Insurance Regulatory Authority (IRA) Commissioner of Insurance and Chief Executive Officer, Sammy Makove argued on Thursday that the introduction of health insurance policies whose prices have not been set by actuaries has been one of the reasons why the medical insurers are perennially posting losses.
“Life and medical products must be properly priced because there is morbidity and probabilities of how many times somebody can get sick and so you need the input of an actuary. You cannot just assume the ‘rule of thumb’ numbers that we charge so much money,” the commissioner said.
A lot of companies seem to be applying this principle with estimates showing that only one in 10 medical underwriters use actuaries for their pricing.
This has taken a toll on their performance with data from the Association of Kenya Insurers showing that in 2010, this class of insurance suffered the highest loss ratio of 81.5 percent when compared to other categories of insurance.
The ratio which is computed as a percentage of the income generated from premiums over the total number of claims made effectively means that for every Sh100 worth of premium paid, Sh81.50 is paid out as claims.
And while this loss ratio has been increasing every year, the irony is that it is one of the classes that have been growing significantly in the last two years posting an improvement of 25 percent in 2008/ 2009 and 26.27 per cent in 2009/2010.
This disconnect, the Actuarial Society of Kenya Chairman James Olubayi explained was due to the fact that many insurers are only concerned with only growing their revenues.
“Insurance companies seem to be quite keen on growing their top-line to grab the money in but not quite keen on the profitability,” he said.
The other reason he added was due to the fact that many businesses are broker-driven meaning that these agents generally try to drive the prices down.
With the directive which takes effect immediately however, the regulator is moving to avert a collapse of this class of business which is important in the penetration of insurance products which is still very low in the country.
For this goal to be achieved however, the industry will require the assistance of professions such as actuaries to help unpack the highly complicated and technical concepts in the sector.
At a regional congress of actuaries in Africa, the role of these professionals particularly in objectively mapping risks and opportunities in the medium and long term was reinforced.
However, the region will have to first address the shortage of qualified actuaries challenge. Kenya is already on the way to addressing this skill gap with the IRA’s committing to sponsor five students each year to study actuarial science in the United Kingdom.
Their intention is to have a ‘critical’ pool of not less than 30 qualified actuaries over the next five years who will be deployed in the local market.