Shareholders of East Africa’s insurance firms are staring at reduced earnings this year due to the rising cases of fraud and premium undercutting by competitors.
A new survey by analysts shows increased cases of fraud within the general insurance business, posing a significant threat to the profitability of insurance firms.
“The rising costs of fraud presents insurers with the challenge of being unable to adequately price risks, leading to deteriorated returns to equity,” says a survey by consultancy firm Deloitte.
The survey notes that while regional insurance market offers a lot of growth potential, fraud, price wars and inefficiencies in claims settlement significantly affect shareholder returns.
“Unless insurers introduce simpler products and be quicker on claims settlements, they will remain at risk of stunted organic growth,” said Deloitte in Unlocking the potential: Insurance outlook report for East Africa 2018.
According to the report, Kenya’s group life business registered slower growth compared with the combined life insurance business due to price wars among industry players.
Another market study by stock brokerage firm AIB Capital shows fraud as a menace, with low insurance penetration leading to cutthroat competition.
“As a result of stiff competition insurers are undercutting each other in product pricing in order to gain market share despite the risk that comes with product mispricing,” says AIB Capital, adding that fraudulent claims are on the rise in motor and medical segments of the insurance business.
An earlier study by consultancy firm KPMG found out that fraud accounted for about 25 per cent and 33 per cent of the total cost of insurance premiums in Kenya and Tanzania respectively.
In Uganda and Rwanda, it accounted for 10 per cent and five per cent of the cost of insurance premiums respectively.
According to KPMG, a high incidence of fraud provides opportunities to improve claims management.
East Africa’s insurance penetration has stagnated below two per cent for decades.
Tanzania and Uganda report penetration of less than one per cent, Rwanda less than two per cent while Kenya’s, overall insurance penetration has stagnated at an average of 2.8 per cent since 2015.
On the continent, South Africa, which boasts the largest insurance market, has the highest penetration ratio of about 14 per cent.
Other major markets are Morocco, Egypt, Kenya and Nigeria, with Africa’s top five insurance markets accounting for 85 per cent of total premiums.
Africa’s low insurance penetration remains the biggest opportunity, provided the array of products and innovative distribution channels are used to access the continent’s corporate and partly untapped retail consumer base, including its growing middle class.
Africa’s insurers point to the importance of an adequate regulation to control and facilitate the market’s expansion.
In East Africa, the slow growth of the insurance sector is partly attributed to lack of variety of insurance products, particularly targeting low-income earners and low levels of awareness on the need for insurance.