New targets to drive growth in insurance

A puzzled trader at Owino park-yard market looks on after fire razed the market - the second in two years in August last year . He is one of the many traders who lost a lot of money and property because the cost of insuring their businesses. The Insrance sector is one of those that performed poorly in 2011 has been advised to offer affordable products to Ugandans.  

By Faridah Kulabako

In Summary

Low penetration. The insurance industry might have been the ‘sick man’ of the financial sector in 2011 with economic hardships pressing potential clients.

Low uptake of insurance in Uganda explains why the insurance sector did not make money for the better part of 2011.

Insurance penetration in Uganda is about 0.6 per cent, the lowest in the region, compared to Kenya’s 2.6 per cent, and Tanzania and Rwanda’s 1 per cent respectively.

Players now eye new targets set during 2011 to uplift the industry in 2012 and beyond.

After years without a full Commissioner for Insurance, the Finance Ministry in June appointed Mr Ibrahim Kaddunabbi Lubega head of Uganda Insurance Commission - the regulator of the insurance industry.

Three months later, parliament passed the long awaited Insurance Amendment Act in September 2011.

The Act provided for among others, the rebranding of Uganda Insurance Commission (UIC) to Insurance Regulatory Authority of Uganda (IRA).

The Act also stipulates regulation of micro insurance and health insurance, allows banks to be involved in selling insurance products and delinks IRA from Bank of Uganda supervision.

With the delink from Bank of Uganda (BoU), the Act brings IRA under Finance Ministry supervision and instructs an increase in the amount of security deposit to an insurer from 10 to 50 per cent.

The Act also demands that a local reinsurance company is created. The proposed Uganda Re which should have been passed before close of 2011 seeks to save the country billions of shillings channeled overseas for reinsurance services annually.

Building the image
In October, UIC officially rebranded to IRA. The changes, in the Amendment Act should improve services in the sector. During 2011, IRA raised insurance companies’ minimum paid-up capital requirements in a bid to build a strong and competitive local industry.

Effective October 2012, insurance companies should have minimum paid-up capital of Shs4 billion for non-life insurance and Shs3 billion for life insurance companies, up from Shs1 million for both policies. Brokerage firms should have minimum paid-up capital of Shs75 million, reinsurers - Shs10 billion, up from Shs50 million and Shs2.5 billion respectively.

Raising Capital
Uganda has the lowest paid-up capital requirements in East African when compared to Kenya’s Shs16.6 billion for reinsurance firms, Shs4.9 billion for life insurance service providers, Shs10 billion for non-life insurance firms while brokerage companies are required to have paid-up capital of Shs51 million.

In Tanzania, reinsurers are required to have minimum paid-up capital of Shs14 billion, Shs6.3 billion for life and non-life while brokerage companies are required to have paid-up capital of Shs28.5 million.

“…this problem of insignificance of the insurance sector must stop. We have given ourselves up to three years within which the paid-up capital must be doubled. Once we have strong companies we shall have a better place in the financial sector in Uganda,” Mr Kaddunabbi said.

This, he says, will strengthen the financial base of the industry, as players quickly settle claims, to fund bigger risks such as those in the oil industry and grow insurance penetration.

Uganda Insurers Association chairman Mathew Koech said the two-year grace period to October 2014 gives players enough time to mobilise resources for the minimum paid-up capital requirements or else they quit the industry.

Mr Kaddunabbi, stressed that new entrants will not be licensed unless they meet the new minimum paid-up capital requirements, except Uganda Re, which should have a Shs5 billion capital to be licensed and should have raised Shs10 billion capital within three years.

Setting timelines
During the year, players also agreed on timelines within which all claims should be paid. For instance, insurance firms are required to pay claims of up to Shs10 million within 10 working days after receiving a discharge voucher.

Claims of between Shs10 and Shs50 million should be settled within 15 working days while those above Shs50 million should be paid within 20 working days after receiving a discharge voucher or on receiving a cash call payment receipt from reinsurers.

A Policy Holders’ Fund to settle clients’ claims in case individual insurance companies fail to pay was established after some clients complained about firms that did not pay their claims. This has worked against the industry’s reputation, driving away potential policy holders.

Mr Kaddunabbi says, a compensation fund assures people that they will be compensated in case a risk occurs.

The industry also attracted a new player, Britam Insurance Company, in July, bringing the number of players in the local market to 23.

Challenges
However, 2011 also had hiccups in the industry. Makerere University Academic Staff Association (Muasa) sued the National Insurance Corporation (NIC) over a Shs16.7 billion pension savings package it claimed the insurance giant owed it.

It was later reported that NIC was selling off some of its money-spinning assets including three apartments with 18 flats of 2-3 bedrooms and a vacant piece of land in Kansanga, a Kampala City suburb, to raise money and pay the institution’s Academic Staff.

The regulator also observed that some insurers were undercutting or charging premiums that are far below the approved minimum rates to attract customers, a scenario Mr Kaddunabbi said leads to unfair competition and robs the industry of revenue.

He added that such an unprofessional act of non-compliance with the law affects both insurers and reinsurers and sometimes leads to companies’ inability to pay claims in the wrong run.

The minimum premium rate for motor comprehensive policy cover for private vehicles is 4 per cent of the car value while that for buses and other passenger service vehicles is 7.5 per cent.

For the case of burglary and house breaking, the premium rate is 0.1 per cent of the total value, plus 0.5 per cent without first loss while that with first loss has to add 1.1 per cent.

In case of school fires, the minimum premium rate is 0.15 per cent while that of offices is 0.125 per cent.
Reinsurers should not take on risks priced below the minimum premium rates. A Shs10 million fine will be slapped on companies that undercut rates.

 

Sneek peak into 2012
To boost this industry, the public should understand what insurance entails in addition to industry players reviewing other laws such as motor third party. If all players in the industry follow the set targets, 2012 will be a good year for the industry.“We expect growth of not less than 10 per cent in 2011 and not less than 20 per cent by the end of 2012,” Mr Kaddunabbi said