Rwanda’s insurance market is composed of fourteen private insurers: ten general insurers and four life insurers. The cost of insurance is expected to increase because the National Bank of Rwanda has raised the minimum capital requirements for insurance firms.
The decision was reached following a 2013 study that showed insurance companies stand to incur losses if they don’t revise the premiums upwards. The study showed that there was no way any insurance company operating in the country could expect to make profits going by the previous tariffs. Therefore as an industry, there was the need to revise premiums upwards.
Insurance companies have been making losses for the past five years and the situation has been made worse by rampant fraud cases especially in motor insurance sector. The National Bank of Rwanda in its monetary policy and financial stability statement attributes the deteriorating performance to the failure of private insurance players to observe prudential norms and to meet the required corporate governance issues. However, growth is expected to be driven by recapitalisation of the industry which remains dominated by Kenya-based companies.
The sector’s total capital increased by 12% (Rwf222 billion) by the end of December 2015 from Rwf198 billion at the end of December 2014. The solvency margin, one of key indicators for measuring insurance financial soundness, was 6% above the minimum requirements of 100%. The sector also registered sufficient liquidity as evidenced by its liquidity ratio of 355% which is well above the minimum prudential benchmark of 150%. As of December 2015, National Bank of Rwanda data showed that the insurance penetration in Rwanda had stagnated at 1.5% compared with the Kenya mature market which is 3.16%.
The increment was made in consultation with the National Bank of Rwanda, which is the industry regulator. The regulator believes that its decision aims to align the operations of insurance firms with market conditions. The minimum capital requirements for the insurance sector were last revised in 2016. Also, the previous rates have been in place since 2003.
Under the new arrangement, general insurers are expected to raise a minimum capital of 3 billion Rwf (USD3.3 million) while life insurance firms are expected to have a minimum capital of 2 billion Rwf (2.2 million) from the 1 billion Rwf (USD1.1 million). Health Maintenance Organisations (health insurance firms) have a minimum capital requirement of Rwf500 million and that of reinsurers have been increased to Rwf5 billion. The general insurers have a transition period of 3 years to raise the capital while life insurance firms have two years. The decision took effect on January 1, 2019.
Under the current monetary-targeting regime, the central bank managed to keep inflation low and stable, averaging 6.1% from 1997 to 2017, and 1.4% during the first 11 months of 2018. As of June 2018, the assets in the sector stood at Rwf423 billion, up from Rwf366.5 billion in the same time in 2017.
According to the insurance law and its implementing regulations on investments, insurance companies are required to invest their assets in a manner that caters for risk diversification and avoid putting investments in concentrated investment ventures. They are also not supposed to exceed 30% of aggregate investments in equity shares of other companies and up to 20% for investments in marketable debt securities.
Effect on Motor Comprehensive
Insurance companies in the country have unanimously increased motor insurance premiums by up to 73% effective January 1, 2019. The mandatory third party insurance policy has increased by 40 to 73%, while the comprehensive package has increased from 3.5% of the value of the vehicle to 4.5%. Although the final cost will be determined by the in-house pricing of the insurer and might vary from one company to another, the increment has already sent car owners into a panic.
The rationale used for the increment was based on the lack of a minimum wage, which has exposed the industry to high compensation claims that have been increasing over the years. 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 ($0.5) per day. Currently, it has reached Rwf3,000 ($5) per day.
The most affected car owners will be those on the comprehensive motor insurance package as the annual rate will increase significantly. Analysts predict that many car owners will likely to shun a comprehensive package for third party where the annual premium is relatively less.
A commuter coaster that has been paying Rwf400,000 ($468) for third party insurance per year will now pay Rwf692,000 ($809) per year. An owner of a Toyota Corolla model 1999 who has been paying a third party policy of Rwf75,000 ($87) per year will now be paying Rwf129,750 ($151). A Yaris model 2002 has been paying Rwf350,000 ($409) per year for a comprehensive policy, but this will significantly go up in the new tariff structure. The owner of a Mercedes Benz 1998 model who is on a third-party policy and has been paying Rwf130,000 ($152) per year will now be paying Rwf224,900 ($263) in the new tariff structure.
Nevertheless, the sector will is expected to recover from the negative practices like price wars (undercutting) especially in private insurance which has been a major challenge. This development could also lead to mergers and acquisition for firms that are unable to raise the minimum capital requirements.
Statistics shows that at least 79% of the premiums were spent on paying claims, meaning the 12 private insurance players shared Rwf7.4 billion. The revenue was not big enough to prop up the sector from posting loses with underwriting profits dropping to negative 6.8% in June 2018 compared with the negative 3% registered in 2015 during the same period.
A combination of fraud, price undercutting as competition picks up and the industry not having a cap on claims is partly responsible for high claim ratios in Rwanda. According to the central bank, the insurance firms in Rwanda are selling the easy to manage general insurance products like motor and fire insurances, a market which is still small. The insurance players considered the high records of claims for motor vehicle cover due to the increased number of accidents. Most of the claims recorded were from public passenger vehicle transporters. Nevertheless, the move to increase the minimum capital requirements could address the major challenges such as not responding promptly to claims from clients.
According to the central bank of Rwanda, the poor performance of the insurance sector is due to inefficient operations, maintaining inadmissible insurance receivables and a general lack of innovation. However, the motor insurance sector has been making the most losses, yet it is the biggest insurable asset in the country (60%). Insurers are advised to adopt “more flexible front end solutions” around better pricing to reflect the risk they cover whether it is micro or main-stream, and that in turn will create better public trust and drive up premiums.
Writer: Gideon Sarfo
Email Address: firstname.lastname@example.org
Place of work: Tri-Star Insurance Services Gh. Ltd.