Britam Insurance Uganda Ltd officials during the launch of their new
home in Nakasero recently. Britam acquired some insurance companies in
Mozambique and Tanzania as one of its expanding strategies. PHOTO BY
RACHEL MABALA
Are there many insurance companies serving a
limited market? With only 0.73 per cent insurance penetration in Uganda,
the sector comprises 29 companies, 21 non-life insurance and 8 life
assurance companies.
This was not the case before 2011 when all companies operated under one roof, both life and non-life insurance.
However, the regulator, Insurance regulatory Authority (IRA) deemed it necessary for these companies to detach from one another and to run solo courses, in 2011, a process which took three years to accomplish, in order to give clarity to clients interested in the different covers.
This was not the case before 2011 when all companies operated under one roof, both life and non-life insurance.
However, the regulator, Insurance regulatory Authority (IRA) deemed it necessary for these companies to detach from one another and to run solo courses, in 2011, a process which took three years to accomplish, in order to give clarity to clients interested in the different covers.
According
to Allan Mafabi, Britam chief executive officer, the multiplicity of
insurance companies is likely to reduce in the future, especially with
the introduction of Risk Based Supervision (RBS).
RBS is an approach that places strong emphasis on understanding and assessing the adequacy of each financial institution’s risk management systems, which are in place to identify, measure, monitor and control risk in an appropriate and timely manner. RBS requires supervisors to review the manner in which insurers are identifying and controlling risks.
IRA is mandated to use RBS as a supervisory approach through the Insurance Act 2017, a new law which was passed in May 2017, premising the regulation and supervision of licenses on a risk-sensitive basis.
RBS is an approach that places strong emphasis on understanding and assessing the adequacy of each financial institution’s risk management systems, which are in place to identify, measure, monitor and control risk in an appropriate and timely manner. RBS requires supervisors to review the manner in which insurers are identifying and controlling risks.
IRA is mandated to use RBS as a supervisory approach through the Insurance Act 2017, a new law which was passed in May 2017, premising the regulation and supervision of licenses on a risk-sensitive basis.
Put
simply, RBS is an approach that is going to be used by IRA to regulate
and supervise insurance players, by making sure they have in place,
policies and controls that will mitigate risk before it happens.
This is meant to ease the work of the authority while securing the lifeline of insurers, in other words, RBS is an equivalent of IFRS 9 in banking. IFRS 9 is a new accounting standard for the financial sector that requires provisioning for future losses on the company’s books.
According to Chris Kananura, the manager insurance IRA, the move by the authority aside from seeking to protect insurance companies from insolvency, stems from insufficient resources to supervise all insurers spread throughout the country. “The other main reason for adoption of the RBS is that the regulator has limited resources. Time needs to be spent on those companies, which represent a larger degree of risk to the regulator.
This is meant to ease the work of the authority while securing the lifeline of insurers, in other words, RBS is an equivalent of IFRS 9 in banking. IFRS 9 is a new accounting standard for the financial sector that requires provisioning for future losses on the company’s books.
According to Chris Kananura, the manager insurance IRA, the move by the authority aside from seeking to protect insurance companies from insolvency, stems from insufficient resources to supervise all insurers spread throughout the country. “The other main reason for adoption of the RBS is that the regulator has limited resources. Time needs to be spent on those companies, which represent a larger degree of risk to the regulator.
Execution
RBS in essence is divided into two aspects; regulation and supervision.
The gist of supervision herein lies primarily with the insurance companies themselves.
The unique feature surrounding the approach is that the insurance companies are going to be granted permission to create custom made policies, on which they will run their operations. However, the authority will require these companies to enforce corporate governance through ensuring that a qualified board of directors, who will oversee all operations of the company is in place.
“In that respect, every insurer and Health Maintenance Organisation (HMO) shall establish and maintain strategies, policies, procedures and controls appropriate for the nature, scale and complexity of its business and its risk profile and ensure that they are regularly reviewed and updated,” Kananura says.
RBS in essence is divided into two aspects; regulation and supervision.
The gist of supervision herein lies primarily with the insurance companies themselves.
The unique feature surrounding the approach is that the insurance companies are going to be granted permission to create custom made policies, on which they will run their operations. However, the authority will require these companies to enforce corporate governance through ensuring that a qualified board of directors, who will oversee all operations of the company is in place.
“In that respect, every insurer and Health Maintenance Organisation (HMO) shall establish and maintain strategies, policies, procedures and controls appropriate for the nature, scale and complexity of its business and its risk profile and ensure that they are regularly reviewed and updated,” Kananura says.
