New supervision model signals mergers in insurance industry

A trader looks at burnt money after a fire gutted a building on Nasser road last year. PHOTO BY FAISWAL KASIRYE 

By FARIDAH KULABAKO

As the insurance industry prepares to shift from compliance-based to risk-based supervision, players have expressed concern that the move to the new model could result into mergers and acquisitions.

The industry regulator’s chief executive officer, Mr Ibrahim Kaddunabbi Lubega, told insurers last week that they will have to shift to the new model of supervision in the near future to ensure transparency in the insurance sector and improve the sector’s public image.

The new model
Compliance-based supervision requires all players, irrespective of the risk levels of their companies to follow the same rules and meet the same minimum capital requirements – currently at Shs4 billion for non-life insurance business and Shs3 billion for life insurance.

Risk-based supervision, on the other hand, looks at the insurer’s risk levels to determine the capital requirements of each insurance company. Under the new model, insurance companies will only be allowed to underwrite risks depending on their specific risk profile and capacities.

Companies will also be required to show a clear calculation of their solvency by clearly showing their balance sheet, income statement, premium and unearned premium.

The costs
However, Mr Newton Jazire, the Lion Assurance managing director, said although risk-based supervision will create a consistent way of monitoring risk across the market in a structured manner, the high implementation costs and capital requirements associated with the new supervision framework may induce consolidation waves and hamper small and medium sized companies growth.

He added that survival may require merging, purchasing existing portfolios or entering new partnerships to maintain profitability, realise economies of scale and stronger market position.

“If some companies are struggling to meet the current minimum capital of Shs4 billion, it will even be more challenging when we move to risk-based supervision,” Mr Jazire told the heads of insurance industry meeting last week.

A market analyst said only eight out of the 22 players in the market meet the minimum paid-up capital requirement. Presenting a paper on risk-based supervison, Mr Dipan Shah, Kiboko Financial Services executive director, said the current model of supervision (compliance-based) is not as effective in managing and mitigating risks that could affect a company’s solvency as the new model.

Benefits
He said risk-based supervision will enable the regulator to assess companies and identify the most pressing risks for each company, determine the risk levels, its financial vulnerability and ability to pay claims and areas that are likely to generate losses.

It is upon that information that the regulator will then set minimum capital requirements for each insurance player depending on risk levels. Mr Kaddunabbi said assessing companies will help them to advise players where they should focus resources depending on risk levels and enable firms to take timely preventive measures to avoid insolvency.

“This will give us a better understanding of the different risks companies face, improve their profitability in underwriting, and prevent or minimise by spotting significant problems in time and remedying them effectively,” Mr Kaddunabbi said.