Undercutting can retard industry growth
Published On January 28, 2014 » 3283 Views» By Administrator Times » Business, Columns
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Insurance talk logo2IN 2012 the Pensions and Insurance Authority (PIA) introduced minimum premium rating guidelines which took effect on June 7.

These guidelines were issued pursuant to powers vested in the regulator in Section five of the Pensions and Insurance Act Cap 255.

Prior to 2012 each insurer had the prerogative to charge whatever premium they deemed right based on their own underwriting philosophy.

Insurance premium is simply an amount of money paid by the client as consideration for transferring a risk to another party called an insurer.

Without paying premium or an agreement to pay it the contract is not valid at law.

This premium should be sufficient to cater for among other things; administrative expenses such as printing documents, salaries and other employee benefits, claims or risk premium, commission in case of an intermediary, reinsurance premium where possible and some profit for shareholders.

The conventional premium brought to the pool is supposed to be commensurate to the degree of the risk i.e. the higher the risk the higher the premium.

Technically the premium can be adjusted to take into account competition prevailing.

At present there are twenty three insurance companies in Zambia all competing for the K1.4 billion written premiums as at close of 2012.

A considerable number of these companies are new entrants and one of the strategies for new entrants is throat cutting in order to penetrate the market.

So what is undercutting? This is charging lower than the minimum premiums guided by the law.

With undercutting it means insufficient premiums will collected and it will put pressure on paying claims, paying wages and ultimately profits.

This will also mean retarded growth to the industry.

The practice can also attract prosecution of officers or companies involved.

Prior to the intervention by the regulator the situation became precarious such that if it was left unchecked it would further dent the image of an industry which was already struggling to win the trust of the mass of the people.

The stiff rivalry alluded to above pushed some insurers to adopt the unconventional strategy of undercutting premiums just to win business at all costs but without collecting sufficient funds to pay claims.

Although there are no statistics to prove this point those in the industry know about this game.

Failure to pay claims does not only tarnish one insurer but spreads across the industry.

The message would be ‘insurance companies’ don’t pay claims on time.

Following the introduction of minimum rates there has been a strong argument as to whether we are in a controlled economy or a free market one. One would expect that being in a free market there should not be price controls.

In this column I will not delve into the debate of the dynamics of the different types of markets discussed in economics.

However, suffice it to state that Zambia is not the only country that has minimum rates.

Uganda and Ghana are good examples with controlled pricing among many other countries.

Apparently the challenge of undercutting is still found in all these countries.

While researching on this article I came across interesting stories on the internet from Uganda and Ghana on the implementation of minimum rates.

Whereas regulators have the mandate to enforce this law the practice is still going on by a number of players.

The question now is do the regulators have the muscle to monitor the implementation or do they have the ‘teeth’ to bite the dissenters.

Hopefully PIA can comment through this column.

I also ask players and the readers of this column to make comments on this subject. Do we need minimum rates? What is the best way to implement them?

Comments: webster@picz.co.zm or webster_tj@hotmail.com or on facebook search for Insurance Talk zambia page or 0977857055

(The author is a Chartered Insurer with ten years industry experience)

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