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Insurance is an arrangement by which one party The insurer promises to pay another party the insured or policy holder a sum of money if something happens which causes the insured to suffer financial loss (Diacon.S.R and Carter R.L, 1998) In the past few years, private health insurance sector in Kenya has been recorded as the highest loss-making insurance class with loss ratios of 74.0 per cent, 80.4 per cent , 81.5 per cent and 83.5 per cent in 2008, 2009 2010 and 2011 respectively (AKI report, 2011). Private health insurance has continued to perform poorly in the year 2011, posting a loss of 650 Million compared to a loss of Kshs. 530 Million in the previous year.
According to the Association of Kenya Insurers (2011), only four out of the 20 Private health insurance providers in Kenya made an underwriting profit in 2011, the four include General Accident Insurance Company, Jubilee Insurance Company, Mercantile Insurance Company and Real Insurance Company. The sector has the highest loss ratio in the industry of 83.5% with net earned premiums reaching KES 8.9bn (US$74.5mn) and net incurred claims reached KES 5.4 bn (US$60.6mn).
This trend has been consistent for the last 4 years 2008, 2009, 2010, and 2011, with all indications that 2012 will also be a loss, a situation has prompted the Private health insurance premiums to be increased from time to time but the situation has not been improved much, it is therefore imperative to examine the challenges facing Private health insurance companies and their effect on business performance with a view of informing future insurance policy formulation.
This study will seek to investigate the cchallenges facing insurance companies in the provision of Private Health insurance and their effect on business performance because this sector is an important one for the economic development of the Nation hence the need to guard it.
This chapter presents the background of the study, statement of the problem, purpose of the study, research objectives, research questions, justification of the study, significance of the study, assumptions limitations and delimitations, definition of terms and chapter summary.
1.1 Background of the Study
Health insurance is a form of collectivism by means of which people collectively pool their risk, in this case the risk of incurring medical expenses. It is a contract between an insurance company and an individual or a sponsor in the form of an employer. The contract can be renewable annually or monthly depending on the agreement between the parties in that contract. The type and amount of health care costs that will be covered by the health insurance company are specified in advance, in the member policy contract.
The importance of health insurance cannot be underestimated in any economy. As observed by Wasow and Hill (1986) who argued that health insurance is an important channel for financial capital accumulation. Health insurance companies’ policies offer policies, which are purchased exclusively to protect the customer against risk. They often involve substantial savings. This is because Insurance companies must accumulate reserves against anticipated future claims which provide for large sums of money, which can be lend to individuals, the government, commerce and industry.
According to the World health Organization (World Health Report, 2008), access to healthcare is the right of every individual. Governments all over the world have therefore undertaken various programs in order to realize this objective. The Government of Kenya has also not been left behind on this as Kenya is a signatory to the Abuja Declaration (Institute of Policy and Research, 2005) which requires its signatory member states to spend at least 15% of their Gross Domestic Product (GDP) on healthcare. As of the year 2009, Kenya spent 9% of her GDP on healthcare which was far below the recommended proportion (IPAR, 2005).
Health insurance schemes are an increasingly recognized factor as a tool to finance health care provision in low and middle income countries. Given the high latent demand from people for health care services of a good quality and the extreme under-utilization of health services in several countries, it has been argued that social health insurance may improve the access to health care of acceptable quality. Whereas alternative forms of health care financing and cost recovery strategies like user fees have been heavily criticized, the option of insurance seems to be a promising alternative as it is a possibility to pool risk transferring, unforeseeable health care costs to fixed premiums.
Private health insurance is considered private when the third party (insurer) is a profit seeking organization such as the private insurance companies. In Private Health insurance, people pay premiums related to the expected cost of health services to be provided to them. Therefore, people who are in high health risk groups pay more, and those at low risk pay less. Membership to a private insurance scheme is usually voluntary and is solely based on the decision of the insured. Private Health insurance has been offered by general insurance firms as one of their portfolio of products.
