Markets & Finance

Insurers dealing with unrated firms to hold higher capital levels

IRA

IRA chief executive Sammy Makove (left) with AKI executive director Tom Gichuhi at a media briefing in Nairobi on Monday. PHOTO | SALATON NJAU

Insurance firms which give their reinsurance businesses and credit to unrated companies will be required to hold higher capital levels in a move meant to protect the industry from defaults.

The insurers will also start listing insured people who fail to keep up with their premiums’ payments with credit reference bureaus beginning next year to de-risk the business.

The Insurance Regulatory Authority (IRA) is recommending that insurers hold capital equivalent to amount owed by unrated creditors while putting in the equivalent of 45 per cent of what is owed by the worst rated companies.

The recommendation is likely to push insurers to give reinsurance business only to companies with a credit rating.

“Credit risk capital charge aims to cushion against risk of losses resulting from counterparty default,” explained IRA in the recently released regulations.

The industry has also settled on sharing of information of persons who do not honour their insurance contracts in a move to weed out repetitive defaulters.

Association of Kenya Insurers (AKI) chief executive Tom Gichuhi said a memo had already been sent out to all insurance companies asking them to upgrade their systems so as to generate the required information.

“This information will be shared even with the banks because we are going to join the general platform so that if you owe an insurance company premiums and are trying to access a loan the bank will be able to first refer you to the insurance company you clear your premiums so that you access the loan,” he said.

The insurance industry is, however, yet to agree on the number of months that a policy has to be in arrears before it is declared a default.

AKI hopes to use the listing to stop people from taking a cover only to stop paying the premiums later and move to another insurance company.
Insurance firms usually pay their sales officers bulk commissions on initial phases of the policy contract.

This means when the premiums stop coming in the insurer is left in a loss position.

The sector could face legal headwinds in implementing the system given that the payment of premiums is purchase of service and not a credit.
The system allows listing by credit providers and not service companies.

It has, however, accommodated utility companies, such as electricity and water companies, to share information on defaulters.

The proposed capital regulations on the other hand are in line with recent change of law which requires insurers to hold capital based on the riskiness of their business and not a standard statutory minimum.