Business

Preventing premium underpricing in insurance industry

In this piece, JOSEPH INOKOTONG highlights that while underpricing premiums can have negative consequences, there is also a danger of overpricing it.

EXPERTS are of the view that premium underpricing is the bane of insurance growth in Nigeria. The phenomenon stirred up heated conversations in the industry, which culminated in the claims advocacy conference organised recently by Carefirst Consult with the theme, ‘Understanding Insurance beyond Claims Payment.’

In the insurance industry, premium underpricing refers to the practice of charging premiums that are lower than the true risk level associated with the policy. This can happen for a number of reasons, such as a desire to attract new customers, inaccurate risk assessments or pressure from competitors. Whatever the reason, premium underpricing can have negative consequences for both insurers and policyholders. It should be prevented by instituting necessary measures.

One consequence of premium underpricing is that it can lead to adverse selection, which is when only the riskiest customers are willing to purchase policies at low premiums. This can cause insurers to lose money, which can lead to higher premiums for all policyholders. Another consequence is that underpricing can cause a moral hazard, where policyholders take more risks because they know they are covered by insurance. This can lead to more claims, which can also drive up premiums.

For example, imagine there is a homeowner who lives in an area that is prone to flooding. The homeowner knows that there is a risk of flooding but the person decides to buy a homeowners insurance policy with a low premium because the insurer has underpriced the risk. The homeowner then takes no precautions to prevent flooding, like elevating the home or installing flood barriers. When the home gets flooded, the homeowner files a claim with the insurer and receives a payout. This is a moral hazard because the homeowner took more risks since he knew he was covered by insurance.

However, there are steps that can be taken to prevent premium underpricing. First, insurers can use data analytics and risk modelling to better assess the true risk of policies. This can help them set premiums that more accurately reflect the risks involved. Second, regulators can establish minimum premium standards to ensure that insurers do not underprice their policies. Also, consumers can educate themselves about insurance and shop around to find the best deal for their needs.

Indeed, experts have identified premium underpricing and lack of collaboration among insurers as the bane of insurance growth in the country. They pointed out that the premium charged in Nigeria is too meagre compared to what is obtainable in other climes. They called on operators and regulators to take necessary action about this and emphasised the essence of collaboration among all operators in the industry.

Speaking at the advocacy conference, the chairperson of the event, Ms Prisca Soares, former Secretary General of the African Insurance Organisation (AIO), said the “premium charged in Nigeria is too meagre compared to what is applicable in other parts of the world and something needs to be done about that. A situation where some companies give so much as discounts to their clients is one thing that is not allowing the industry to grow the way it should. This is a suicidal tendency, which we have to do something about. We really do need to cooperate in this market so that there would be sustainability because if insurance goes down, everything else does.”

Mr Reginald Egbuniwe, in his presentation entitled, ‘What Insurers Do When Claims are Reported’ listed the complexities of handling some claims, which he said is very important for consumers to understand. Highlighting the differences between simple and complex claims, Egbuniwe said, “If you have a simple claim, the insurance company has to be notified. Once a claim is reported, the insurance company has to receive it and make sure that whoever is reporting the claim has a policy with them. The claim has to be authenticated and when that is ascertained, a number will be allocated and a claim form will be sent. This doesn’t take long. Depending on what is in the policy, it is expected that a claim should be reported in seven, 14 days, or whatever.” He called for the employment of loss adjusters into the insurance system “so that they can monitor the process of our work in real-time.”

Mrs Rashidat Adebisi, Chief Client Officer, AXA Mansard Insurance, spoke on the topic ‘Why Documentation is Critical for Claims payments.” She highlighted the importance of accuracy and timelines as critical to claim administration, which she said assist the insurers in making decisions on claims.

Adebisi noted that insurance needs to have documentation, which is actually required by law, noting that as a policyholder, when an incident occurs and one is making claims, it is expected that the person provides concrete evidence before he/she can be paid.

“There is a need for documentation because sometimes insurance companies may want to pay but if you don’t have the necessary document required by law, it becomes a problem. Customers should always ensure that forms sent to them are properly filled and returned to their insurance companies ahead, not necessarily when there are claims to make. Some people even tender fake receipts and you have to validate it. There is a need to investigate because, in this part of the world, people can be funny,” she said.

Mr Richard Ogunmodede, a financial/fintech expert, in his presentation on ‘Claim is the Best Teacher in Insurance/Life after Claims,’ highlighted the industry’s problems and the negative effect on its growth.

He stated, “The problem is the leading indicator and the impact is a liking indication. If you want to manage something, it is better to focus on the leading indicator because you cannot control or influence the liking indicator.

Insurance has been mispriced in Nigeria. There is a mismatch in the system. In the industry, you have bad insurers and bad consumers and so you have big systemic problems. Insurers talk all the talk but they never do the work. They just compete based on agreed premium and at a zero rate and the consumer assumes there are implicit guarantees that even when the insurer goes down, they will still get their indemnity so they don’t care about the rate too”.

He observed that the Nigerian insurance industry’s growth rate and its contribution to the nation’s Gross Domestic Product (GDP) is minimal and urged operators to take action, especially on the rate issue. He decried the cumbersome process of getting claims in the country and called for a change for the better.

The founder/Principal Consultant of Carefirst Consult Limited, Mr Gus Wiggle, said the conference aimed “to ease discussions about claims among insurance stakeholders thereby filling the void in the insurance ecosystem and adding to the value chain of insurance.

“We are purposed to be the bridge between the consumers and the insurance providers. Claim will remain the anchor of insurance business and will remain on the front burner while communication will become the point of impact of expressing consumers’ impressions.”

According to him, paying claims is part of the insurance proposition and a lot needs to be done to boost communication with customers on claims issues. “Customers desired to be informed regularly in a manner that keeps them abreast of the industry activities as this is pivotal to insurance penetration. Insurance can achieve this by exploiting social media. No insurance company currently does this consistently, especially using the social media platforms.”

It is pertinent to note that while underpricing premiums can have negative consequences, there is also a danger of overpricing premiums. This can lead to consumers not being able to afford the insurance they need, which can leave them vulnerable to financial hardship if they experience a loss.

Experts say to prevent premium underpricing a balance should be struck when it comes to pricing premiums. The goal should be to price premiums in a way that covers the cost of potential losses while still being affordable for consumers. This can be a difficult balance to strike, but it is important to remember that insurance is meant to protect people from the financial impact of losses.

For many people, the only time they really think about insurance is when they need to file a claim. However, it is helpful to consider insurance as part of the overall financial planning. It can provide peace of mind and help protect one and family from unexpected events.

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