Small insurers face storm over risk-based capital

The UAP-Old Mutual merger remains the stand-out major consolidation in the insurance industry in recent years. FILE PHOTO | NMG 

By CONSTANT MUNDA
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The risk-based capital (RBC) regime kicking off in July next year is likely to touch off a spate of
mergers and acquisitions, the insurance industry umbrella lobby has said.

The Association of Kenya Insurers (AKI) said “quite a good number” of industry players are struggling to meet the minimum capital adequacy ratios required for operations as a going concern from July 2020.

Citing an industry survey, titled Second Quantitative Impact study on RBC whose report was finalised on July 22, AKI executive director Tom Gichuhi said it anticipates heightened mergers and acquisitions activity in the coming year.

“If you were to bring July 1, 2020 to today, you will be finding quite a good number of companies who will not comply with the capital adequacy ratio,” Mr Gichuhi said in an interview.

“The options (for non-compliant insurers) will be either you merge to raise your capital levels or if you do not find anybody to merge with or prepared to invest in your company, then you offer yourself to be bought out.” The UAP-Old Mutual merger, first agreed in June 2015 and only completed earlier this year, remains the stand-out major consolidation in the industry in recent years.

Under the proposed risk-based capital model, only second to South Africa on the continent, the capital held by an insurer will be tied to the level of risk underwritten in a move largely aimed at tackling rampant premium undercutting in the 59-member industry.

As a result, insurers will be required to match their paid up capital to the risk as opposed to current standard capital of Sh300 million and Sh150 million for general business and life insurers, respectively.

The paid up capital for general business underwriters will consequently double to Sh600 million or 20 percent of the net-earned premiums of the preceding financial year, whichever is higher, under the new regime.

Long-term business (life) insurers will raise their capital to Sh400 million, or five percent of the liabilities of the business for the financial year, whichever is higher, while a composite underwater will have to shore up capital to Sh1 billion.

The risk-based regime, which was earlier set to kick in from July 2017, was pushed back for three years through a miscellaneous amendment to Insurance Act in May 2017 after industry players successfully asked for more time to restructure their balance sheet. “Whether we shall have increased buyout or mergers will be determined by the implementation of RBC,” Mr Gichuhi said.