One of the overall goals of the Government of Kenya is to promote and improve the health status of all Kenyans by making health services more efficient, available and affordable. The importance of Private health insurance in the provision and utilization of health care cannot be overemphasized. Funding for health care has become a cooperative responsibility shared among the government, employers, and insurance companies because of the importance of the service and the rising costs of medical services. This makes Private health insurance one of the most significant instruments to maintain a healthy workforce to drive the economy. Private health insurance coverage is provided by public and private sources. Public sources include National Hospital Insurance Fund while private sources include private insurance companies such as APA insurance company Kenya limited, UAP Insurance Company limited, Jubilee Insurance Company and Madison Insurance among others
1.1.1 Private health Insurance
Health insurance is an institutional and financial mechanism that helps households and private individuals to set aside financial resources to meet costs of medical care in event of illness. It is based on the principle of pooling funds and entrusting management of such funds to a third party that pays for healthcare costs of members who contribute to the pool. The third party can be government, employer, insurance company or a provider (Kraushaar, 1994).
Wang’ombe et al., (1994) identify two categories of private health insurance in Kenya: direct private health insurance and, employment based insurance. Direct private health insurance is very expensive and only the middle and high-income groups afford it (Nderitu, 2002). In the employment-based plans, the employer provides care directly through employer-owned on site health facility, or through employer contracts with health facilities or healthcare organisations. These are both voluntary health schemes and are not legislated by the government.
1.1.2 Private Health Insurance in Kenya
According to the AKI report (2011) there was 47 licenses insurance Companies with 20 companies licensed to practice and sale health insurance products. There are additional 23 medical Insurance providers (MIPs) which are more of managed care organization.
The total premiums for private medical insurance in 2011 were over 8.3 billion with claims ratio at 83.5 percent. Private health insurance accounts for 15 percent of the gross total premium for all insurance products in 2011. According to the World Bank working paper number 193 (2010), the health insurance penetration stands at 2 percent with about 600,000 people insured with public insurance and over 2 million insured under the public insurance NHIF
In the past few years, private health insurance sector in Kenya has been recorded as the highest loss-making insurance class with loss ratios of 74.0 per cent, 80.4 per cent , 81.5 per cent and 83.5 per cent in 2008, 2009 2010 and 2011 respectively (AKI report, 2011). Private health insurance has continued to perform poorly in the year 2011, posting a loss of 650 Million compared to a loss of Kshs. 530 Million in the previous year. According to the Association of Kenya Insurers (2011), only four out of the 20 Private Health Insurance providers in Kenya made an underwriting profit in 2011, the four include General Accident Insurance Company, Jubilee Insurance Company, Mercantile Insurance Company and Real Insurance Company. The sector has the highest loss ratio in the industry of 83.5% with net earned premiums reaching KES 8.9bn (US$74.5mn) and net incurred claims reached KES 5.4 bn (US$60.6mn).
1.2 Statement of the Problem
Despite numerous efforts and strategies by insurance companies to maximize profitability, private health insurance has been performing poorly The insurance industry in Kenya is experiencing diverse challenges, key among them being the poor public perception of insurance (AKI Report, 2011 despite being the highest loss making class among the other classes of insurance. In the past few years, private health insurance sector in Kenya has been the highest loss-making class with loss ratios of 74.0 per cent, 80.4 per cent, 81.5 and 83.5per cent in 2008, 2009 2010 and 2011 respectively (AKI report, 2011). Private health insurance has continued to perform poorly in the year 2011, posting a loss of 650 Million compared to a loss of Kshs. 530 Million in the previous year. According to the Association of Kenya Insurers (2011), only four out of the 20 Private health insurance providers in Kenya made an underwriting profit in 2011. The sector has the highest loss ratio in the industry of 83.5% with net earned premiums reaching KES 8.9bn (US$74.5mn) and net incurred claims reached KES 5.4 bn (US$60.6mn). The trend has been consistent for the last 4 years 2008, 2009, 2010, and 2011, with all indications that 2012 will also be a loss, this has prompted the Private health insurance premiums to be increased from time to time but the situation has not been improved much
A big proportion of health insurance companies covering Private health insurance have continued to suffer losses and face the risk of collapse unless urgent measures are taken to understand and mitigate against the current the trend of losses where the total premiums collected cannot fund the number of claims incurred thereby forcing insurance companies to finance the claims with other premiums, thereby compromising profitability. The sale of private health insurance products in the Kenyan industry is proving to be a high risk investment for insurance companies. Several companies have collapsed with billions of policyholders’ funds, causing uncertainty and turmoil in the insurance industry. Examples of some of the insurance providers doing Private health insurance that have collapsed in Kenya include Discovery health, Mediplus and Smart Guard. Discovery Health, Health Plan services, Medex and Mesco consultants
There is little empirical data and information available on the challenges and constraints facing private health insurance in Kenya. The study will therefore seek to address this knowledge gap. An explication of the challenges facing Private health insurance will facilitate insurance companies in positioning their products better in the market, and enable them undertake mitigation measures to ensure profitability. The study will seek to investigate the real challenges facing Private health insurance in Kenya, and the effects on business performance with a view of informing the formulation of effective mitigation strategies.
