Premium undercutting : Compromising standard practice?
Over a decade ago, I used to sell/market insurance policies on behalf of one of Ghana’s leading indigenous insurers, particularly motor insurance and did the errands in delivering the policy certificates to our clients directly.
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On one such assignment, I had to outline the benefits of a comprehensive motor insurance package to a prospect in a bank. After negotiating and agreeing on the premium, I requested the commencement of the underwriting process, as I prepare to deliver the policy certificate.
Two hours later, I drove all the way from Accra to Tema with the joy of having ‘killed’ one business, only to be told by the client that he was sorry another insurer had offered him a better deal - a far lower premium. When I checked the other offer, I noticed the difference was so outrageous that the client would certainly not consider ‘my expensive offer’….a clear case of UNDERCUTTING PREMIUM. To really put this in perspective, we had settled on GHC1, 100 as premium for comprehensive cover for a vehicle worth GHC20, 000; thus, a rate of 6 per cent less acceptable discount.
My competitor, however, charged GHC350 for the same cover….ridiculously outrageous, isn’t it? This is only a tip of the iceberg, as a few recalcitrant players still engage in it, despite the tough stance of the National Insurance Commission (NIC).
Instructively, a good number of the insuring public is often motivated by lower premiums, without cognizance to the ability of an insurer to pay claims when they arise. I dare say, this largely accounts for the delay in the payment, and sometimes, outright repudiation of motor insurance claims. The obvious truism is that the undesirable phenomenon of undercutting insurance premium, particularly in the non-life insurance business, arises from stiff industry competition, as well as the floodgates allowing ease of entry by new players, whose focus is to occupy market space in the industry.
Unfortunately, this creates conditions where sound insurance operational practices give way to shortsighted unconventional approaches to procuring business, with its attendant dire consequences to the individual insurer with the potential to compromising the integrity of the industry in the end.
In the particular case of the undercutting insurer cited above, for instance, the company folded up a few years down the line. Yes, they secured businesses alright, by offering ridiculously low rates, at the expense of building sound reserves, which invariably affected their claim payment, as they did not have enough to pay their claim obligations, I opine.
What is premium undercutting?
Premium undercutting is the practice where an insurance company secretly offers clients unrealistically low premiums in order to gain a competitive advantage. It must be emphasised that the practice is not only unethical but criminal, as the NIC may revoke a defaulting insurer’s licence. The motive of engagement is usually to increase the business portfolio, but this invariably depletes the insurer’s reserves, making it difficult for them to honour claims, sometimes.
Reasons for premium undercutting
The following are some of the reasons some insurers undercut premium:
Price Differentiation
Typically, the insurance landscape in Ghana is that of a Perfect Competition, where players offer similar products. Pricing then becomes the major source of differentiation. Indeed, besides the accepted rates, insurers are also allowed to offer limited discount rates. The challenge, however, is where some insurers offer rates far and above the acceptable minimum discount.
Poor underwriting
Another area worth noting is the technical wherewithal of the underwriter. Where the underwriting officer’s expertise falls short of acceptable standards, they tend to quote lower premiums, without proper profiling of the risk.
Marketing and operational dichotomy
Another key area is the usual clash between the marketing and operations departments. Whereas the operations department is concerned about technically underwriting policies, their counterparts in marketing are focused on raking in more business, as such, insist on accommodating certain risks. This often generates huge conflict between the two units; leading to compromises, which could lead to premium undercutting.
Leaked quotations
Often some Insurance Intermediaries who scout the market to obtain premium quotations for their clients tend to discreetly disclose quotations obtained from the competition to other prospective insurers in order to secure much lower quotations.
Poor claims payment
The inability of some insurers to honour genuine claims when they fall due means that they have to undercut premiums to remain afloat.
What practitioners think
Some industry practitioners have bemoaned the phenomenon referring to it variously as cancerous and deadly. They insist that the phenomenon must be nipped in the bud before it consumes the industry. Indeed, the recent ‘mild’ increase in motor insurance premiums, and the attendant public outcry that greeted this, could lend a subtle credence to the perpetuation of this unacceptable act, as the insuring public in their vulnerability, are becoming price sensitive.
