Despite the success of the ‘no premium, no cover’ initiative, the insurance industry is confronted by the problem of rate-cutting among operators. Stakeholders are of the opinion that if left unchecked, many insurers will be running at a loss, NIKE POPOOLA writes
Towards the end of the last financial year, the National Insurance Commission read out the riot act to operators that they should not provide cover for policyholders who failed to pay premium on their policies. The aim was to bring to an end credit transactions and premium payment default in the industry.
While the ‘no premium, no cover’ policy is making significant progress and stakeholders are adjusting to the new regime, operators are still faced with a major challenge of rate-cutting, which results from cut-throat competition.
Rate-cutting is a situation whereby an underwriter charges ridiculously low premium on an insurance contract in order to secure it, even if it has to be done at a loss.
While premium payment default may soon be phased out, rate-cutting has the tendency to make the insurers to continue to do business at a loss, and overtime, it will affect their ability to remain in business.
As a way out of the quagmire, members of the Nigerian Insurers Association signed a market agreement in 2009.
The major objective of the agreement was to ensure that members did not charge inappropriate premium rates in their thirst to get businesses, a situation that could make them to be unable to settle claims.
Unfortunately, while most members of the association concurred on the market agreement terms, as soon as they left the meeting, they seemed to have forgotten what they had signed and resumed business as usual as far as rate-cutting was concerned.
The underwriters made another attempt to resurrect the agreement, but unfortunately, they still found it hard to stick to the terms.
As a result, the operators have continued to groan that most corporate and government accounts are unprofitable to them, even though they have to pay huge claims.
The Managing Director, Equity Assurance Plc, Mr. Ekpe Ukpabio, blamed rate-cutting on pressure on the industry because every underwriter desired to have a piece of the available business.
“Of course, we are burning our fingers because some will go to the market with rates that are not commercially viable just to get the business,” he said.
While noting that underwriters were not giving priority to proper risk assessment because of this, he said governments and corporate bodies usually give the business to the firms with the lowest rates.
“You are left to either take it or back out of the consortium. Some people have backed out because it is not helping the bottom line. But some will say because of the profile of the client, they want to be part of it,” Ukpabio added.
The President, Chartered Insurance Institute of Nigeria, Dr. Wole Adetimehin, said the issue of rate-cutting was debatable.
According to him, rate-cutting can make a firm to continue to record underwriting losses when it is not generating enough premium and needs to pay claims
In charging rates, he said in a particular year, if there were huge losses, which could destabilise the insurance pool, what the insurers should ideally do was to raise the rates the following season.
Claims experience, he added, would help to ascertain if a particular class of insurance was good or not, and if the rate should be reviewed upward or downward.
He also expressed worries that local manufacturing industries were not springing up while old ones were dying.
The implication of this, Adetimehin said, was that companies that should be insured were reducing in numbers and insurers were equally scrambling to get businesses from the few existing ones.
For this reason, he said where the insurers should be proposing an increase in rate; they lacked the courage to do so because if one firm did it, others would be waiting for the opportunity to grab its business.
Adetimehin, however, said, “I think insurers should be able to hold on to their market agreement. If everybody is talking the same language, it becomes very difficult for the insured or any broker to impose any rat, because if you move from company A to B, you will meet the same brick wall.”
The Chief Business Analyst, North Waterloo Farmers Mutual Insurance Company, Canada, Mr. Kehinde Borisade, said rate-cutting was not prevalent in North America because it was a mature and evolving market that operated within an organised structure where regulation and code of ethics were taken very seriously.
According to him, flouting the law can lead to severe sanctions.
“An insurer has to seek rate change approval from regulatory authorities and adequate notice and reasons for rate changes must be given to the brokers and affected clients before changes are effected,” he said.
Borisade pointed out that NIA, in conjunction with all stakeholders, could play a leading role in overhauling the rating system and structure of premium rating by creating a rating bureau.
The bureau, he added, would collect loss information, which could then be analysed to ensure premiums were adequate to cover losses, expenses, allow for profit and also maintain insurers’ solvency.
“NAICOM, NIA, Nigerian Council of Registered Insurance Brokers, CIIN and other stakeholders, as part of their code of ethics, can also establish whistle-blowing policies to expose errant companies,” Borisade said.