A survey of fire rating practices in the Kenya insurance market

Abstract

Insurance rate making is the process of establishing a premium rate for a particular class of insurance. The rate is the price of a unit of insurance. The premium, say for a particular building, is arrived at by multiplying the sum insured i.e. amount of insurance coverage by the premium rate. Adequate rating is essential if profitable business is to be written. In a competitive market the price of insurance like that of other services is to a large extent determined by forces of demand and supply. With too many operators on the supply side there is a danger the price might not be right. This study set out to establish the perils and factors that affect rating of fire insurance and the practices adopted by insurance firms underwriting fire risks in a competitive environment. A survey was therefore carried out so as to meet the objectives of the study. The main objectives of the study were to identify factors considered during fire rating and the practices adopted by insurance firms to cope with competition. The survey was carried out among all insurance companies who underwrite general business including fire. Questionnaires with both open and closed ended questions were used to collect data. The main findings of the survey are that fire rating is affected to a very large extent by explosion perils, earthquake perils, storm and flood perils, collision and impact perils, riot and strike perils, subsidence and ground heave perils and malicious acts perils. The findings also revealed that the industry has suffered substantial losses totaling to over 4.7 billion shillings in the last decade as a result of fire and that fire rating practices are not standardized. In the light of these findings it is recommended that the industry formulates generally accepted fire rating guidelines and sensitizes its clients on the benefits of good housekeeping so as to minimize risks and hence avoid huge claims resulting from fires.