1.3 Purpose of the study
The purpose of this study is to examine the the challenges facing insurance companies’ in the provision of private health insurance and the effect on business performance
1.4 Research Objectives
To identify the challenges facing the Private health insurance companies in Kenya.
To determine the effects of these challenges on the business performance of Private Health insurance companies in Kenya.
To recommend strategic interventions measures to address the challenges facing the Private health insurance sub sector in Kenya.
1.5 Research Questions
What are the challenges affecting provision of Private health insurance companies in Kenya?
How do these challenges affect the performance of the Private health insurance companies in Kenya?
What interventions measures can be employed to address the challenges in the Private health insurance Companies in Kenya?
Previous research studies on insurance have concentrated on documenting the coverage and impact of insurance products, with little empirical evidence on factors affecting the sustainability of different insurance categories in the long term. It is envisaged that this research study will serve to fill this knowledge gap by identifying and elucidating the challenges that influence the implementation of private Health insurance, and contribute to the existing body of knowledge on insurance. It is hoped that this study will yield data and information that will be useful in formulating sound insurance policies and form the basis for further research and review on the insurance sector in Kenya. As such this study is important as it will identify the challenges facing the private health Insurance sector and how the challenges can be mitigated to ensure the industry grows and does not make losses.
1.7 Significance of the study
This study will be important to various stakeholders including Private health insurance providers, future researchers and academicians, Association of Kenya Insurers, Insurance Regulatory Authorities and the General public.
1.7.1 Private Health Insurance Providers
The findings and recommendations of this study will be useful to new Private health insurance providers intending to introduce new Private health insurance products by enabling them to formulate and target their products effectively. The study will benefit the existing Private Health insurers in understanding underwriting challenges facing medical insurance and how to address with the problems. Managers of insurance companies will find the findings of this study useful in designing strategic plans to help their businesses gain competitive advantage.
Knowledge seekers in the fields of economics, research methods, management, and development studies will find this research study useful. In particular, this research study will be beneficial to the researchers with research interests in insurance, by serving as a point of reference. In addition, future researchers will be able to formulate further studies based on the recommendations of this study. The author, who is also a knowledge seeker, will be awarded a Master of Business Administration degree by successfully completing this research study.
1.7.3 Government and Regulatory agencies
Government and regulatory agencies will find the findings and recommendations of this study useful in formulating future insurance regulations and laws that will aid in regulating and operationalization of the private health insurance industry.
1.7.4 Employers and Members of the Public
The study will benefit the members of the public by helping demystify the operation of the insurance business and thereby appreciate the role of private Health insurance as well as challenges facing the Private health insurance sector in Kenya. Employers will find the findings and recommendations useful in understanding underwriting conditions proposed by insurance companies in Private Health insurance covers.
1.8 Scope of the Study
The target population of this study will be all the Private health insurance providers currently operating in Nairobi, Kenya. The study will cover all the insurance companies licensed to offer Private Health insurance. Data will be collected by administering a questionnaire to managerial staff in the insurance companies.
