Local insurance firms will be exempted from capital adequacy requirements for the six months between July and December this year.
The move is expected to help the industry cope with the impact of Covid-19, which has eroded the earnings of many Kenyans and some are unable to keep up with regular premium payments.
The sector also faces the risk of higher claims as the pandemic continues to depress the country’s economy.
National Treasury Cabinet Secretary Ukur Yatani said in a gazette notice that the companies were exempted from maintaining the capital adequacy ratio of 100 per cent over the six-month period. The ratio is the measure of the available capital in relation to the required capital. General insurance companies need to have a minimum capital of Sh600 million, while life insurers are supposed to hold a minimum of Sh400 million.
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The Insurance Act requires insurers to maintain this at 100 per cent while insurers carrying on both long-term and general insurance businesses are supposed to maintain separate capital adequacy ratios.
“In exercise of the powers conferred by Section 181 of the Insurance Act, the Cabinet Secretary for the National Treasury and Planning exempts all the registered insurers from the provisions of section 41 of the Act for the period commencing July 1, 2020 and ending December 31, 2020,” said the notice.
The relaxation of the rule is among a raft of measures aimed at helping insurers cope with the impact of the pandemic.
The industry has put a pause to the planned migration to a risk-based capital (RBC) regime, which was expected to come into effect in July as well as delayed requirements to increase the capital adequacy ratio from 100 per cent to 200 per cent.
A recent report by Financial Sector Deepening (FSD) Kenya noted that insurers would experience a decline in premium income especially from signing new clients as well as sectors that have been hit by the pandemic. It would also affect their liquidity and in turn ability to meet their capital adequacy.
“Substantial reductions in premium income from new policies and from scaling down risk coverage of heavily affected sectors will have negative impacts on insurers’ liquidity and ability to meet short-term expenses and claims obligations,” said the FSD report.
“Liquidity constraints will be exacerbated by insurers’ heavy reliance on term deposits and government securities, which may become increasingly risky and not yield the same generally high and steady returns insurers are used to.”
When the World Health Organisation declared Covid-19 a pandemic, it triggered different reactions from local insurers, with many informing their clients that being a pandemic, the disease was not covered by their current policies. Some insurers have however reversed the decision and have been settling their customers’ Covid-19 related medical claims.