The challenge
Generally, while the law is quite strict on vehicle owners having motor insurance (at least third party), which is strictly enforced by the NIC with the support of the Ghana Police Service, the other lines of insurance business are mostly discretionary; hence prudent underwriting must always apply in order to charge commensurate premiums, the continuation of this unethical practice of undercutting insurance premium could, undoubtedly, further dent the image of an industry that is already struggling to shrug off negative public perception, particularly regarding claim repudiation or delay.
Indeed, the latest trend is that some of these unscrupulous insurers identify key existing clients of competitors, whose policies are due for renewal and bait them with such unacceptable rates in order to win them over.
In this regard, unsuspecting prospects fall prey to the mischief and in the event of mishap, they have difficulty redeeming their claim from the insurer, as the insurer has little reserve to cater for such claims. It is therefore imperative for the insuring public not to be enticed by ridiculously low premium offers, but rather ascertain whether the offered premium matches the risk cover, as well as the ability of the insurer to settle claims when they arise. After all, if the average cost of fuel in Ghana is GHC 15 per gallon, one will certainly be suspicious and inquisitorial if a pump station is offering the same gallon for GHC5!
Effects on low penetration rate
With the current insurance penetration rate under two per cent, the natural consequence of a deepening negative public perception of the insurance industry in Ghana, remotely caused by premium undercutting, is a cascading low industry penetration. When there is a general feeling that insurers do not want to honour claims, the public may lose confidence in the industry, which could result in their exercise of minimal compliance; thus, depriving underwriters of needed funds for investment, and reinsurers the required reserves to mitigate future risks.
Way forward
The ball is now in the court of all industry players to save the industry from this challenge. Particularly, the NIC, GIA and GIBA must setup a taskforce to monitor the price control regime and ensure that players are in compliance.
In this regard, I will like to commend the NIC for introducing ‘mystery shopping’ to expose recalcitrant companies. While this has yielded some positive results, a more aggressive taskforce is required to nib this canker in the bud.
Similarly, the NIC in conjunction with the taskforce must ensure that insurers settle claims, regardless of whatever premiums they charged at inception. This will inevitably reduce the negative public perception, which has bedeviled the industry for a long time.
Notwithstanding the grave competition between the over 43 licensed insurance companies in Ghana, product innovation is almost non-existent. Insurers must now focus on product enhancements, by tweaking the benefits, in order to create distinct identity for their products. This will create a regime where companies compete on their features, instead of finding ways to unethically outwit each other on pricing.
With the advent of technology and human ingenuity, in particular, insurers must begin to tailor their products to specific clients’ needs while providing continuous education.
This will invariably restore the eroding public confidence in the industry, while creating the enabling conditions to increase the industry penetration.
Until Next Week, “This is Insurance from the eyes of my mind.”
What practitioners think
Some industry practitioners have bemoaned the phenomenon referring to it variously as cancerous and deadly. They insist that the phenomenon must be nipped in the bud before it consumes the industry. Indeed, the recent ‘mild’ increase in motor insurance premiums, and the attendant public outcry that greeted this, could lend a subtle credence to the perpetuation of this unacceptable act, as the insuring public in their vulnerability, are becoming price sensitive.
The challenge
Generally, while the law is quite strict on vehicle owners having motor insurance (at least third party), which is strictly enforced by the NIC with the support of the Ghana Police Service, the other lines of insurance business are mostly discretionary; hence prudent underwriting must always apply in order to charge commensurate premiums, the continuation of this unethical practice of undercutting insurance premium could, undoubtedly, further dent the image of an industry that is already struggling to shrug off negative public perception, particularly regarding claim repudiation or delay.
Indeed, the latest trend is that some of these unscrupulous insurers identify key existing clients of competitors, whose policies are due for renewal and bait them with such unacceptable rates in order to win them over.
In this regard, unsuspecting prospects fall prey to the mischief and in the event of mishap, they have difficulty redeeming their claim from the insurer, as the insurer has little reserve to cater for such claims. It is therefore imperative for the insuring public not to be enticed by ridiculously low premium offers, but rather ascertain whether the offered premium matches the risk cover, as well as the ability of the insurer to settle claims when they arise. After all, if the average cost of fuel in Ghana is GHC 15 per gallon, one will certainly be suspicious and inquisitorial if a pump station is