1.9 Limitations and Delimitations
This research study may encounter a number of limitations. First, the data collection will be subjected to insurance managers who may have their own formed opinions on the challenges of Private health insurance, which they may fail to articulate or tend to overemphasize for fear of the information being used for other reasons other than academic. To overcome this limitation, the researcher will carry along an introduction letter from Daystar University to confirm that the data requested will only be used for academic reasons.
Data collection procedure will be restricted to the use of questionnaires thereby locking out other vital data collection tools like document analysis as they may not be availed by the companies for scrutiny. To overcome this, the study will visit the Companies’ websites and the information filed with the Insurance Regulatory Authority and the Association of Insurance to add on the information collected. The study will also look into other studies that have been done by other scholars on this subject.
1.10 Definition of terms
Principle: A principle denotes a general guiding rule, which does not include specific directions, which vary according to the subject matter (Holzheu, 2006).
Insure: To make sure or secure, to guarantee, as to insure safety to anyone. It also means to indemnify a person against pecuniary loss from specified perils or possible liability (Chen and Wong, 2004)
Insured: The insured is the policy-holder who is entitled to indemnity or monetary compensation on the happening of an event insured against. The insured is also the person who obtains or is otherwise covered by insurance on his health, life or property (Holzheu, 2006).
Insurer: He is the party who undertakes in consideration of an amount paid to him by the insured (premium) to pay money to the insured or assured on the happening of a stated (Holzheu, 2006).
Underwriting: The process of assessing and classifying the degree of risk presented by a proposed insured or group with respect to a specific insurance product and making a decision concerning the acceptance of that risk. ( Bickley.M,C,Jones H. E, Brown.B.F and Brown J.L 2007)
Adverse selection: People with a higher than average risks of needing health care are more likely than people to seek health insurance. Adverse selection results when these less healthy people disproportionately enroll into a risk pool.People with a higher than average risks of needing health care are more likely than people to seek health insurance (De Weerdt and Dercon, 2006).
Co-insurance: A form of medical cost sharing in a health insurance plan that requires an insured person to pay a stated percentage of medical expenses after the deductible amount, if any, was paid (Gertler and Gruber, 2002).
Co-payment: A form of medical cost sharing in a health insurance plan that requires an insured person to pay a fixed amount when a medical service is received (Leive and Xu, 2008).
Deductible: A fixed dollar amount during the benefit period – usually a year – that an insured person pays before the insurer starts to make payments for covered medical services. Plans may have both per individual and family deductibles (Leive and Xu, 2008).
Fully insured plan : A plan where the employer contracts with another organization to assume financial responsibility for the enrollees’ medical claims and for all incurred administrative costs (Russel, 1996).
Premium: Agreed upon fees paid for coverage of medical benefits for a defined benefit period. Premiums can be paid by employers, unions, employees, or shared by both the insured individual and the plan sponsor (Leive and Xu, 2008).
Self-insured plan: A plan offered by employers who directly assume the major cost of health insurance for their employees (De Weerdt and Dercon, 2006).
This chapter summarized the information from other researchers who had carried out their research in the same study challenges facing health insurance and their effects on busines performance. The study specifically covers the theoretical discussions, conceptual framework and research gap.