The
board will act as a substitute for the authority who will now
prioritise companies with weak internal controls. The board will hire an
internal auditor on a regular basis, assess the liquidity of the
company and determine the amount of risk the company could be exposed
to, among other responsibilities.
“A low risk insurer is one which has excellent policies and systems to mitigate risks and implements them effectively at all times and is well capitalised with access to additional capital if required,” Kananura explains.
“A low risk insurer is one which has excellent policies and systems to mitigate risks and implements them effectively at all times and is well capitalised with access to additional capital if required,” Kananura explains.
Implication to stakeholders
L-R:
Sanlam General Insurance Uganda chief executive officer Gary Corbit,
Sanlam Emerging Markets Proprietary Ltd regional executive Julius Magabe
and Sanlam emerging markets CEO Junior Ngulube address the media after
taking over Lion Assurance Company Ltd at Kampala Serena Hotel recently.
FILE PHOTO
IRA
The proliferation of low risk insurers subsequently curtails costs incurred by the regulator in supervisory missions, human resource and financial escapades. The regulator will shift concern to weak and high risk insurers since low risk companies will not need frequent drop-ins from the regulator.
The regulator’s work will also be eased since they will review reports from low risk companies and cut down on routine visits.
The proliferation of low risk insurers subsequently curtails costs incurred by the regulator in supervisory missions, human resource and financial escapades. The regulator will shift concern to weak and high risk insurers since low risk companies will not need frequent drop-ins from the regulator.
The regulator’s work will also be eased since they will review reports from low risk companies and cut down on routine visits.
Insurers
According to the CEO Uganda Insurers Association, Miriam Magala, insurance companies are willing to conduct business in accordance with international best practice in the socio-economic environment, which is leaning towards risk based supervision.
She says RBS will affect insurers quantitatively; with issues to do with capital, debt, recognition of premium income and resources; qualitatively through supervision requirements relating to corporate governance and group wide supervision among others.
According to the CEO Uganda Insurers Association, Miriam Magala, insurance companies are willing to conduct business in accordance with international best practice in the socio-economic environment, which is leaning towards risk based supervision.
She says RBS will affect insurers quantitatively; with issues to do with capital, debt, recognition of premium income and resources; qualitatively through supervision requirements relating to corporate governance and group wide supervision among others.
In depth, Kananura says RBS
provides for the establishment and maintenance of control functions
such as a risk management function; a compliance function; an actuarial
function; an internal audit function; as well as other control functions
as may be specified in regulations made under the insurance act 2017.
Under risk management the function is risk based capital (RBC).
According to Kananura, the two, RBS and RBC move hand in hand to effectively reduce the risks the insurer is exposed to.
According to Kananura, the two, RBS and RBC move hand in hand to effectively reduce the risks the insurer is exposed to.
Risk
based capital is a preventative measure that requires insurers in
addition to the minimum capital requirements set by the authority, to
increase their capital in line with the premiums underwritten. It means
that insurers that continue growing their figures in regards to
premiums underwritten will be required to increase capital to handle
claims in case of materialisation.
This is in line with the regulator’s role in safeguarding policy holders and ensuring insurers pay claims. This is where smaller companies that seek to grow may find a challenge, as they need to match capital with premiums. This kind of scenario may tend to favour the bigger players with deeper pockets.
This is in line with the regulator’s role in safeguarding policy holders and ensuring insurers pay claims. This is where smaller companies that seek to grow may find a challenge, as they need to match capital with premiums. This kind of scenario may tend to favour the bigger players with deeper pockets.
Prior
to RBC, the regulator set minimum capital requirements that insurers
needed to have as capital in their company before a licence was issued.
“Reinsurance company Shs10b, non-life insurance company Shs4b, Life insurance company Shs3b and an insurance or reinsurance broker has to have Shs75m worth of capital to be licensed,” according to annual insurance market report 2016.
“Reinsurance company Shs10b, non-life insurance company Shs4b, Life insurance company Shs3b and an insurance or reinsurance broker has to have Shs75m worth of capital to be licensed,” according to annual insurance market report 2016.
The above stipulation left Mafabi
convinced that since need to invest capital is going to increase, small
insurers will be swallowed by the big fish (mergers) to stay in
business.
He says to avoid many players chasing a small market, Britam acquired already existing companies in Mozambique and Tanzania and believes it will be the norm as the company expands further south.
