The insurance market regulator has prepared new industry guidelines that limit competitive motor vehicle premiums pricing signalling a looming increase in the cost of transportation that has been under pressure from highly priced oil.
The new rules are targeted at price undercutting that underwriters say has discouraged new investments in the business line and limited its growth by scaring away potential players.
Key among the measures that the Insurance Regulatory Authority (IRA) is the setting of minimum motor vehicle premium prices to prevent insurers from charging premiums that cannot support the risks involved.
This means car owners are likely to see a general increase in the cost of premiums for all classes of vehicles - including the core public service vehicles - that will pass on the additional costs to consumers in the form of higher fares.
Price undercutting in the motor vehicle segment of the insurance business has been a thorn on the industry's side that has caused the collapse of underwriters that sold policies at rock-bottom prices and were ultimately incurred high claim bills than the premiums could pay for.
IRA has also set the minimum excess fees a company can charge a motor vehicle insurance cover beneficiary.
"This action has the potential of restoring sanity and profitability to the sector by eliminating the unsustainable premiums and excess fees that most insurers are currently charging," said UAP Insurance Head of Marketing and Distribution Joseph Kamiri.
But even as insurers look forward to a return to order in the market, the new regulations are in short term expected to pile upward pressure on transport costs at a time when the shilling in weakening and the cost of petrol is on the rise.
Headline inflation rose for the fourth straight month in February to 6.54 per cent year-on-year from 5.42 percent in January, according to the Kenya National Bureau of Statistics.
Higher transport costs are expected to be particularly painful to low income earners who depend on public transport and face the highest inflation rate of 7.4 per cent compared to high income earners.
Kenya's motor insurance segment remains the industry's backbone that generates highest gross revenue and has helped shield the operators from consumers' indifference to general insurance.
This is partly because the law demands that every motor vehicle owner must have an insurance cover.
In 2009, for instance, the motor insurance accounted for 43.4 per cent of gross general insurance premiums.
Proper functioning of the motor insurance industry should however make motor vehicle insurance more attractive to new players, drive innovation that should ultimately bring down the premiums.
Under the new guidelines, insurance companies will be required to file with IRA the premium rates for every product and other riders offer for coming year.
Underwriters will be required to inform the regulator before introducing any new products in the market.
Industry sources said although this requirement started four years ago for large risks like fire, the IRA has found it fit to introduce the same in the motor vehicles business line to level the playing field.
Besides the price limits, the guidelines also seek to standardize and simplify insurance contracts for easy understanding by consumers.
The new measures are expected to give motor vehicle insurance a new lease of life following years of loss making that has been linked to price undercutting, rampant fraud and careless driving.
Auto-insurance, especially for private cars, holds the dubious distinction of having the highest loss ratio of up to 84 per cent of gross premiums against an industry standard of 50 per cent.
The proposed contracts are clear on what an insurance company can pay and what it cannot pay for.
IRA is also seeking to stop ambulance chasers on their tracks by setting the maximum amount of money that is payable as compensation on one or many claims arising from one accident.
The new rules also specify when excess fee should be charged and what percentage of it the policy holder will be required to pay.
Excess fee is a percentage of the claim that the policy holder pays or the percentage of the claim that is withheld by the insurance company.
Based on the new guidelines, if a private motor vehicle with anti-theft device is stolen, the insurance company will withhold 10 per cent of estimated value of the vehicle or a minimum of Sh20,000.
IRA, however, said that standard contracts and guidelines on excess fees remain subject to deliberations by industry players in the first week of April before final publication.
Insurance companies that fail to adhere to guidelines on minimum premiums and excess fee bear the risk of being denied an annual operating license.
Last year, IRA introduced non-claim discount premium payment system to stop the heavy losses in motor vehicle business and set minimum premiums a company can charge.
The industry introduced structured compensation system that defined how much an accident victim is paid based on injuries sustained.
Insurers said the standardized contracts, minimum premium rates, structured compensation and excess fees could breathe a new lease of life into a business line with a fraud rate of up to 80 per cent of all premiums collected.
In 2008, for example, the loss ratio for private motor vehicle insurance was the industry's highest at 84 per cent -- meaning that for every Sh100 received as premium, Sh84 was paid in claims.
This was above the industry breakdown that allocates 50 per cent to claims, 30 to management and 10 each to agents and shareholders.
In 2009, the loss ratio dropped to 80.8 per cent for private motor vehicle but remained the highest in the industry.
Out of the Sh5.9 billion gross premium collected, Sh4.7 billion was paid out in claims.
New regulations require that motorists who make no claims will pay 10 per cent less for their premium in the second year (from 7.5 per cent of the value of the vehicle in the first year), 20 per cent less in the third year and 30 per cent less in the fourth year.
"The intention is partly to improve consumer understanding of their insurance products through simple contracts," said IRA's head of communication Noella Mutanda.
The regulations are in line with recommendations by Financial Sector Deepening (FSD) Kenya that insurance and banking services contracts be revised to help consumers understand the products and buy more.
The FSD study showed that the average consumer buys products without clear understanding of the accompanying terms and conditions.
The highly technical language, coupled with generally low literacy levels have been blamed for loan defaults and low uptake of insurance policies as consumers do not understand their rights and obligations.