The Court of Appeal has blocked the Insurance Regulatory Authority (IRA) from setting minimum premium prices for motor vehicle insurance, saving customers from a near doubling of underwriting fees.
The appellate court found that the motor insurance guidelines issued in 2009 by the IRA, which set the minimum premium at seven percent of the value of a vehicle against the prevailing 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 firms offering the lowest premium rates.
The High Court had earlier nullified the 2009 motor insurance guidelines, arguing that the regulator had no role is fixing prices.
Although the appellate court found that it was within the statutory powers of the insurance regulator under section 3A of the Insurance Act to issue the guidelines, it affirmed the High Court’s decision blocking the implementation of the minimum premiums.
Justices Mohammed Warsame, Sankale ole Kantai, and Pauline Nyamweya said the IRA did not provide any evidence of monopolies in the insurance sector to justify the setting of premium prices.
“From the foregoing analysis, it would have been more rational, reasonable, and less costly for IRA to prevent a crisis or mitigate its impact, than to directly regulate the supply of insurance services through price fixing, especially given the likely market effects, and that no market justification was provided by IRA for this method of regulation,” said the judges.
The Commission on Administrative Justice (CAJ) or the Ombudsman challenged the Motor Insurance Underwriting Guidelines, arguing that fixing prices would leave motor vehicle insurance in the hands of a cartel of big industry players.
The Ombudsman argued that smaller firms are only able to survive by charging lower premiums and should therefore not be forced to charge the same prices as their bigger rivals.
According to CAJ, the guidelines effectively constituted price fixing, supported monopolistic and cartel behaviour, and outlawed competition and the free interplay of market forces.
In a judgment in March 2017, then High Court judge John Mativo agreed with CAJ and quashed the guidelines.
The Attorney-General and the IRA appealed the decision, saying that the guidelines were not a strategy to restrict competition.
The IRA had in response argued that a number of motor vehicle underwriters could collapse if minimum premium charges were removed.
The regulator added that the price floors were introduced after several motor vehicle insurers faced collapse, having been undercut by competitors without considering that insuring some classes of vehicles is riskier than others, or that the premiums were not commensurate with the risks covered.
The insurance industry watchdog argued that in 2008 the insurance industry made a Sh1.161 billion loss, prompting it to introduce measures to avoid further financial damage to firms.
Last year, the motor segment returned an underwriting loss of Sh5.92 billion.
The IRA insisted that it acted lawfully in fixing the minimum premium rates, and that the move had boosted the strength of motor vehicle insurers who now stand a lower risk of collapsing.
The IRA further said the guidelines were not only made lawfully and within its powers but also in the best interest of the wider public.
The court heard that the guidelines stabilised the insurance industry by significantly reducing the risk of collapse of insurance companies and increased business and the performance of the insurance companies.
The IRA also submitted that the reason for the guidelines was to ensure motor vehicle insurance claims were paid and motor insurance companies stayed afloat, arguing it was in the best interest of the public.
“We accordingly affirm and uphold the order of certiorari issued by the High Court in the said judgment to quash the Motor Insurance Underwriting Guidelines issued by IRA under Circular No. IC 07/2009 dated 20/11/2009 for this reason,” said the judges.
The Ombudsman had also argued that setting a minimum premium rate for only one category of insurance was discriminatory, and contrary to consumer protection laws.
The Ombudsman held that consumers were not offered a choice as prices had already been set.
