New cash ratio sweetens mergers, acquisitions for small insurance firms

Small insurance companies are likely to be acquired, merged or fold if they fail to enhance their capital base in the next three financial years, following new proposals in the Budget.

National Treasury Cabinet Secretary Henry Rotich while presenting the 2015/16 Budget in Parliament last week proposed major plans geared towards enhancing the capital base of insurance companies.

This, he said is meant make them financially strong to withstand economic shocks as prescribed in Vision 2030. “The vision targets the creation of an international financial centre able to attract international investments and participants in the financial services arena,” said Rotich.

“In addition, Kenya needs to have strong and well capitalised financial institutions which are not only able to participate in financing the large projects envisaged in the Vision but that are also well capitalised to withstand financial shocks and crisis.” Rotich’s new measures in the insurance industry include increasing the minimum capital to Sh600 million for general insurance, and Sh400 million for long term insurance business by June 2018.

urrently, the minimum capital for general insurance companies is Sh300 million while those in long term insurance business stands at Sh150 million. He said the new measures conforms to the recent shift of the industry from rule and compliance based system to Risk Based Supervision. “In addition to increasing the minimum capital requirements, I propose to introduce risk based capital requirements to be determined by the specific risk profile of the company,” he said.

Last year, Insurance Regulatory Authority in conjunction with the World Bank Support Programme introduced Electronic Regulatory System  top enable companies submit data online. During the Budget speech, Rotich said the investment provisions in the Insurance Act do not comply with international core principles of insurance supervision.

“I am therefore proposing to move to a more principle based investment framework where insurance companies will be required to prepare and submit investment policies and will be subject to broad prescribed investment guidelines,” he said.

Remaining afloat

Industry players while welcoming the new initiatives, noted that the move will have major implications in the industry and are likely to trigger mergers and acquisitions or entry of more foreign companies.Association of Kenya Insurance Executive Director Tom Gichuhi said the new plans will require shareholders to inject in more capital into their companies, failure to which the underwriters will be acquired or merge with bigger firms locally and international. “We expect companies to embark on strategies to raise new capital in order to remain afloat in the business,” said Gichuhi.

The Insurance Sector Outlook for East Africa 2015 a report released last month by the Deloitte East Africa in Nairobi opined that the local insurance companies have been developing new products targeting new segments, agriculture, oil and gas, terrorism among others.

Director Deloitte East Africa Thomas Njeru observed that with the rapid expansion of East Africa’s economy, the insurance industry is on a solid footing with demand for both life and non-life products continuing to rise as more households join the middle-income class.

Local companies, Britam, Jubilee Insurance, CIC Group, and UAP have spread their operations in Tanzania, Mozambique, Burundi, Rwanda, South Sudan, DRC Congo and Uganda. Mid last year, Britam acquired Real Insurance Company which had operations in Tanzania, Malawi, and Mozambique while Jubilee insurance the local market leader plans to increase its footprints in East, Central, and West Africa in the current financial year.

Rotich noted that the investment framework will see the insurance industry in harmony with the framework on retirement benefits and collective investment sectors. To increase more agents in the industry, Rotich proposed removal of the condition requiring agents be only licensed by the Insurance Regulatory Authority after a recommendation by the insurance companies.

He noted that whereas over 25,000 agents have qualified for award of Certificate of Proficiency which is a requirement for licensing as an insurance agent, there are only 5,000 agents licensed by the IRA. “This is partly as a result of an oppressive requirement that agents must be recommended by an insurance company before they can be licensed,” he added.

MMI Holdings Ltd, a South African based financial services group early last year acquired a majority stake Cannon Assurance while Pandit family sold their controlling stake in Mercantile Insurance to a Morocco-based Saham Finances in 2013.

Prudential Plc acquired Shield Assurance Company while Pan African Insurance is in the process of acquiring substantial shareholding stake in Gateway insurance company.