Kenya is introducing a number of regulatory changes to its insurance sector, including a move towards risk-based capital, increased capital requirements, new guidelines for short-term business and takaful rules.
Popular distrust has been a historical challenge for the sector, and insurance regulators in Kenya have been prioritising building confidence and cleaning up after several insurers closed in recent years, due to poor governance and insufficient oversight. Since then the emphasis has been on tightening legislation and regulations to root out abuses.
Most countries in East Africa have been updating their frameworks for insurance regulation. Kenya’s Insurance Regulatory Authority (IRA) works with the industry to offer tighter controls, including risk-based capital requirements and general increases in capital requirements, as well as new guidelines and rules for Islamic insurance. It aims to ensure these changes contribute to the sustainable development of the industry by putting pressure on less successful companies in an overcrowded insurance market and ensuring that competition remains strong.
In his June 2015 budget speech, National Treasury Secretary Henry Rotich highlighted some of the key changes to the financial sector. He pointed out that regulators have all adopted the risk-based supervision model in line with international best practices. Secretary Rotich proposed to increase minimum capital requirements in addition to introducing risk-based capital requirements, which would be determined by the specific risk profile of each company. He also drew attention to the fact that the investment provisions in the Insurance Act are rules-based and not currently in compliance with the international core principles of insurance supervision. He therefore recommended the 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 suggested that this investment framework would bring the insurance industry into greater harmony with the framework already pertaining in the retirement benefits and collective investment sectors.
The wider regulatory framework is being streamlined in line with national policy to merge several financial regulators into one. IRA collaborates with Central Bank of Kenya (CBK), Sacco Societies Regulatory Authority (SASRA), Capital Markets Authority (CMA) and the Retirement Benefits Authority (RBA). The reason behind the timing of the merger is unclear but could be postponed until after the next general election, due in 2017. Instead of further updates to the Insurance Act, passed in 2013 and last amended in 2014, the plan is to create a combined Financial Services Bill that includes inputs from all of the agencies. Other relevant influences include Kenya’s Vision 2030, the Constitution of 2010 and the Consumer Protection Act 2012.
In the meantime, the IRA is working in terms of the Finance Act, which was submitted by President Uhuru Kenyatta after debate in Parliament. It has been issuing regulations and directives in terms of the 2013 Insurance Act. The IRA’s 2013-18 strategic plan has three goals: promoting greater consumer education and protection; encouraging an inclusive, competitive and stable insurance industry; and offering high quality customer service across the board.
Increased & Risk-Based Capital
Treasury Secretary Rotich published regulations in June that spell out a phased increase in basic capital requirements for insurers, to be finalised by June 2018. General insurers must boost capitalisation from KSh300m ($3.3m) to KSh600m ($6.6m), life insurers from KSh150m ($1.65m) to KSh400m ($4.4m), general reinsurers from KSh500m ($5.5m) to KSh1bn ($11m), and life reinsurers from KSh300m ($3.3m) to KSh500m ($5.5m). Businesses offering combined lines will need to increase capital significantly to show they can cover each line separately.
The new rules also spell out a hybrid system for determining the amount of capital required, which is the higher number of a stated amount (KSh250m or $2.75m) that was mentioned in the draft Insurance Bill, a fraction of premiums collected the previous year or the risk profile for capital.
Stephen Wandera, managing director at British American Investment Company, told OBG, “The market is currently crowded, characterised by high fragmentation, heavy competition and price undercutting. Consolidation of the market will be encouraged by the move towards risk-based compliance.” The formula was not yet clear at the time of going to press, although IRA leaders had been discussing different options with the industry for several months.
When the UK’s Prudential announced in September 2014 a KSh1.5bn ($16.5m) deal to buy Shield Assurance from Blue Shield, part of the funds were earmarked for paying outstanding benefits on matured policies.
Contributions to the Policyholders Compensation Fund, first set up in 2005, were altered in terms of 2015 regulations that require insurers to contribute 0.5% of premiums collected from life and general business. Previously the insurer and the insured each contributed 25%. Insured individuals are to get a maximum compensation refund of KSh100,000 ($1100) if a company goes into liquidation or closes.
The fund had assets of KSh3.6bn ($39.6m) at the end of June 2014, up from KSh2.8bn ($30.8m) the previous year, and received contributions of KSh540m ($5.9m) in the year, up from KSh442m ($4.9m), according to the annual report. By June 2014 no payouts had yet been made since it was launched, but four insurers were under statutory management and compensation would be payable to policyholders in the event the court declares any of them insolvent.
Other issues covered in the draft 2015 regulations include keeping reinsurance business in Kenya where possible. There is a relaxation for micro-insurers, who do not need an actuary. Other insurers are required to have their actuaries submit a financial condition report showing the company can meet minimum capital requirements for the next three years after providing for material risks.
Procedures are outlined for approving new products, and companies must also submit regular reports on performance for at least three years from launch, as well as explain why they want to withdraw products. Companies will have to submit their investment policies to the regulator, and investment will be regulated according to principles instead of rules.
In January 2015 the regulator forwarded draft guidelines for bancassurance to the Central Bank of Kenya, after insurance agents complained that banks were breaching rules on choice. The proposed guidelines state “the bancassurance agent shall not induce or compel a prospect to buy an insurance product of its principal. All prospects shall be allowed to decide out of their own volition, which insurance product they wish to buy and from which insurer.”
The IRA has also introduced new guidelines for takaful insurance products. Muslims make up about 15% of Kenya’s population of 40m, but Islamic banking comprises only about 2% of total banking business. Islamic insurance is based on the principle of mutuality, in which the takaful company oversees a pool of funds contributed by all policyholders. Currently two companies provide takaful schemes, while Kenya Re has also developed a sharia-compliant reinsurance product.
Companies that offer both forms of insurance will need to report their takaful windows from the parent firm and keep the funds separate. Moreover the operating model must be approved by a board of religious scholars, the Sharia Supervisory Council. The new rules are effective from June 2015 for compliance by the end of December 2015.
Other priorities include policing agents – of whom more than half are estimated to be unlicensed – to prevent mis-selling and working to reduce fraud. The IRA is also issuing stress tests to insurance companies. Underwriters must discount the value of their real estate assets by 70%, due to lack of liquidity, and only report 30% of the value on their balance sheets. Furthermore, the IRA launched its Electronic Regulatory System in January 2014, and all regulated entities must use this platform to submit returns online, streamlining time on data outputs and analysis, and only online registrations for agents and brokers will be accepted from 2016.
Additional consumer protection measures are to include “cash and carry” rules that require insurers to assume risk when they receive a premium. This has also been a factor in some fraudulent claims. Other changes include new penalties on late settled claims – the IRA target is for claims to be settled within 30 days – and some taxation changes for life insurance.
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