.5 million) in 2016, the contribution of the mandatory motor vehicle premiums have remained in the negatives for the fourth straight years.
“The net underwriting losses for private insurers stood at Rwf4.3 billion ($5 million) as at December 2017,” said Mr Rwangombwa during the presentation of the Monetary Policy and Financial Stability Statement on March 6.
On their part, the insurers complained that the current minimal wage used as a basis for compensating accident victims is the biggest contributor to the losses.
The insurers say compensations for motor vehicle accident victims in Rwanda has remained high compared with other East African countries. This is largely because Rwanda has unlimited liabilities while Uganda and Kenya have caps.
They argue that the process of coming up with a minimum wage to compensate accident victims, which was decided by a courts of law, was done without involving the insurers. As a result the minimal wage is the highest in the East African Community.
“In the 1940’s the minimum wage was Rwf10 then later increased to Rwf80. But courts are awarding Rwf3,000 ($3.5) per day to accident victims,” said Alex Bahizi CEO of Bank of Kigali General Insurance.
“If an 18-year old victim sustains injuries during a car accident, current regulation requires that they are compensated for the rest of their lives as the assumption is that they will have worked for the rest of their life,” said Mr Bahizi.
When the Rwf3,000 minimum wage is multiplied by say 48 years, the victim can get upto Rwf52.5 million ($61,425) — a figure insurers say is huge in a competitive motor vehicle insurance sector.
New pricing model
The insurers have come up with a draft legislation that was presented to the insurance industry regulator — National Bank of Rwanda — to correct the industrial anomaly.
The draft law comes shortly after the insurers hiked motor vehicle insurance premiums to protect their profits and shareholders’ capital.
The motor insurance premiums were hiked by up to 73 per cent in January, causing an uproar in the country.
The mandatory third party insurance policy was increased by 40 to 73 per cent, while the comprehensive package has increased from 3.5 per cent of the value of the vehicle to 4.5 per cent.
The central bank strongly believes the new insurance pricing model will further improve business for the insurance sector.
Mr Rwangombwa said there was a need for proper assessment of insurance risk and appropriate pricing if private insurers are to sustain solvency at required levels.
On a positive note, the liquidity ratio of private insurers improved to 127 per cent from 106 per cent. This falls within the required liquidity position range of minimum 120 per cent and maximum 150 per cent for insurers.
“Better management of receivables, combating fraud in the claims process and containment of management expenses is also expected to improve the insurers underwriting profits,” said Mr Rwangombwa.