Fraud remains a complex and significant risk affecting industry operations. Early this month, the Insurance Regulatory Authority (IRA) penalized an insurer for engaging unlicensed brokers to sell products. This was a tough warning to other industry players on consequences of non-compliance. Fraud and other malpractices afflict the industry and remain a complex and most significant risk affecting insurers and intermediaries.

The industry report for 2012 says the number of insurance fraud cases was 133; 29 per cent involved agents while motor fraud was at 26 per cent. Now, the regulator requires that insurance intermediaries register since they are the first contact with the consumers. They must be licensed and renew yearly. Because of the challenges mentioned above, IRA has also set minimum entry qualifications for agents that sell. And, they must be trained to attain proficiency. Kenya has more than 4,862 insurance agents and 170 brokers. A large number that has reduced the effect of licensing, fanning malpractices by intermediaries. What confronts most potential insurance consumers is how to establish whether the information given during sale presentations by agents match what is contained in policy papers. Sadly, some of the promises are hard to believe, but are the order of the day, perhaps due to insurance illiteracy.

Whenever a risk occurs, the policy holder is taken aback when the insurer rejects claims as invalid. This is misrepresentation. Misrepresentation takes the following forms. First, it can occur where the sales agent believes they are doing the right thing; it could be a case of inexperience or limited product knowledge. But, two, some agents are outright dishonest and are hungry for quick cash. This is the most prevalent type of misrepresentation still thriving in the industry. Reason? It is usually difficult to unearth until the insured presents a claim for settlement and it is rejected for not meeting the provisions of the policy in question. At this point, the agents are nowhere and the tussle ensues between the insurer and the client. The policyholder loses and the agent is not penalized.

False Promise

For instance, most prospects will often want to know what follows when they lose their jobs while they have signed up. Most dishonest agents, enthusiastic to make quick sales, will give a false promise that the policy provides for compensation for upkeep. Others will also go ahead to declare that when the insured loses their job, they will be exempted from premium payments until they secure another job. As a matter of fact, whole life insurance cover provides benefits to the dependants of the insured for financial loss upon the death of the insured. The insurable risk in this case is death with an exception of suicide motive. Therefore, when a policyholder loses a job while having an insurance cover, he will not be entitled to compensation since that is not contained in the policy.

Accurate presentation

All these loopholes leave the policyholder with the challenging task of verifying whether all the information given by the sales people is accurate. Unlike fraud, which mainly affects the insurers, misrepresentation impacts both on the insurer and the policyholders.

Uncontrolled misrepresentation will translate to increased termination of covers and rejection of claims. No consumer will be willing to buy a cover with an insurance firm that has a high rate of claims rejection. This will dent the revenues. To curd this kind of malpractice, the regulator should go an extra mile beyond setting the basic level of proficiency. First, the watchdog needs to draft and ratify an insurance needs assessment template that can be adopted by all underwriters.

Before selling a product, the agent will be required to fill in the needs assessment form which will automatically identify which kind of product is suitable for their needs. The needs assessment forms will be signed by both the consumer and the agent and a copy filed with the regulator as well as by the insurer. This will make it easy to trace the agent in case there are reservations when the insured presents their cases for compensation. Should the agent be found culpable, it should be easier to punish them and find recourse for the insured. Before this is affected, a policyholder or prospect should ensure they take precautions such as researching and reading literature on the policy to reassure on what you are buying, what is covered and not covered.

Required;

1. According to the study, it is noted in the 2012 report, the number of insurance fraud cases was 133; 29% involved agents while motor fraud was at 26%., Explain what can be done to reverse this negative trends in the insurance sector in Kenya. [10 marks]

2. From the passage it is very clear that there are so many risks that faces the insurance sector, explain TEN principals of risk management that may be employed by this very fast growing sector. [10 marks]