Firms poke holes on insurance rule

Kenya Reinsurance Corporation limited managing director Jadiah Mwarania during the release of the firms half year performance results at the Intercontinental Hotel in Nairobi on August 15, 2014. PHOTO | SALATON NJAU  

In Summary

• The underwriters say there is no incentive for the three re-insurers to improve their services because they have a guaranteed stream of business.
• Therefore, they argue, Kenya Re is now partly privately-owned implying that the rule on cessions, which guarantee business to private entities, is untenable.
• The underwriters said although it is right for the governments to protect the local industry during certain phases of development from domination by foreign players, its measures should be to cushion the entire market not individual firms.

By MWANIKI WAHOME
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Insurance firms have criticised a rule requiring them to cede a share of their business to reinsurers. The insurers say this regulation is against free trade practices.

“It is against free trade practices to compel Kenyan insurance players to cede a significant amount of their reinsurance — 33 per cent — to Kenya Re, ZEP Re and Africa Re,” said the underwriters, who did not want to be named due to business interests.

However, the Kenya Reinsurance has defended the ownership plan.

“Compulsory cessions contribute to our bottom line but it’s far from our area of focus. We do not see mandatory cessions as source of income as we operate on the private sector business principles. There are other countries where compulsory cessions exist such as Ghana and India,” Kenya Re managing director Jadiah Mwarania said.

Undue advantage

The insurers said compulsory cession gives undue advantage to the three local re-insurance firms. Kenya Re takes 20 per cent, PTA/ZEP Re 10 per cent and Africa Re 5 per cent.

GUARANTEED BUSINESS

Underwriters said they have to reinsure with the three firms that include East Africa Re and Continental Re. This requirement, they said, is a hindrance to entry into the market by international firms as fully-fledged subsidiaries.

Insurance Regulatory Authority, however, said it is yet to receive the complaints by the underwriters.

“Kenya Re is government-owned and this is a matter that lies within the Treasury. We, however, have not received such complaints,” the regulator said.

The insurers argue that only 67 per cent of their business is available for them to place on a competitive basis as the rest is locked in compulsory cessions.

The underwriters say there is no incentive for the three re-insurers to improve their services because they have a guaranteed stream of business.

“We do not want to be given business because we are a Kenyan company but because of service delivery. Kenya Re is more than a Kenyan company,” Mr Mwarania said.

The insurers said the government has been extending compulsory cessions since 2000, adding that the system was to be phased out by 2002. The underwriters say that Kenya Re was listed on the Nairobi Securities Exchange in 2007 after the government off-loaded a 40 per cent shareholding.

Therefore, they argue, Kenya Re is now partly privately-owned implying that the rule on cessions, which guarantee business to private entities, is untenable.

The insurers want the compulsory cession removed noting that the market has changed with some of the roles that Kenya Re used to play being taken over by the regulator, Insurance Regulatory Authority.

“At the time, the local reinsurance sector was entirely dominated by international reinsurance companies. The scenario today is very different. The local reinsurance market is vibrant with a mix participation of foreign, regional and local reinsurance markets. Kenya is today the regional reinsurance hub with seven reinsurers,” the insurers noted.

“Kenya Re was at a nascent stage and as government-owned entity, it enjoyed monopoly and was mandated to play a leading role in the development of the local insurance industry through capacity building and training of insurance personnel.”

Kenya Re also played an industry regulatory role by setting minimum applicable terms on key risks and monitoring concentration of risks exposures.

LIMITED FOREX

However, the Insurance Regulatory Authority has since taken over the regulatory, control and compliance functions that Kenya Re used to perform.

The insurers note that another objective of compulsory cession was to retain as much forex as possible in the country by limiting the amount of reinsurance premium paid to international reinsurers.

“This was during the era of controlled and limited forex in the country. With the liberalisation of the economy, the situation is totally different as there is no shortage of forex,” the insurers said.

“Furthermore, with the establishment of a number of locally based reinsurers, there is sufficient capacity to retain a significant amount of reinsurance without ceding overseas.”

The underwriters said although it is right for the governments to protect the local industry during certain phases of development from domination by foreign players, its measures should be to cushion the entire market not individual firms.

The underwriters said the government is losing tax revenue with the current arrangement as ZEP Re and Africa Re enjoy tax free status both at personnel and corporate level.

“This essentially means that the reinsurance ceded to the two players is not subject to tax when the companies make underwriting profits. The investment proceeds from reinsurance business is not subject to any tax,” the insurers told Smart Company.

They also noted that countries such as Tunisia, Ghana and Nigeria that adopted the model of compulsory cessions have replaced them with more progressive approaches such as domesticating certain lines of business.