In the
wake of the new Cash and Carry regulation introduced early this year,
insurers have appealed to banks to reduce insurance premium financing
interest rates.
Insurance premium financing interest
rate is the percentage charged by banks when paying insurance premiums
on behalf of the insured to the insurance company.
Speaking
on the sidelines of the 44th Chief Executive Officer (CEO) breakfast
meeting last week, Mr Allan Mafabi, the Britam Insurance chief executive
officer, urged banks through Uganda Bankers Association to reduce the
premium financing interest rate to encourage more insurance uptake.
“What
we are saying is can you drop the interest rates from the current rates
because they are counter guaranteed by insurance players. When a client
defaults, the bank informs the insurer, we cancel the policy and
payback the loan,” he said, noting that banks are pivotal in insurance
growth, especially through their intermediary role as bancassurance
agents.
The Cash and Carry regulation was conceived in
January, directing that insurance companies can only take cash payments
for premiums in a bid to eliminate large debts from the sector.
Insurance
Regulatory Authority (IRA) explained then that the new regulation would
enable insurers to have more liquidity for both investment and timely
payment of claims to the public.
How premium financing works
According to Mr Mafabi, banks through insurance premium financing issue up-front payment on behalf of clients to insurance companies payable over a 10-month period.
According to Mr Mafabi, banks through insurance premium financing issue up-front payment on behalf of clients to insurance companies payable over a 10-month period.
Currently, banks charge about 6 per cent
interest for dollar-based policies and between 8 per cent to 10 per cent
for shilling-based policies.
However, insurers are now
seeking for a revision from banks to reduce the interest rate to 1 per
cent for dollar policies and 3 per cent for shillings-denominated
policies.
Their argument, is that the co-guarantee from
insurance companies eliminates the risk borne by banks when they
finance premiums since insurers pay the loan back in case of default by
the insured.
Speaking to Daily Monitor in a phone
interview at the weekend, Mr Wilbrod Owor, the UBA executive director,
said a discussion between bankers and insurers is currently ongoing to
determine if the proposals are possible.
“Yes, we have
had discussions with the insurance association and we formed a technical
committee to review the technical aspects and what is making it
costly,” he said, emphasizing that he was confident of finding a
breakthrough.
To enforce the Cash and Carry regulation,
Insurance Regulatory Authority gave insurers an ultimatum of November
to have cleared all legacy debt amassed from premium receivables from
their books of account.
New regulations
The
insurance sector, in addition to the Cash and Carry regulation,
welcomed stiffer regulation in 2019 including the roadmap to risk based
capital.
Risk-based capital, which places strong
emphasis on understanding and assessing the adequacy of each financial
institution’s risk management system, requires insurers to recapitalise
to about 200 per cent.
A requirement that is proving strenuous to insurance companies that say it might not be attainable in 2019.
However,
Mr Ibrahim Kaddunabbi Lubega, IRA chief executive officer insists that:
“The issue of 2019, you said 200 per cent is not possible, if you are
maybe at 150 per cent and we gave you a target of 200 per cent, I cannot
exactly remember the target we gave, but for those who were in 170 per
cent, we asked them to reach 200 per cent, that is possible.”
IRA pegged the attainability of recapitalisation on the elimination of legacy debt.
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