Insurers reluctant to merge under new law

Mergers and take-overs expected in the insurance industry may not materialise as players rope in strategic partners to help them meet the new capital requirements.

The underwriters are expected to increase three-fold the capital base of their businesses by June this year, the end of a three-year grace period given by the government.

Life insurers are required to beef up their core capital from Sh50 million to Sh150 million, general insurers from Sh100 million to Sh300 million and composite insurers — those that handle both general and life — from Sh150 million to Sh450 million.

With time running out, however, the chances of seeing a flurry of activity on consolidation are dimming as the exercise would require elaborate due diligence and long negotiations.

“All indications are that there will be no expected merger or takeovers as players are preferring to have strategic partners acquire a stake in exchange for a stake in the existing businesses,” said Tom Gichuhi, the chief executive officer of the Association of Kenya Insurers (AKI), the industry lobby.

According to Mr Gichuhi, the scope for mergers and takeovers has also been diminished by a requirement that caps individual ownership of an insurance company at 25 per cent.

The threshold falls one percentage point short of the level that is protected under international investment law, making the stakes only attractive to local strategic investors.

Most of the local insurance companies are also majority-owned by individuals or families who are not willing to relinquish stakes.

However, AKI chairman Nelson Kuria indicated that the new requirement will allow initial owners to exit by offloading their stake hence realising their investment.

Mr Kuria adds that the ownership rigidity common among local businesses is counterproductive as it normally locks out infusion of more funds and bringing in of fresh ideas that can improve management.

Other players have de-linked sound management to ownership, indicating that insurance business is controlled by a few people worldwide.

“The ownership limit, though expected to improve corporate governance, is not properly thought out as the practice of few owners is worldwide”, said Mr Ashok Shah, the managing director of APA Insurance.

Mr Shah argues that linking ownership to corporate governance is missing the point as insurance companies can be required to separate management from ownership hence improve corporate governance.

The initiative to cap ownership and also divorce management from ownership is intended at creating a ‘Chinese Wall’ between management and ownership, hence allow for sound management.

Even as insurance companies race to bridge the new capitalisation gap, already the regulator, the Insurance Regulatory Authority (IRA), has called for the break-up of composite insurance into life and general arms.

The separation of the two business lines is to put to an end to the current scenario where the entities are said to be subsidising each other in terms of claim settlement.

General insurance has higher claims than life business which tend to be long term.

For instance, in 2008 claims from general insurance amounted to Sh15.9 billion while those under life insurance were Sh10.6 billion.

There are 15 companies offering both general and life insurance categories.

The latest player to opt to separate the two businesses is Blue Shield, which has created Shield Assurance to handle life and Blue Shield retaining general assignments.

“By separating the two business lines, we expect to eliminate subsidies between the entities and consequently the inefficiencies associated with running the two business lines together”, said Patrick Wanjala, the managing director in a previous interview.

Due diligence

Mr Wanjala indicated that the splitting of the two classes of business will allow each entity to refocus on their core points by aligning them to be profit making centres.

“This has necessitated restructuring by de-merging so as to grow both Life and General insurance as separate entities, thus allowing each to effectively focus on its operation, boosting specialisation in respect to their specific individual products.”

Contractual obligations

With neither sector consolidation nor entry of new strategic investors confirmed, analysts see time running out for the drawn-out pre-acquisition phase that involves due diligence, an audit of businesses records to determine a firm’s financial health.

“Due diligence exercise involves looking at a firm’s liabilities, contractual obligations and its assets in real value terms,” said Ashwini Bhandari a partner at Daly & Figgis Advocates.

Depending on the size of an existing business, Ms Bhandari says that due diligence can take about three months depending on how well the records have been kept.