History of Insurance Regulation
The notion of insurance in Kenya can be traced back to the “social insurance programme” which for a long time has been around Africa. However, the history of the development of commercial insurance in Kenya is closely related to its colonial heritage. Like some African and other developing countries, there was no specific insurance legislation in Kenya until 1960, when the Insurance Ordinance of that year was promulgated.
Prior to the Ordinance, insurance companies had to comply only with the Companies Act. Moreover; the law relating to insurance had to be gleaned from provisions of a number of scattered statutes owing to lack of sector-specific legislation. Among such laws is government directives issued in 1978 by the Minister for Finance, which is also critical to the historical development of insurance legislation in the country. These directed that all insurance companies operating in the country had to seek local incorporation and that all imports into the country had to be insured locally, while reinsurance treaties arranged by local companies should be reviewed and approved by Kenya Reinsurance Corporation, as the office of the supervisory authority had not been established.
1 Thereafter; Kenya like other emerging nations in Africa realized that there was need to introduce legislation on insurance to guide the growth of the industry and make it relevant to the national economy. Thus; the Insurance Act, Chapter 487 of the Laws of Kenya, was enacted in 1984 to amend and consolidate laws relating to insurance. It became operational in 1987. Since then; it has been an effective instrument for regulating the insurance industry, being complemented by the Workmen’s Compensation Act (Cap 236) which provides for compensation to workers for injuries or death suffered in the course of their employment; the Insurance (Motor Vehicle Third Party Risks) Act (Cap 406) and the Marine Insurance Act.
However; over time it has become a less than ideal piece of legislation and tool for responding to the changing insurance environment. In this regard, the Act has been amended substantially during its life. These amendments have been intended to tackle the myriad of challenges that have been bedeviling the industry. Firstly; negative market perception occasioned majorly by the significantly huge numbers of non-paid claims that lie about within the market due to insolvency has been the key challenge. This may be attributed to high claims of over 61% on average. At least 6 insurers collapsed between 1996 and 2005. Some have been put under statutory management. Secondly; insurance products are perceived as complex and relatively expensive by the low-income households who form the larger segment of the population. To counter these twin problems, the 2006 amendment to the Insurance Act established Insurance Regulatory Authority (IRA), a statutory government agency to regulate, supervise and develop the insurance industry.
2 Furthermore; the Policyholders Compensation Fund (PHCF), a State Corporation under the Ministry for Finance was established through the Legal Notice No. 105 of 2004 and commenced its operations in January 2005. The Fund was established for the primary purpose of providing compensation to policyholders of an insurer that has been declared insolvent and for the secondary purpose of increasing the general public’s confidence in the insurance sector. It was later encapsulated in the Act by dint of section 179 of the Insurance Act. It is also governed by the Insurance (Policyholders Compensation Fund) Regulations, 2010.
3 To strengthen sector solvency, the Insurance Regulatory Authority introduced the capital requirements in 2007 which became effective in June 2010. These requirements increased the minimum required paid up capital to K. Shs. 300m from K. Shs. 100m for short term insurance underwriters, K. Shs. 150m from K. Shs. 50m for long term underwriters and K. Shs. 450m for composite insurance companies.
4 Moreover; the Finance Act, 2009 amended Section 23 of the Insurance Act to restrict the ownership and management of an insurer to 25% and 20% respectively. Hence; an individual owning more than 20% is barred from participating as an executive. This was intended to guard against engineered collapse of insurers.
5 In order to protect policy holders and improve public perception a penalty of 5% of the outstanding amount is to be chargeable to the underwriter for any amount that remains unpaid 90 days after the reporting of a claim.
6 The Insurance Regulatory Authority requires brokers to remit premiums that they receive from policy holders the same day cash is received. Previously there was no set timeline. In addition to positive impact on cash flows for underwriters, the rule allows for accurate estimation of risk and therefore more objective loss provisioning.
7 Furthermore; the insurance sector’s development has been crippled by over capacity and price wars among the insurance companies. The industry is fragmented with 47 players in the market offering similar products with minimal switching costs. For instance; for short-term business, out of the 37 underwriters the top 5 players account for only 37% of GWP; this has led to cut-throat price wars with smaller players offering very low rates in order to stay in business. To remedy the situation, IRA in its regulations has set minimum premiums chargeable for certain classes of business thereby reducing undercutting and unfair competition.
