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Executive summary

The Court of Appeal has ruled that the Insurance Regulatory Authority (IRA) was empowered to issue Motor Insurance Underwriting Guidelines (the guidelines) but had failed to justify setting premium prices as the most appropriate intervention measure over other regulatory methods, rendering the guidelines void.

This appeal arose from a judgment by the High Court of Kenya in Nairobi, issued on 20 March 2017, which had declared the guidelines to be null and void because the IRA lacked statutory authority to issue them.

The IRA issued the guidelines on 20 November 2009, under circular No. IC 07/2009. The guidelines set minimum premium rates to be charged by insurance companies in a bid to mitigate underwriting losses. However, according to the Commission on Administrative Justice (CAJ), the IRA acted beyond its authority in issuing the guidelines. Additionally, the CJA contended that the guidelines constituted price fixing, supported monopolistic and cartel behavior, and outlawed competition and the free interplay of market forces.

The IRA appealed, asking that the Court of Appeal set aside the High Court's decision and declare that the guidelines were valid and enforceable.

The Court of Appeal, on 20 September 2024, declared that IRA had acted within its statutory powers in issuing the guidelines; however, the court also ruled, the guidelines were void for being irrational, unreasonable and disproportionate.

Detailed discussion

The Court of Appeal considered whether Section 3A of the Insurance Act empowers IRA to set the premiums to be paid for various insurance covers by insurance companies.

Section 3A states that the objects and functions of IRA include to:

 … ensure the effective administration, supervision, regulation and control of insurance and reinsurance business in Kenya;

issue supervisory guidelines and prudential standards from time to time, for the better administration of the insurance business of persons licensed under this Act …

In establishing what entails insurance regulation, the Court of Appeal relied on a 2011 scholarly article1 and concluded that Insurance regulation included the following:

• Solvency regulation: Regulators aim to limit insolvency risk by requiring insurers to meet specific financial standards and by taking appropriate actions if an insurer assumes excessive default risk or experiences financial distress.
• Price regulation: The aim of price regulation is to prevent excessive financial risk and inadequate pricing, ensuring consumers are not misled by low prices without understanding the associated risks. Additionally, it would enforce a ceiling to prevent prices from rising above a competitive level.
• Market-conduct regulation: These are steps taken by regulators to mitigate market-conduct problems through self-compliance measures and the establishment of voluntary self-regulatory organizations.

Based on this analysis, the Court of Appeal declared that IRA's functions included price regulation hence they had acted within their statutory powers in issuing the guidelines.

However, the Court of Appeal declared that the IRA had acted in an irrational, unreasonable and disproportionate manner by failing to justify setting premium prices as the most appropriate intervention measure over other regulatory methods.

Conclusion

This decision affirmed the IRA's role in setting premium prices as part of their insurance regulation mandate. However, when establishing price regulation guidelines, the IRA must justify the necessity of price regulation as the most appropriate intervention over other regulatory methods.

Insurance companies operating in Kenya should monitor future guidelines issued by the IRA and take into consideration any required changes in their business operations.