The Court of Appeal has blocked the Insurance Regulatory Authority (IRA) from setting minimum premium prices for motor vehicle insurance, saving customers from nearly doubling underwriting fees.
The appeals court found that the motor insurance guidelines issued in 2009 by the IRA, which set the minimum premium at seven percent of the vehicle’s value against the industry minimum of four percent, were irrational, unreasonable, and disproportionate.
The decision comes as a relief to motor vehicle owners, who will remain free to buy insurance from companies that offer the lowest premium rates.
The Supreme Court had earlier struck down the 2009 motor insurance guidelines, arguing that the regulator had no role in fixing prices.
Although the appellate court found that it was within the insurance regulator’s authority under section 3A of the Insurance Act to issue such guidelines, it upheld the High Court’s decision that blocked the implementation of minimum premiums.
Judges Mohammed Warsame, Sankale ole Kantai, and Pauline Nyamweya said the IRA did not provide evidence of a monopoly in the insurance sector to justify the setting of premium prices.
“From the analysis above, IRA is certainly more rational, reasonable, and cheaper to prevent the crisis or reduce its impact, than to directly manage the supply of insurance services through price fixing, mainly because of the market effect, and that there is no market justification provided by the IRA for this method law,” the judge said.
The Commission on Administrative Justice (CAJ) or the Ombudsman challenged the Motor Insurance Underwriting Guidelines, arguing that price fixing would leave motor vehicle insurance in the hands of a cartel of large industry players.
The Ombudsman stressed that small companies can only survive by charging lower premiums and therefore should not be forced to charge the same prices as larger competitors.
According to the CAJ, these guidelines effectively form fixed prices, support monopolistic and cartel behavior, and prohibited competition and the free interaction of market forces.
In court in March 2017, High Court judge John Mativo agreed with the CAJ and overturned the guidelines.
The Attorney General and the IRA appealed the decision, saying that the guidelines are not a strategy to limit competition.
The IRA has responded by arguing that some motor vehicle underwriters may collapse if the minimum premium charge is removed.
The regulator added that the price hike was launched after some motor vehicle insurance companies experienced a collapse, because they were underestimated by competitors without considering that insuring some classes of vehicles is more risky than others, or that the premiums are not commensurate with the risks covered.
The insurance industry watchdog stressed that in 2008, the insurance industry made a loss of Sh1.161 billion, hence the need to adopt measures to avoid financial ruin for the company.
Last year, the motorcycle segment posted an underwriting loss of Sh5.92 billion.
The IRA insists that it is acting legally to fix minimum premium rates, and that the move will increase the power of motor vehicle insurance which is now at risk of collapse.
The IRA further argued that the guidelines were not only made lawfully and according to its powers, but also in the wider public interest.
The court heard that the guidelines stabilized the insurance industry by reducing the risk of insurer collapse and improving the business and performance of insurers.
The IRA also submitted that the rationale for the guidelines was to ensure motor vehicle insurance claims were paid and motor insurance companies continued to thrive, arguing that it was in the public interest.
“We should confirm and uphold the order of certiorari issued by the Supreme Court in the said court to cancel the Motor Insurance Guarantee Guidelines issued by the IRA in Circular No. IC 07/2009 dated 20/11/2009 for this reason,” said the judge.
The Ombudsman also argued that setting a minimum premium rate for only one category of insurance is discriminatory, and contrary to consumer protection laws.
The ombudsman said consumers were not given a choice because prices were set.
