The move by insurance companies to drastically increase motor vehicle insurance premiums by up to 73 per cent has irked their clients.

Effective January 1, 2018, the mandatory motor insurance increased for both public and private vehicles. Both those who opt for the comprehensive package and the more affordable third-party insurance have been affected.

According to the Association of Insurers, (ASSAR), the new prices were set to safeguard the insurance sector from collapsing as the players were not making money.

However, experts argue that when private businesses come together and control prices, it is a cartel in the making and a slippery slope for free-market economies like Rwanda.

It is very rare that you will find all players coming together and setting minimum prices without the full consent of the regulator.

The National Bank of Rwanda is the official regulator of insurance companies.

In their defence, the insurers argue that a study was carried out in 2013 in collaboration with the central bank and among the recommendations was increasing the prices.

However, since 2013, no price adjustments have been made and this led to the players making losses, they say.

"Annually, the sector has been losing Rwf6 billion on this particular product (motor insurance) due to wrong pricing,” Jean Pierre Majoro, ASSAR’s executive secretary, told The New Times.

"This (increasing prices) is something we should have done 6 years ago when the study was first done,” he added.

"The new prices are coming to safeguard the market and help make the industry more competitive and profitable.”

When contacted, the central bank referred The New Times to a twitter post by the Governor, John Rwangombwa, on January 5, 2018.

"Prices of financial products are set based on the market conditions. Our understanding is that this change in prices was to remove distortions that were threatening to crush this sector; with big losses over the past 5 years.”

He, however, went on to add that the price adjustments could have been gradual.

If the central bank Governor (regulator) publicly acknowledges that the price adjustments ought to have been gradual, why then were the insurance companies allowed to go ahead with the large price hike?

One of the concerns is that if the insurance companies are allowed to operate with minimal checks from the regulator, what message does it send to other players? What would happen if say telcom companies or internet service provider would come together and set minimum prices? Or if fuel dealers were allowed to set the prices without the full consent or go-ahead from the regulator?

The insurance sector in Rwanda has of recent seen new or international players join the scene.

"Why would new or international players join the sector if it was not profitable? Is it an issue of the price or it is the way business is carried out?” asked a financial expert who was shocked by the move.

It would have been easier to convince the public of the need for a price hike if there was a little more transparency.

In a 2012 study commissioned by the Insurance Regulatory Authority in Kenya, the authors argued that when consumers are provided with appropriate information to allow them to assess the financial as well as other aspects of an insurance company, they, in turn, are able to make informed decisions. In doing this, markets can then act efficiently by rewarding those companies that manage risks efficiently and penalising those that do not.

"For this to be realised and market equilibrium attained, the disclosure of information on risk is critical in operation of a sound, fair and efficient market,” the study adds.

Like banks, the regulator should also oblige insurance companies to publicly disclose their performance as a rule of the thumb, say on a quarterly basis.

Otherwise, it appears that both the efficiently run companies and the poor performers have come together, leaving the public with no option.

And, owing to the fact that it is the compulsory motor insurance that they all agree upon, makes the cartel argument stronger.

On their part, the insurance companies argue that with the increased charges, the quality of service will improve.

There have been complaints of delayed or denied payments which has often frustrated clients but there is no guarantee that the increased premiums will lead to better services.

One of the areas The New Times wanted to clarify with the central bank was that there was an instruction to insurance companies to recapitalise their reserve deposits with the National Bank of Rwanda. And this instruction would have prompted the companies to increase their pricing.

There have been reports that some insurance companies have had to tap into their reserves to pay dividends, slowly eroding their capital reserve deposited with the central bank.

The cNational Bank of Rwanda has previously raised concerns about unethical practices like price undercutting and selling premiums on credit, saying the habit had greatly affected the industry.

Insurance sector experts say that pricing has been one of the major challenges affecting the insurers.

According to Damascene Uwumuremyi, a Kigali-based insurance broker, there have been multiple incidences when companies rush to undercut each other, affecting their competitiveness, with some offering packages that do not make business sense and, in the long run, end up catching up with the companies bottom line.

Uwumuremyi added that is a positive move to always evaluate the level of risk before pricing to be able to pay your future claims as an insurer.

"Motor vehicle insurance contributes about 60 per cent of what we sell to the market, therefore getting right on pricing will help turn around the industry and make it more competitive,” one chief executive told The New Times. 

In a recent interview with journalists, ASSAR’s president, Gaudens Kanamugire, said: "There is no way any insurance company operating in the country can expect to make profits going by the current tariffs.”

In supporting his argument, Kanamugire gave an example of why it was important to revise the pricing, "Because there is no minimum wage the compensation in a case where a person is hit by a car is determined by a judge. In 2009, daily compensation for an injured party was Rwf500 per day, it has now reached Rwf3,000 per day.

Sector performance

In fact, Rwanda insurance industry has stagnated at a 2 per cent penetration rate for the past few years. It is not yet clear how the new prices will affect the uptake of this particular product. Rwanda’s insurance industry registered considerable growth during the first half of 2017 with total assets growing by more than 10 per cent.

In monetary terms, the sector’s total assets stood at Rwf366.5 billion by June 2017, indicating a year-on-year growth of 10 per cent. This growth in assets, according to the central bank was largely attributed to the increase in capital injected, especially by the new market entrants and the retainership in profits during the period under review.

For example, the central bank estimated that between June 2016 and June 2017, new capital injected in the insurance sub-sector amounted to Rwf10.3 billion while profit was more than Rwf17.9 billion. However, despite this positive growth, experts say the sector could have performed much better if products were rightly priced.

Public reaction

Patrick Nzamwita, a motorist, said; "The move by insurers will make it more difficult for car owners to buy comprehensive insurance. Besides, these companies often make it difficult when one makes a claim. The industry is best known for the delays in paying compensation. They shouldn’t be the same people increasing prices without considering users.”

Aline Kamaliza, a financial expert and car owner, said: "Increasing prices without proper consultation could backfire and send the sector into more trouble than what it is today.

We hope the central bank will come in and bring the insurers to order so that the matter is addressed without affecting businesses.”

A sector analyst, Trevor Amooti said, "The psychology behind increments is that it should be gradual. The 40 per cent rise in third-party policy rate by the insurers is not only ill-informed; it’s lazy calculation heavily dependent on the hope that it is the magic bullet to solving their woes.

"I think they should focus more on innovation and efficiency as opposed to ‘over-milking’ car owners who are already paying much in form of fuel consumption related taxes, parking fees, traffic fines and, of course, the import duty on cars.”

"I am surprised the regulator approved these rates. I am quite sure no other service industry (apart from monopolies) could announce a 40 per cent hike. Imagine if banks did it on interest rates, the economy would literally get a heart attack.”

editorial@newtimes.co.rw