General insurance companies to undergo risk, financial audit annually

All insurance companies will be required to conduct risk and financial audits - technically called actuarial audits - annually as the National Treasury seeks to strengthen the sector.

The audits help identify an insurers’ liabilities giving a clearer picture of their financial status and the amount of risk they carry in their underwriting business.

The Treasury has proposed to amend the Insurance Act to rope in general insurers for the annual actuarial investigations, which are currently conducted by life insurers only.

“An insurer shall on 31st of December every year, and irrespective of any contrary provision in the articles of association or deed of settlement, cause an investigation to be made into his financial condition,” reads the proposed amendment.

Insurers welcomed the move noting it was in compliance with the risk-based supervision model taken up by the industry.

“We are on risk-based regulation and some of these requirements are important to ensure companies are on the right track of doing business,” said the Association of Kenya Insurers (AKI) chief executive Tom Gichuhi.

General insurers are currently not mandated to have actuaries check their financial exposure leaving the companies in groping in the dark over the liabilities in their books.

The amendments also seeks to standardise reporting within the sector by requiring all companies to report as prescribed by the authority.

Currently the insurers are required to meet the minimum basis prescribed making it difficult to make comparisons within the sector.

READ: New capital rules ease funding for insurance firms

Risk-based supervision requires insurers to hold capital equivalent to the value of liability exposure they carry on their books and not a flat amount as was the case before.

Currently general insurers are required to have Sh300 million in minimum capital while life underwriters must have a minimum of Sh150 million.

Under the new risk-based dispensation, at the very least general and life insurance companies must have capital of Sh600 million and Sh400 million respectively but this rises once the risks a company carries are higher.

Some of the capital measures that insurance companies will have to observe include the paid-up capital being more than a tenth to their total premium collections.

The new capital and reporting requirements are expected to hit the insurers’ bottom line.

Last year, PanAfrica Insurance paid out Sh7.8 million as actuarial fees signalling the cost burden to be borne by the general insurers.

“In the initial stages it may look punitive but in the long term it will be beneficial to the shareholders because they will know the financial position of the company at any given time,” said Mr Gichuhi.

A series of collapse of insurance firms over the year has hurt public confidence in the sector, which the regulator is seeking to restore by gaining more oversight on the companies’ activities.

Under-cutting in prices and copying of products from competitors without research on their risk exposure has been blamed for poor performance and collapse of some companies.

Companies conducting short-term business have been the most affected by the collapses underlining deficiencies in their management. Hence, the inclusion of general insurers in annual actuarial audits.

Insurance penetration is low in the country with total premiums collected less than three per cent of gross domestic product, which has been attributed to a lack of trust in the system.