Undercutting: The undesirable phenomenon in insurance
“Liquid soap does not clean well when diluted.”
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I used to market insurance policies for one of Ghana’s leading indigenous non-life insurance companies, particularly motor insurance and did the errands in delivering the policy certificates to our clients directly.
On one such assignment, I had to outline the benefits of a comprehensive motor insurance package to a prospect in a bank. After negotiating and agreeing on the premium, I prepared to deliver the policy certificate.
Two hours later, I drove all the way from Accra to Tema with the joy of closing yet another business, only to be told by the client that another insurer had offered him a better deal - a far lower premium.
We had settled on GH¢1,100 as premium for comprehensive cover for a vehicle worth GH¢20,000; thus, a rate of six per cent less acceptable discount.
My competitor, however, charged GH¢350 for the same cover. Ridiculously outrageous, isn’t it? This is only a tip of the iceberg, as a few recalcitrant players still engage in it, despite the tough stance of the National Insurance Commission (NIC).
Instructively, a good number of the insuring public is often motivated by lower premiums, without cognisance to the ability of an insurer to pay claims when they arise. I dare say, this largely accounts for the delay in the payment, and sometimes, outright repudiation of motor insurance claims.
The obvious truism is that the undesirable phenomenon of undercutting insurance premium, particularly in the non-life insurance business, arises from stiff industry competition, as well as the floodgates allowing ease of entry by new players, whose focus is to occupy market space in the industry.
Unfortunately, this creates conditions where sound insurance operational practices give way to shortsighted unconventional approaches to procuring business, with its attendant dire consequences to the individual insurer with the potential to compromising the integrity of the industry in the end.
In the particular case of the undercutting insurer cited above, for instance, the company folded up a few years down the line. Yes, they secured businesses alright, by offering ridiculously low rates, at the expense of building sound reserves, which invariably affected their claim payment, as they did not have enough to pay their claim obligations.
Premium undercutting in perspective
Premium undercutting is the practice where an insurance company secretly offers clients unrealistically low premiums in order to gain a competitive advantage.
It must be emphasised that the practice is not only unethical but criminal, as the NIC may revoke a defaulting insurer’s licence.
The motive of engagement is usually to increase the business portfolio, but this invariably depletes the insurer’s reserves, making it difficult for them to honour claims, sometimes.
Reasons behind undercutting
The following are some of the reasons some insurers undercut premium:
• Price differentiation
Typically, the insurance landscape in Ghana is that of a perfect competition, where players offer similar products. Pricing then becomes the major source of differentiation.
Indeed, besides the accepted rates, insurers are also allowed to offer limited discount rates. The challenge, however, is where some insurers offer rates far and above the acceptable minimum discount.
• Poor underwriting
Another area worth noting is the technical wherewithal of the underwriter. Where the underwriting officer’s expertise falls short of acceptable standards, they tend to quote lower premiums, without proper profiling of the risk.
• Marketing and operational dichotomy
Another key area is the usual clash between the marketing and operations departments. Whereas the operations department is concerned about technically underwriting policies, their counterparts in marketing are focused on raking in more business, as such, insist on accommodating certain risks. This often generates huge conflict between the two units; leading to compromises, which could lead to premium undercutting.
• Leaked quotations
Often some Insurance Intermediaries who scout the market to obtain premium quotations for their clients tend to discreetly disclose quotations obtained from the competition to other