The Insurance Institute of Malawi (IIM) has bemoaned the tendency of premium undercutting in the insurance industry, saying instead of charging clients premium based on risk, some firms devalue the risk to charge lower premiums.
Speaking during the opening of this year’s Insurance Annual Lakeshore Conference in Mangochi on Friday, IIM president Maclonex Mwase said the challenge with premium undercutting—a practice in which an insurance company offers clients unrealistically low premium to gain a competitive advantage—is exposed whenever claims for such undervalued policies are due.
“Although the risk definitions and scope in these policies are normally compromised to allow for a lower premium, the claims of those policies are unfortunately not assessed based on the lower premium paid,” he said.
Mwase said insurance is based on the law of large numbers, which which means that all those exposed to a risk contribute a relatively small sum to a common pool, compensating the few who suffer losses.
“In setting the contribution, which is the ‘price’ reflected as premium, it needs to be ensured that each party pays an amount that reflects his/her propensity to losses varying in frequency and intensity,” he said.
In insurance, the claim payment is based on the face value of the policy, that is, the original risk and value of assets agreed prior to being insured.
As a result of this, the insurance company earns less and could result in the company being unable to honour the claim.
Guest of honour at the function, Malawi Communications Regulatory Authority (Macra) director general Godfrey Itaye said the conference theme Digital Insurance: Innovate and Evolve resonated with the worldwide revolutionary trend where digital transformation is the key to all facets of development.
“This cannot spare the insurance sector, and for that matter, digital insurance is about using technology in innovative ways to achieve true customer focus across the entire organisation,” he said.
For insurers, Itaye said, digital transformation and disruptive innovation have gone from being vague futuristic concepts to immediate-term action items on strategic agendas.
He said the Internet and digital technologies have transformed almost every aspect of our lives over the past 15 years.
The two-day conference, which brought together about 300 local and international delegates, came at a time insurance penetration is at 1.4 percent, according to Reserve Bank of Malawi. n