The Court of Appeal has barred the Insurance Regulatory Authority from setting minimum premium rates for motor vehicle insurance, saving customers the cost of doubling their underwriting fees.
The Court of Appeal found that the Individual Retirement Administration’s 2009 auto insurance guidelines, which set the minimum premium at seven per cent of the car’s value versus the industry minimum of four per cent, were unreasonable, unreasonable and disproportionate.
The decision comes as a relief to car owners, who will remain free to purchase insurance from companies offering the lowest premium rates.
The Supreme Court had earlier struck down the 2009 motor insurance guidelines, arguing that the regulator had no role in setting rates.
Although the Court of Appeal found that the issuance of the guidelines was within the statutory powers of the Insurance Regulatory Authority under Section 3A of the Insurance Act, it affirmed the High Court decision that prevented the implementation of the minimum insurance premiums.
Judges Mohammed Warsame, Sankali Ole Kantai and Pauline Nyamuya said the tax administration had not provided any evidence of monopolies in the insurance sector to justify setting premium rates.
“From the foregoing analysis, it would have been more rational, reasonable and less costly for the IRA to prevent the crisis or mitigate its impact, rather than to directly regulate the supply of insurance services through price fixing, particularly in light of the potential market impacts, and the IRA has not provided any market justification for this method of regulation,” the judges said.
The Administrative Justice Commission, or Ombudsman, has challenged the motor insurance underwriting guidelines, arguing that price fixing would leave motor insurance in the hands of a handful of big industry players.
The Ombudsman claimed that small businesses could only survive by charging lower premiums, and therefore should not be forced to charge the same prices as larger competitors.
According to the Competitive Justice Organization, these guidelines actually constitute price fixing, support monopolistic and cartel behavior, and prohibit competition and the free interaction of market forces.
In a ruling in March 2017, then-Supreme Court Justice John Mativo agreed with the High Court of Justice and struck down the guidelines.
The Attorney General and the Competition Authority appealed the decision, saying the guidelines did not constitute a strategy to restrict competition.
The IRA responded by saying that a number of car insurance companies could go under if the minimum premium charge was removed.
The Authority added that setting the minimum prices came after many vehicle insurance companies faced collapse, after being subjected to discounts from competitors without taking into account that insuring some categories of vehicles is more dangerous than others, or that insurance premiums are not commensurate with the risks covered.
The insurance industry suffered losses of Sh1.161 billion in 2008, prompting it to introduce measures to avoid further financial damage to companies, the insurance industry watchdog said.
The automotive sector last year recorded an underwriting loss of Sh5.92 billion.
The IAEA insisted that it acted lawfully in setting minimum premium rates, and that the move strengthened auto insurers, who were now less at risk of collapse.
The Authority added that these guidelines were not only established legally and within its powers, but were also in the wider public interest.
The court said these guidelines had stabilised the insurance industry by significantly reducing the risk of insurance company collapse and increasing the business and performance of insurance companies.
The Indian Excise Department also claimed that the reason for setting these guidelines was to ensure that motor vehicle insurance claims are settled and that motor insurance companies remain afloat, arguing that it was in the interest of the public.
“Accordingly, we affirm and support the writ of summons issued by the High Court in the said judgment to quash the Motor Insurance Underwriting Guidelines issued by the Inland Revenue Authority vide Circular No. IC 07/2009 dated 20/11/2009 for this reason,” the judges said.
The Ombudsman also alleged that setting a minimum premium rate for only one class of insurance was discriminatory and contrary to consumer protection laws.
The Ombudsman decided that consumers were not offered any choice because prices were already fixed.