2.1.1 Concept of Risk
The existence of risk is the fundamental rationale for insurance (Criel 1997). If there is one thing about which we can be certain in this world, it is that uncertainty surrounds all that we do. This uncertainty is at the heart of risk and risk is at the very core of insurance. Risk would be defined as the probability of a cause of an event with negative outcome occurring. The cost of risk can be looked at in at least three different perspective i.e. frequency of risk, monetary cost or financial severity and human cost in terms of pain and suffering (Dickson 2002). In view of the adverse effects of risks there is a need for risks to be managed. Insurance companies are able to provide protection against the financial consequences of loss because the concept of risk pooling
2.1.2 Insurance Device
Insurance contract involves two parties including the insurer and the insured. The primary function of insurance is to act as a risk transfer mechanism. Insurance involves transferring or shifting risk from one individual to a group and sharing losses, on some equitable basis by all member of the group (Vaughan, 1989). Insurance has two fundamental characteristics namely transferring or shifting risks from an individual to a group and sharing losses on some equitable basis by all member of the group (Dickson 2002). Insurance rests upon the principal of risk-sharing between many people. It relies on the law of large numbers whereby what is unpredictable for an individual is highly predictable for a large number of individuals (Criel, 1997). ” The law of large numbers state that typically the more times we observe a particular event the more likely that it is that our observed result will approximate be true probability that the event will occur” (Bickley, Jones, Brown. & Brown, 2007: 7)
Insurance primarily concerns itself with risks which have financially measurable outcomes and whose outcome can only be unfavourable or leave enterprises in the same position as they were before occurrence of an event (Chen & Wong, 2004). Insurance deals with fortuitous or accidental losses which must not be catastrophic for example wide spread in nature. To counter the tendency of the persons whose exposure to loss is higher than average to purchase or continue insuring to a greater extent than those whose exposure is less than average, which is referred to as avoidance of adverse selection, there must be randomness in the risks covered (Holzheu, 2006). That is there must be a proportion of good and bad risks in the insured group equal to the proportion of good and bad risk of the group on which the prediction is made. Finally the cost of insuring the risk must not be high in relation to the possible loss i.e. insurance must be economically feasible.
The major activities of all insurers include rate-making, production, underwriting, loss adjustment and investment. Rate making is the process of determining the price per unit of insurance which like any other price is a function of the cost of production. The rates must be adequate, not excessive and not unfairly discriminatory (Holzheu, 2006). The premium income of the insurer must be sufficient to cover losses and expenses. Production involves supervision of the sales efforts which is carried by the agents or salaried representatives of the Insurer while underwriting on the other hand is the process of selecting and classifying exposures. If an insurer does not select from among her applicants, the result will be adverse to them (Bickley et al, 2007).
The main responsibility of the underwriter is to guard against adverse selection. While attempting to avoid adverse selection through rejection of undesirable risks, the underwriter must secure an adequate volume of exposures in each class. In addition they must guard against congestion or concentration of exposure that might result in a catastrophe (Marwa, 2007). Finally loss adjusting is the loss settlement process which provides for the indemnification of those members of the group who suffer losses. It is obviously important that the insurer pay claims fairly and promptly but it is equally important that insurers resist unjust claims and avoid overpayment of them (Vaughan, 1989). As a result of their operations, insurers accumulate large amounts of money for the payment of claims in the future which are added to the funds of the insurers themselves. It would be a costly waste to permit these funds to remain idle and it is the responsibility of the insurers finance department to see that they are properly invested.
2.1.3 Basic principles of Insurance
Insurance practice is reputed for its general principles, and the principle of indemnity is one of them, others are insurable interest, utmost good faith, subrogation, contribution and proximate cause (Marwa, 2007). Insurance is an intricate economic and social device for the handling of risks to life and property. It is social in nature because it represents the various co-operations of various individuals for mutual benefits by combining together funds to reduce the consequence of similar risk. Insurance is the placing back of a person who has suffered a loss in the same position he was before loss occurred. It aims to eradicate the consequence of a loss by not allowing the insured to suffer the consequential loss. However, unless one meets the requirements of all the basic principles of insurance, he will be estopped from claiming under an insurance contract (Holzheu, 2006).
Risk is the uncertainty about an outcome in a given situation. An event might occur, and if it does, it leaves us in unfavourable position. Insurance therefore is one of the most established techniques of risk transfer. Insurance is a risk transfer mechanism by which one exchanges uncertainty for certainty. It is a risk reducing investment in which the buyer pays a small fixed amount (premium) to be protected from a potentially large loss. An entity seeking to transfer risk becomes the ‘insured’ party once risk is assumed by the ‘insurer’, the insuring party, by means of a contract, called an ‘insurance policy’ (Shavell, 1979). The fee paid by the insured to the insurer for assuming the risk is called the ‘premium’ (Dionne and Doherty, 1994). Insurance principles are the basic doctrines that guide the practice of insurance. They include insurable interest, utmost good faith, proximate cause, indemnity, subrogation and contribution (Marwa, 2007). While life assurance is guided only by the first three, non-life insurance (including motor) is guided by all the six principles.
