Insurers cash calls loom on new capital rules in Finance Bill

Money Markets

 

Treasury secretary Henry Rotich. PHOTO | BILLY MUTAI 

By GEORGE NGIGI, gngigi@ke.nationmedia.com

In Summary

• Treasury wants insurers to hold a minimum capital pegged on three parameters that include the risk-based capital and a minimum capital set for each business class.
• The current law only requires insurance companies to meet flat minimum capital levels that may not reflect the actual risks for all the underwriters.
• Insurance companies have up to June 2018 to meet the new capital requirements which are meant to ensure the sector has enough buffers to absorb to shock any turbulence.

Insurance companies are expected in the market to raise capital in the coming months if the new Finance Bill passes into law.

Treasury secretary Henry Rotich has among other rules recommended that underwriters hold capital higher than the risk they are perceived to carry by the Insurance Regulatory Authority (IRA).

Mr Rotich wants insurers to hold a minimum capital pegged on three parameters that include the risk-based capital and a minimum capital set for each business class.

For general insurance the minimum capital will be Sh600 million while life insurers will hold a minimum of Sh400 million.

At the moment, life insurers must maintain a paid-up capital of at least Sh150 million while those underwriting general business must have a minimum paid-up capital of Sh300 million.

The third parameter will be the size of the business conducted the previous year.

“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,” said Mr Rotich in his Budget statement.

The current law only requires insurance companies to meet flat minimum capital levels that may not reflect the actual risks for all the underwriters.

The Treasury secretary has used the Finance Bill to hasten the coming to play of risk-based supervision in the sector following delay in tabling of the Insurance Bill in Parliament.

General insurers will be required to hold capital exceeding 20 per cent of the net premiums collected the previous year. Life insurance firms will hold more than five per cent of the liabilities of the life business for the financial year.

This means that CIC General Insurance, with the largest net premiums last year of Sh8.7 billion, would be required to hold a minimum capital of Sh1.74 billion.

CIC was holding Sh1.7 billion in share capital compared to the current minimum requirement of Sh300 million.

Insurance companies have up to June 2018 to meet the new capital requirements which are meant to ensure the sector has enough buffers to absorb to shock any turbulence.

Collapse of several insurers in the past has eroded public confidence, partly contributing to the low insurance penetration at less than four per cent.

Concord Insurance, Blue Shield, and Standard Assurance are some of the firms that have collapsed over the past decade.