“That way, it enables companies grow bigger balance sheets. Most of these small companies will not exist, they will be forced either to sell or liquidate. Probably by 2020 you will see a different landscape for the industry,” he projects.
He says to avoid many players chasing a small market, Britam acquired already existing companies in Mozambique and Tanzania and believes it will be the norm as the company expands further south.
“That way, it enables companies grow bigger balance sheets. Most of these small companies will not exist, they will be forced either to sell or liquidate. Probably by 2020 you will see a different landscape for the industry,” he projects.
He went on to say that it is a
positive change for the sector and it will be unfortunate for those
without investors or capital for they will have to sell.
However, IRA contends with believing mergers will be a result of an arm twist from RBS. Kananura says the decision to merge or sell lies solely on the company. He says it is merely a business decision that is made in consideration of many factors. UIA reiterates IRA position and recognises that while RBS requires additional capital where need be, it depends on a particular company’s choosing, to either inject more capital hence negating the need to merge or merge with another company.
However, IRA contends with believing mergers will be a result of an arm twist from RBS. Kananura says the decision to merge or sell lies solely on the company. He says it is merely a business decision that is made in consideration of many factors. UIA reiterates IRA position and recognises that while RBS requires additional capital where need be, it depends on a particular company’s choosing, to either inject more capital hence negating the need to merge or merge with another company.
KEY ISSUES UNDER MERGING
Benefits of RBS to policy holders
In 2014, the regulator, IRA moved to caramel, an intermediary stage of supervision that combines compliance based and limited RBS approaches to supervise the players. However, now the shift is moving to an all-round RBS approach for effective management and supervision.
Insurance supervision is purposed to protect insurers and policy holders. RBS will protect the insurers from going broke which in turn protects the policy holder from losing their benefits. Through risk based capital, the policy holders are also going to be protected from failure by insurers to pay claims as well as protection from mistreatment by insurers.
In 2014, the regulator, IRA moved to caramel, an intermediary stage of supervision that combines compliance based and limited RBS approaches to supervise the players. However, now the shift is moving to an all-round RBS approach for effective management and supervision.
Insurance supervision is purposed to protect insurers and policy holders. RBS will protect the insurers from going broke which in turn protects the policy holder from losing their benefits. Through risk based capital, the policy holders are also going to be protected from failure by insurers to pay claims as well as protection from mistreatment by insurers.
Country position
According to UIA, the move to risk based supervision is quickly becoming the most forward and internationally recognised system to allow regulators supervise the financial services industry effectively.
It is therefore more forward looking as it incorporates possible future events including the different risks facing different insurers.
Uganda has only joined the movement recently while its counterparts Kenya, Tanzania and Rwanda shifted to RBS earlier to protect their financial institutions.
According to UIA, the move to risk based supervision is quickly becoming the most forward and internationally recognised system to allow regulators supervise the financial services industry effectively.
It is therefore more forward looking as it incorporates possible future events including the different risks facing different insurers.
Uganda has only joined the movement recently while its counterparts Kenya, Tanzania and Rwanda shifted to RBS earlier to protect their financial institutions.
Employee retention challenges
During mergers and acquisitions, employee retention can be a challenge, as many believe it can be a threat. Inherently, many mergers and acquisitions deal have retention issues, which result from negative attitudes felt by employees. This can include uncertainty about the future of the organisation’s direction, job security, perceptions of lack of leadership credibility and feelings of confusion due to lack of communication. In essence, employees often lose trust in their organisation and feel betrayed by their leadership.
During mergers and acquisitions, employee retention can be a challenge, as many believe it can be a threat. Inherently, many mergers and acquisitions deal have retention issues, which result from negative attitudes felt by employees. This can include uncertainty about the future of the organisation’s direction, job security, perceptions of lack of leadership credibility and feelings of confusion due to lack of communication. In essence, employees often lose trust in their organisation and feel betrayed by their leadership.
The shift
Since the birth of the Insurance Regulatory Authority, the regulator has used the compliance based method of supervision to keep tabs on insurers. Here, requirements were set out in legislation and regulations and it was assumed that compliance with requirements will ensure viability of institutions.
“It was a matter of checking boxes to ensure that the insurance companies adhered to the requirements as set by IRA,” Kananura explains.
Since the birth of the Insurance Regulatory Authority, the regulator has used the compliance based method of supervision to keep tabs on insurers. Here, requirements were set out in legislation and regulations and it was assumed that compliance with requirements will ensure viability of institutions.
“It was a matter of checking boxes to ensure that the insurance companies adhered to the requirements as set by IRA,” Kananura explains.
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