2.1.4 Social Insurance
Insurance is not always practised in this ideal commercial situation as described above as there are some people in society who face risks that they cannot afford to deal with themselves and require a social approach to insurance. Social insurance (SI) is defined as a device for pooling of risks and their transfer to an organisation usually governmental that is required by law to provide pecuniary or service benefits to or on behalf of covered persons upon the occurrence of certain pre-designated losses (Vaughan, 1989).
In SI individual equity is secondary in importance to the social adequacy of the benefits (Carin, 2004). Benefits are weighed in favour of certain groups so that all persons will be provided a minimum flow of protection. SI does not exclude anyone who belongs to a group that qualifies for coverage nor does it charge risk related premiums. SI includes Social Health Insurance (SHI), which deals with the risk of ill health. Health Insurance as a source of financing for health care is a system in which potential customers of health care make an advance payment to an insurance scheme, which in the event of future health service utilization will pay the provider of care some or all the direct expenses incurred (Criel, 1997).
The International Labour Organisation (ILO) provides a guideline for an initial minimum package for social health insurance (SHI) which includes general practitioners care such as home visits, hospitalization where necessary, specialists care in hospitals, essential pharmaceutical supplies and prenatal, maternity and postnatal care by medical practitioners or qualified midwives. (ILO, 1952). SHI is guided by the basic assumption that health is a basic human right and insurance is a tool to advance its implementation whereas Private Health Insurance (PHI) on the other hand views health as a cluster of risks, insurance of which is a profitable economic activity. (UN, 1948 & 1997, WHO 1978). This brings forth the argument that society should provide at least basic health care to all citizens. However, attainment of this status is usually gradual and has to be within a set legal frame work as is illustrated in the examples provided below.
For instance in Belgium during 1851 a special law officially acknowledging the sickness funds (referred to as mutual health funds) was enacted. Sickness funds were based on occupational groups and were rather small-scale. During 1894 registration provided the legal foundation of these funds with a broader scope of activities, while they could henceforth benefit from government subsidies. Subsequently mutual health funds from the same political or ideological background combined into national alliances or unions. Until early 1940’s membership to mutual health funds had been voluntary. In 1944 a decree was adopted to make health insurance compulsory for all salaried workers.
In Israel the first health insurance fund, the KUPAT HOLIM CLALIT (General Sickness Fund), was founded in 1911 by agricultural workers in collective settlements (Kibbutz) which during 1920 was taken over by the HISTANDRUT (General Federation of Labour) and became one of its political power bases (Carin, 2004). In 1920 three other health insurance funds were established and by 1948 when Israel gained statehood, 53% of the population was covered 80% being members of general sickness funds. By 1995 when National Health Insurance Law was voted 96% of the population was covered. Now it is the duty of every resident to register as a member in one of the existing funds (Holzheu, 2006).
Meanwhile the origin of SHI in Japan is the development of voluntary community health insurance scheme in the nineteenth century. In 1935 a community health insurance scheme (having rice as a pre-paid contribution and basic care as the main benefit) was established in the Fukuoka Prefecture. In the 1930’s government encouraged the replication of community health insurance on a National Citizens Health Insurance law based on community financing principle but with cash-based contribution was proclaimed and implemented. The law was designed to meet the needs of poor in underserved rural villages, the farmers and self-employed workers in rural communities and small companies. It was initially run on voluntary basis (Carin, 2004). In 1922 a law was voted establishing compulsory insurance for selected groups of workers and by 1945 employee health insurance together with National Citizen’s Health Insurance covered 60% of the population. Legislation establishing compulsory insurance for all was finally adopted during 1958 and was implemented in 1961 (Carin, 2004).
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