8 The insurance industry has frequently been overwhelmed by huge amounts of fraudulent claims predominantly for medical and motor insurance. This has led to the collapse of several insurance companies especially those dealing with public service vehicles. As a result; most companies have elected not to underwrite such business. To curb this menace, the Insurance Fraud Investigation Unit (IFIU) was established in November 2011 by IRA to deal with cases of fraud in the insurance industry.
It is a specialized unit comprising of police officers from the Criminal Investigation Department with the mandate of investigating insurance related offences. However; its full potential has not been realized due to reluctance by the insurance companies to report fraud cases and pursue criminal prosecution, lack of specific legislation addressing insurance fraud, delay of cases in court and low priority given to fraud cases in general, lack of information sharing platform for the insurance industry and informers becoming too commercial.
9 The Finance Act 2009 allows insurers to recover from the policyholders, amounts over and above the statutory limit of K. Shs. 3million once they have paid such amounts for judgments in respect of third party liability claims. This amendment capped the amounts payable for third party claims at K. Shs. 3million. This new rule has had a significant impact of cushioning underwriters from fraudulent claims especially within the public sector vehicles category.
10 Despite concerted efforts to amend the legislative framework, insurance industry continued to face innumerable challenges. Amendments have not been sufficient to bring up to date the relevance of the Insurance Act to the necessary standards. In this regard, it became crucial to review the relevance of the legislation and propose a modern framework for supervision and development of the industry. Hence; the drafting of the Insurance Bill which seeks to modernize the current legislation in accordance with contemporary drafting principles to ensure that the provisions are in simple language, concepts are easily understandable by stakeholders and it is drafted in a positive style. The Insurance Bill 2011 brings in the underlying standards of a risk based supervision model. For instance, it provides for no universal minimum capital requirement as this would be premised on the risk profile for each regulated entity and likewise investments by the insurers will be on a more risk based approach.
11 The shareholding structure of licensees has also been substantially refined to promote sound corporate governance and development of the market. Moreover; the Policy Holders Compensation Fund has been enshrined in the Act and its mandate expanded in respect to troubled insurers. It has been tasked with provision of compensation to the claimants under policies issued by an insolvent insurer; monitoring, in consultation with the IRA, the risk profile of insurers; acting as a liquidator of an insolvent insurer on appointment under the Act and advising the Cabinet Secretary in charge of the National treasury on the national policy to be followed in regard to matters relating to compensation of policyholders.
12 The draft Bill also abolishes composite insurance. It provides that life and general insurance business will not be undertaken by the same company.
13 This will guarantee to some extent the solvency of the insurers. Licensing requirements has been simplified and harmonized for all players. A licensee shall not carry on its licensed business unless it is a member of an association for the time being recognized by the Authority as representing the interest of reinsurers, insurers, or insurance intermediaries as the case may be.
14 In addition; on-site surveillance has been extended to include investigation, warrants, arrest and prosecution.
15 According to the Bill; winding up processes is to be clearly undertaken by the Authority until the point of appointment of liquidator. This is not provided for in the current legal frame work. To sum up; the legal regime governing insurance in Kenya has been subject to numerous amendments. These amendments have been necessitated by the dynamics in the insurance sector. However; the pace and scope of the amendments has proven to be inconsistent with the dynamics in the sector. Therefore; it is expected that the Insurance Bill will bring up to date, the legislation governing this industry.
PART B: IMPACTS OF INTERNATIONAL AND REGIONAL PERSPECTIVES ON INSURANCE LEGISLATION IN KENYA
The current overhaul of insurance legislation in Kenya has been heavily influenced by both international and regional perspectives. Theses perspectives have been informed to a large extent by global intricacies such as the 2007/2008 global financial crisis. The key influences are the Insurance Core Principles (ICP’s) as developed by the International Association of Insurance Supervisors (IAIS) and international best practice. The ICPs are an internationally developed set of principles, standards and guidance applicable to supervisors/regulators of insurance companies and fundamental to effective insurance supervision. They seek to foster convergence towards a worldwide consistent regulatory and supervisory framework for the insurance sector.
16 As per international best practice; IRA in its guidelines raised minimum capital requirements to stem instability that had gripped the industry over the past decade and boost public confidence in the sector. This is in tandem with international standards on capital requirements. The International Association of Insurance Supervisors’ supervisory standards provide that the regulatory capital requirements should be established at a level such that the amount of capital that an insurer is required to hold should be sufficient to ensure that, in adversity, an insurer’s obligations to policyholders will continue to be met as they fall due.
