Insurance industry regulator, the IRA, has been barred from setting minimum premium prices for motor vehicle insurance, leaving market forces to determine costs and promising consumers some pricing relief.
In a decision delivered after months of hearing a petition filed by the Ombudsman, the High Court found that the Insurance Regulatory Authority (IRA) does not have a role in fixing insurance premium prices.
The judgment renders the 2009 motor insurance guidelines null and void.
“From my interpretation and understanding of the provisions of the Statute on what regulation and supervision entails, I find nothing to suggest, even in the slightest manner that regulation and supervision entail setting prices. I find no express or implied mandate in the Statute to suggest that the IRA has powers to issue the said guidelines,” Justice John Mativo ruled.
“The Motor Insurance Underwriting Guidelines issued by the first Respondent under circular No. IC 07/2009 dated 20/11/2009 are illegal, unconstitutional and therefore null and void for all purposes.”
The decision comes as relief to motor vehicle owners, who are now free to buy insurance from firms offering the lowest premium rates.
The IRA’s guidelines saw motor vehicle insurance premiums rise to 7.5 per cent of a car’s value, up from four per cent.
The minimum premium rate that has now been quashed was to discount by 10 per cent for each year of no claim.
The regulator introduced the new prices in March 2011 through a circular that prescribed a minimum amount that insurers can charge for annual cover.
In the hands of cartels
The Ombudsman had in his suit accused the IRA of fixing prices in order leave motor vehicle insurance in the hands of a cartel of big industry players.
The Ombudsman argued that smaller firms are only able to survive by charging lower premiums and should therefore not be forced to charge same prices as their larger counterparts.
He did not, however, name any of the companies suspected to be pulling the strings behind the scenes.
The IRA had in response argued that a number of motor vehicle underwriters could collapse if minimum premium charges are removed.
The regulator added that the price floors were introduced after several motor vehicle insurers faced collapse, having been undercut by competitors without considering that insuring some classes of vehicles is riskier than others, or that the premiums were not commensurate with the risks covered.
The insurance industry watchdog argued that in 2008 the insurance industry made a Sh1.161 billion loss, forcing it to introduce measures to avoid further financial damage to firms.
The IRA insisted that it acted lawfully in fixing the minimum premium rates, and that the move has boosted the strength of motor vehicle insurers who now stand a lower risk of collapsing.
“Suicidal” for underwriters
Some insurance industry insiders yesterday argued that the decision may return the underwriters deep into the loss-making zone — terming it suicidal.
Isaac Ngaru, an insurance consultant with Ngaru & Associates, said the IRA had created a level playing field for all players, and that the ruling may cause the downfall of firms that cut premium rates simply to attract more customers.
“The IRA had set a level playing field, and it was for the good of the industry. The IRA has the authority to set guidelines, including pricing. Companies could be committing suicide by not keeping to the IRA’s prescribed prices,” he said.
The Association of Kenya Insurers chief executive, Tom Gichuhi, said that there may be no need to set a minimum rate, as the law provides that firms must set a premium rate that is commensurate with their own risks. Failure to do so may place them in the red, resulting into action from the IRA.
The Ombudsman had also argued that setting a minimum premium rate for only one category of insurance was discriminatory, and contrary to consumer protection laws.
The Ombudsman held that consumers were not offered a choice as prices had already been set.
Credit: Business Daily