Insurance: Addressing the challenges of premium collection
June 28 2010
Source : Onlinenigeria.com
Experts say there is an urgent need to find lasting solutions to the lingering problems of outstanding premium and inappropriate pricing of insurance policies, if the insurance industry must reap the full benefits of consolidation. NIKE POPOOLA reports.
Despite the increased ability of insurance industries to undertake big-ticket transactions, post-consolidation, a major industry challenge has been the issue of premium collection.
Though the activities of the insurers received a boost with increased capital, un-remitted premium and inappropriate pricing of insurance policies, popularly known as rate cutting, have continued to eat into industry profit.
The problems, according to experts, reduce the underwriter‘s financial ability since there is less cash to hold in reserve for claims payment or for investment.
They said the challenges facing the insurers‘ premium must be addressed, since it was a primary source of income from which claims were paid.
According to them, through premiums, players in the industry are able to invest in financial instruments, so as to remain in a good position to continue to meet claims obligations as and when due.
Stakeholders, however, said this issue, which had generated heated debate in the sector, was not peculiar to the Nigerian insurance industry alone.
About 80 per cent of premium earned in the industry come through the brokers, unlike in developed countries where the system is well developed. Individuals in the advanced countries can purchase policies online, while the remaining premium comes through brokers and agents.
Nevertheless, the advanced insurance industries also face keen competition as regards the issue of premium. For instance, an intending policy owner in these industries decides the insurance company he is willing to insure with by the amount of premium he is ready to pay.
The competition, according to experts, is so heavy that the premium a company is willing to sell usually decides the income that it earns.
In Nigeria, however, insurance companies have often times charged ridiculously low premiums in their efforts to secure businesses, and this reduces their ability to pay claims when losses occur. This, experts say, is the reason some members of the public think the companies are inefficient.
To solve the many problems facing the industry, experts have called for enhanced regulation on the issue of rate cutting and other unethical practices, capable of hindering the growth of the sector and eliminating post-consolidation gains.
They said often times, a substantial percentage of the premium on policies were given away in order to secure businesses, while other underwriting costs were incurred, bringing the remaining amount left to the insurers to just about 10 per cent of the premium paid.
This unfortunate situation turns insurance companies into perpetual seekers of new capital at the expense of shareholders even when it may not be easy to raise such capital.
For the companies to remain in operation, therefore, stakeholders maintain that right pricing of insurance products and services must be encouraged.
Where this priority is misplaced, they said the industry might be moving towards extinction.
The Managing Director, Cornerstone Insurance Plc, Mr. Livingstone Magorimbo, noted that the level of outstanding premium was high mainly because it was generated through brokers.
He said the insurance companies were yet to have the check process to know whether a customer had paid or not.
He added that there was also no automatic renewal for businesses, adding that most times, brokers did not get the commitment of the customer before placing the risk or renewing it.
This, he noted, was often discovered during reconciliation.
According to him, ”What you find is that part of the premium you are claiming to be outstanding in your books is premium that has been paid to someone who got the business.”
The managing director observed that this situation was more common with the general business because it was renewed annually.
In such situation, Magorimbo said, the insurance company had no obligation to pay claim on premium that had not been paid by the client or the broker.
As part of efforts of the regulatory authority to address the issues confronting premium in the sector, it had enforced various regulations while insurers had also entered into market agreement among themselves.
To the Managing Director, Man-Mountain and Company Limited, an insurance broking firm, Mr. Tunde Oyolola, NIA‘s role in getting some guidelines on rating will help.
But he added that the NIA could come out with a guideline rate to help the insurance companies in making decisions, adding that imposing a fixed rate to be charged by a particular company was not in order.
”The rate you accept should depend on your own experience in that class of business over a particular number of years, and if you accept a particular risk in a particular year and you find out that it is not profitable for you, it is left to you to change the rate, which is the competition,” he said.
He explained that competition was based on the experience and data that were in the market, saying this was different from imposing a rate for a particular kind of business.
He said, ”If we now say that nobody should collect a particular rate, like 0.2 per cent of a business, then, what are we selling? It is like we are no longer selling anything and that now comes to the issue of using your veto power and additional connection.
”When the issue of rating comes in, then, that is the bargaining power of the broker and, based on the experience of the particular business, you know what to apply.”
He explained that if a company charged a particular rate in a year and discovered that it was not favourable, then it must stop the risk or, based on its experience, raise its rate the following year.
The brokers said that at a particular level, the rate would be standardised within the market, without the players being compelled to charge a particular rate.
The Managing Director, Fremir Reinsurance Services, Egypt, Mr. Mohammed Naguib, also told our correspondent that insurance regulators should ensure that insurance rates being charged by their insurance companies were not lower than necessary, noting that this was important to guide against bankruptcy.
According to him, ”It is dangerous if the regulatory authorities of each country allow the insurance companies to cut the rates so low and then lose money. This can lead to a situation of bankruptcy. The regulators should control these rates in order to protect the rights of the insured.”
Naguib, while stressing the responsibility of the regulator in protecting the rights of the insured, noted that if an insurance company went bankrupt, it would not be able to pay claims when losses happened and that the people who had insured their policies would suffer for it.
The reinsurer, however, pointed out that the premium charged by insurance companies could not be fixed because rates were in the form of a vicious circle.
”Rates, worldwide, go on a circle; they go up and come down,” he noted.
He added that the rates charged in Africa and other parts of the world depended on the state of the economy and the volume of losses that had occurred.
”When the economy is good and there are few losses, the rates tend to go down because insurers can pay for the losses from their main income,” Naguib said.
According to him, if the economy is down with more losses, insurers may not make much money from investments and will record some losses, which tends to hike the premium rates charged.
This circle, he said, was natural, adding that “It is the responsibility of the regulatory authority to protect the people, as long as the financial standing of the company is strong. Rates, worldwide, go up and down, but the rates should not go down to the extent that companies will start to lose money and then go bankrupt.”