How Standard Assurance was brought to its knees

Directors, senior executives and insurance brokers were behind the near collapse of Standard Assurance Kenya Limited by failing to remit hundreds of millions of shillings owed to the firm.

This is the preliminary verdict of RSM Ashvir, the statutory manager, tapped by the insurance regulator to work out a turnaround or liquidation of the troubled insurance firm in a report filed in the High Court last month.

The report attached to a court ruling, which extends the mandate of the statutory manager for three months, offers the most vivid picture to date on the details that led to the near collapse of the Insurance firm.

Standard Assurance’s problems had previously been blamed on the rising cases of fraud tied to claims among firms that are heavily dependent on the matatu industry.

But the court documents name the firm’s former general manager Elijah Adul, its majority shareholder Wilson Kipkoit and companies associated with him as having borrowed more than Sh103.5 million from the firm in breach of insurance regulations that bar directors and executives from borrowing more than Sh20,000.

The firm’s employees are also said to have disappeared with petty cash running into millions of shillings upon realising that the firm was headed for collapse.

“We noted that although the accounts show a petty cash balance, no cash was actually in existence,” say the court documents.

The Sh103.5 million borrowing by insiders at the firm exceeds the Sh100 million the shareholders failed to inject in the firm to keep it afloat, leading to its placement under statutory management.

The court documents show that the brokers and agents of the insurance firm failed to remit premiums worth Sh396.7 million to Standard Assurance Kenya despite having received the monies from the policy holders.

This denied the company the financial muscle it required to fund its operations boost its underwriting profits and create a larger investment fund that could have churned out outsized returns from investments such as property and shares.

The company made an underwriting profit of Sh15 million in 2007 but figures on its performance in 2008 is not available.

“As per our estimate the amount receivable will be 25 per cent of the total amount outstanding, which equates to approximately Sh99.1 million,” says the court documents.

This means that the policy holders would only be compensated for part of the premiums if the firm is revived.

The court details were prompted by an application by the statutory manager for an extension of his tenure beyond the deadline of March 11, 2009, which is a year after being placed under statutory management.

The statutory manager, Mr Ashif Kassam, told the court that due to administrative difficulties, he was unable to complete his mandate.

“I am confident that the three months period will be sufficient for the manager to fulfil his mandate,” ruled Mr Justice Muga Apondi.

Details of the fraud have raised questions on why the Insurance Regulatory Authority (IRA) failed to act given that insurance companies were required to file quarterly reports on their financial health.

The authority on Wednesday refused to comment on the story: “I cannot comment on the report because it’s a draft,” said Mr Sammy Makove the chief executive of IRA.

The full report is expected in June.

Of the Sh103.5 billion-debt, Mr Kipkoit had withdrawn Sh55.9 million from the insurance firm for his personal use while Mr Adul had Sh9.9 million, says the court documents.

Companies associated with Mr Kipkoit such as Prudential Building Society, Sirikwa Hotel and Ufanisi Capital & Credit had been lent a total of Sh35 million at a time when the insurance firm was struggling to meet claims of as little as Sh9.6 million.

Court documents and a sworn affidavit by a Mr Karim viewed by the Business Daily indicated that Mr Kipkoti had the majority shareholding in the insurance company with other shareholders named as Elijah Adul, Prudential Building Society, Eldoret’s Sirikwa Hotel and Ufanisi Capital and Credit Ltd.

Prudential Bank was placed under liquidation in 2000 after the then governor Andrew Mullei said it “lacked tangible financial commitment to recapitalise.”

Soon after the collapse of Prudential Bank, Mr Kipkoti and co-director Mr Kahumbura, were arraigned in court in 2002 for alleged embezzlement of depositors funds amounting to Sh53 million.

The matter is still pending in court.

Mr Kipkoti yesterday sought court orders to stop a further extension of the manager’s statutory mandate but Mr Justice Leonard Njagi declined to hear the matter and referred it to Mr justice Apondi for further orders.

Standard Assurance Company has not paid its contribution to Policy Holders’ Contribution Fund since May 2008, and the fund subsequently withdrew its cover to the company’s policy holders.

This means that even if a court awards compensation arising from claims by policy holders or third party damages, the fund cannot pay such claims.

Normally, the fund is meant to pay claims arising from a policy if the insurer is not able to pay for various reasons.

“Failure to pay into this compensation fund was another red flag on the company,” said Tom Gichuhi, the CEO of Association of Kenya Insurers.

In what has become a similar script for collapsed insurers in Kenya, rising cases of fraud and mismanagement has been cited as a key driver behind the spate of collapse of insurance firms.

Access Insurance Company, Stallion Insurance Company Ltd, Lakestar Insurance Company Ltd, United Insurance Company and more recently Invesco Insurance Company Ltd have all been in trouble or collapsed to the disadvantage of many policy holders.

The government is leading reforms in the local insurance industry in an effort to stem the instability that has gripped the sector over the past decade.

This includes limiting ownership of a single individual shareholder to 25 per cent and increasing the minimum capital requirement from the Sh50 million to Sh150 million for life insurers, Sh100 million to Sh300 million for general insurance and Sh150 million to Sh450 million for composite insurance.