Non-compliant insurers must act on capital rules

Commissioner of Insuarance Godfrey Kiptum. Firms have up to December to comply. FILE PHOTO | NMG

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Summary

• Insurance firms control not just people's money in form of premiums but are also the economy's cover against risks and disasters, and therefore the country needs to have strong insurers.
• From past experiences, the failure of an insurance firm to meet its obligations has wide-reaching repercussions, given that their intervention is always needed in times of distress such as accidents, natural disasters and illness.

The disclosure by the Insurance Regulatory Authority (IRA) that a third of Kenya's insurance companies are not complying with capital requirements is a serious red flag for the sector.

Insurance firms control not just people's money in form of premiums but are also the economy's cover against risks and disasters, and therefore the country needs to have strong insurers.

From past experiences, the failure of an insurance firm to meet its obligations has wide-reaching repercussions, given that their intervention is always needed in times of distress such as accidents, natural disasters and illness.

The new capital requirements are meant to reduce cases of insurers being unable to pay claims, a fact that has negatively affected the public's trust in insurers and contributed to the woefully low levels of insurance penetration in Kenya.

Given the growth of the economy — and the number of insurable interests — we agree with the regulator that the capital increase is justified for the insurers to be able to cope with a larger claims base.

For general business, the standard capital has gone up from Sh300 million to Sh600 million, or 20 percent of the net-earned premiums of the preceding financial year, whichever is higher. For life business, it is up from Sh150 million to Sh400 million, or five per cent of the liabilities of the business for the financial year, whichever is higher. Composite underwriters require capital of Sh1 billion.

The IRA must now make sure that all the non-compliant firms shore up their capital before the end of the extended deadline of December.

Failure to this, the regulator must not be afraid of pushing for drastic measures to streamline the industry. The IRA can borrow a leaf from the banking sector, which has seen smaller, unstable lenders either merging with each other or their larger peers when they are unable to meet their capital thresholds.

This will usher in a period of stability for the sector and hopefully encourage more Kenyans to take up an insurance cover.

It will also be a good signal to encourage investment in the sector by global firms, who can provide the capacity to take on a larger risk.

Overall, our view is that it would be better for the economy to have fewer but more stable underwriters, rather than many small firms that are one large claim away from going belly-up.