Day of reckoning arrives for insurance firms

By James Anyanzwa

The Insurance Regulatory Authority (IRA) has commissioned a group of independent auditors to re-examine the accounts of insurers who say they have complied with the new recapitalisation requirement. This came after it emerged that four firms completely failed to pass the regulator’s test.

The audit, which should be completed next month, will pave way for disciplinary action against defiant insurers. The IRA has maintained that non-compliant insurance firms will be shut down.

"From the reports submitted to us by the companies, 42 out of 46 have complied. However, auditors will be sent to all the companies to authenticate the reports submitted by the companies, and report to the commissioner on the actual status of the compliance," Ms Noella Mutanda-Wesonga, the authority’s head of corporate communications, told Financial Journal.

Comprehensive statement

The Authority is expected to issue a comprehensive statement on compliance levels by the beginning of next month.

The unfolding development follows a Legal Notice issued by the Finance minister, Uhuru Kenyatta, through the Kenya Gazette, after the 2007 budget, requiring insurance companies to enhance their paid-up share capital by June 14 this year, when the three-year grace period issued comes to an end. That deadline expired last week.

"We shall not extend the deadline by a single day come June 14. Any company that has not recapitalised will see its licenCe withdrawn," Mr Sammy Makove, the Authority’s chief executive, warned earlier this year.

In the 2007/08 budget, the then Finance minister, Amos Kimunya, proposed an increment in the paid-up capital for all insurance companies. The move was geared at strengthening their financial base, and to clamp down on a string of failures that had rocked the industry.

Following the proposals, relatively small insurance companies were expected to either recapitalise, or allow voluntary mergers ahead of the deadline. The consolidation process was also expected to pull a number of international players into the local insurance market, whose full potential remains largely untapped.

Under the new regulations, insurers conducting long-term insurance business are expected to increase their paid-up capital from Sh50 million to Sh150 million. Those dealing with general and composite insurance businesses will, however, raise their paid-up capital from Sh100 million and Sh150 million, to Sh300 million and Sh450 million, respectively.

The regulations also requires businesses under the same holding company to consolidate activities into separate entities, so that only one entity deals with long-term business (life), while another handles short-term (general).

Following the regulatory measure, companies not meeting the new requirement have entered into discussions with strategic partners for the injection of new capital. Accordingly the number of insurance companies splitting their composite businesses has been rising, as they rush to comply with the new regulations.

Blue Shield Insurance Company (BSIC) sold 51 per cent of its shares through a restricted private placement, in a bid to raise an additional Sh347 million in fresh capital.

Shore-up

The offer which, constituted a total of 17.3 million new ordinary shares, was intended to shore up the Public Service Vehicle (PSV) underwriter’s core capital, and limit the shareholding of its directors to no more than 25 per cent, as part of efforts to comply with the new insurance regulations.

The CFC Life and the Heritage Insurance Company have re-aligned their businesses to enable the parent company, CFC Stanbic, comply with new capitalisation rules. The rearrangement will now see all long-term business come under CFC Life, while short-term business will be brought under Heritage Insurance.

The Insurance Company of East Africa (ICEA) is also reportedly merging with Lion of Kenya Insurance Company by end year, where the latter will handle general insurance business, while ICEA handles the life business.

Low capital has largely been blamed for a number of losses for clients, following the collapse of insurance firms that buckled under the weight of colossal debts, and piles of false claims. Some of the PSV underwriters that collapsed include the Kenya National Assurance, Stallion, United, Lakestar, Liberty, Access, Invesco, and Standard Assurance.

Invesco Assurance company has, however, been revived, and is now licensed as general insurance company. Properly capitalised firms are expected to safeguard the billions of shillings held as premium payment by the public, while generating public goodwill at a time when the recent collapse of insurance companies has hurt the industry’s image.

In his paper ‘Overview of Global Trends in Reinsurance’, Mr Johnnie Wilcox, the managing director of United African Insurance Brokers, argued that many African countries have weak economies with resultant low insurance penetration, due to lack of disposable income, ignorance and inertia.

According to Wilcox, the state of African insurance market —which is characterised by globalisation and competition from foreign companies, basic insurance and reinsurance products on offer — lacks customised insurance solutions to suit local requirements, and has weak and unsophisticated solutions.

Risk selection

Insurance companies are, however, turning to risk selection to check the rising proportion of claims, which are thinning their profitability. The focus on minimising risks is informed by heavy claims, which are eating into their bottom line and profits.

The global recession also contributed to rising claims as many businesses went through a lean time.

It is argued that life insurance companies are more exposed to volatility in global financial markets than non-life insurance firms, due to shrinking returns from investments against growing future liabilities.