17 Moreover; the Insurance Bill 2011 introduces the underlying principles of a risk based supervision model. For example, there is no common minimum capital requirement as this would be premised on the risk profile for each regulated entity and similarly investments by the insurers will be on a more risk based approach. This important licensing requirement was informed by paragraph 28 of the International Association of Insurance Supervisors’ Standards on Licensing. It provides for the establishment of sufficient free capital which is an absolute amount fixed by the supervisor or by law (minimum capital). The amount of the minimum capital should take into account the type of risk that is intended to be covered. For instance; if the applicant company proposes to write several classes it is possible either to require the highest of the amounts fixed for the individual classes or to add up the amounts of the individual classes.
18 Kenya’s domestic insurance legislation is also being significantly influenced by East Africa Community’s perspectives on the industry. Such influence has been manifested by the proposed or already in force amendments to insurance regulation in the country. This is exemplified by the amendments proposed by the Insurance Amendment Bill 2013.
It amends section 22 of the principal Act that provides for the prohibition of registration of persons not eligible to be licensed by extending the exception to bodies corporate incorporated under the Companies Act whose at least one third of the controlling interest, whether in terms of shares, paid up share capital or voting rights, as the case may be, are held by citizens of partner states of East Africa Community or by partnership whose partners are all citizens of East Africa Community or by corporate bodies whose shares are wholly owned by citizens of East Africa Community.
This has been driven majorly by multilateral agreements spearheaded by the East Africa community. Consequently; Kenya will open its market to cross-border investors within the community. However; it is critical to note that such removal of barriers to trade, investment and finance will make Kenya vulnerable to the risks from cross-border exposures and spillover effects. Problems in other economies to which Kenya’s market is financially linked will inevitably affect hers. This possibility was manifested by the global financial crisis in 2007.
It was triggered by the burst of the US housing bubble, yet it led to a domino effect across the globe causing a collapse in credit and demand hence recession. Research suggests that developing countries have been hit harder than was originally predicted. Therefore; the crisis has necessitated the need to re-shape global economic institutions and rethink growth strategies, ensuring these systems work for both rich and poor countries, and to ensure that global growth is more resilient to crises and that it does not fail the poorest.
In this regard; enhancing the deposit insurance coverage level has been the most recommended strategy. From the lessons, it has been obvious that the DIS has a great role to play as a component of financial safety-net particularly in developing countries. It is a fundamental strategy intended to solidify the contingency planning and crisis management framework.
19 Therefore; Policy Holders Compensation Fund has been enshrined, domestically, in the Insurance Bill 2011 and its mandate expanded to include participation in the liquidation process of insurance companies in a bid to cushion the policyholders’ rights during such periods.
20 Additionally; the draft Insurance Bill 2011, states in Section 23 that an insurer, other than a reinsurer, shall not carry on both life and general insurance business. Once the Act is enacted, life and general insurance will be separately licensed. This abolishment of composite insurance is part of the ongoing amendments to insurance regulation in Uganda, Rwanda and Tanzania. In anticipation of this amendment; insurers currently operating in both the life and non-life insurance are beginning to demerge. According to the Kenya Insurance Regulatory Authority’s January to June 2012 report, only three of the ten major composite insurers had demerged and the rest were yet to. In Uganda and Rwanda, the demerger activity has just begun.
21 In conclusion; the domestic legislation on insurance governance in Kenya has borrowed heavily from international and regional perspectives.
REFERENCE
- Birdsall N ‘The Global Financial Crisis: The beginning of the end of the “development” agenda? ’ (April 2012) http://www. cgdev. org/files/1426133_file_Birdsall_financial_crisis_FINAL. pdf Accessed on 6 March 2014.
- Deloitte ‘Demergering Insurance Operation in East Africa’ (2013) http://www. deloitte. com/assets/Dcom-SouthAfrica/Local%20Assets/Documents/Demergers_FSI. pdf Accessed on 2 March 2014. Insurance Act (Cap 487) Laws of Kenya;
- Insurance Draft Bill 2011; 4. IRA ‘Establishment’ (2014) http://www. ira. go. ke/index. php/component/content/article/2-uncategorised/112-ira-establishment Accessed on 6 March 2014;
- IRA ‘Review of the Insurance Act, Chapter 487 Laws of Kenya’ (2013) http://www. ira. go. ke/attachments/article/141/Brief%20stakeholders%20-%20Review%20of%20the%20Insurance%20Act,%20Chapter%20487%20of%20the%20laws%20of%20Kenya. pdf Accessed on 4 February 2014;