Markets & Finance

Insurers to bear burden of compensating customers

SAM

Insurance Regulatory Authority (IRA) chief executive Sammy Makove. PHOTO | FILE

Insurance customers will stop contributing to the policyholders’ protection fund with underwriters bearing the burden under new rules drafted by the industry regulator.

Insurers will contribute 0.5 per cent of the premiums they collect to the fund used to compensate insured persons in case of collapse of the firm.

Currently, the insured share the burden with the companies with each party contributing 0.25 per cent of the premium.

“Every insurer shall pay a levy equal to half per centum (0.5 per cent), of the gross premium collected every month from life and general insurance business transacted in the month they relate,” read part of the draft insurance regulations 2015 by Insurance Regulatory Authority (IRA).

The insured are set to receive a maximum of Sh100,000 refund from the policyholders compensation fund in case a company winds up.

The current scheme means that the compensation from the collapsed company is only half the statutory amount given that the policyholders contribute half of what is awarded back.

The recommendation will see insurers join the league of bankers who solely bear the burden of compensating depositors—to the tune of Sh100,000—in case any of them is declared insolvent.

“This should have been the case from the very beginning because it is not fair to charge policyholders. What does the policyholder got to do with how insurance companies which have gone burst manage their affairs,” asked Isaac Ngaru, managing partner of Ngaru and Associates.

Last year, the industry collected a total of Sh157.8 billion in premiums which would have seen it contribute Sh790 million to the compensation fund, if the proposal applied.

As at end of 2013, the fund had a total of Sh3.1 billion which was a 30 per cent growth from Sh2.4 billion in the previous year. In 2013, the fund received contributions totalling Sh492 million from Sh131 billion collected as premium.

Last year, Treasury secretary Henry Rotich ordered the Compensation Fund for the insured to run two funds to avoid the general and life lines of business eating into each other.

READ: General and life compensation funds for insured now separated

General insurers have been prone to a string of collapses in the local insurance sector.

Since it was set up, the fund has not paid out compensation mainly due to extensions offered for statutory management and the slow judicial process of winding up the underwriters.

Increase in the amount to be set aside by each insurance firm reduces cash available to them for investment purposes.

Insurance companies have two main sources of income, one being the core business of underwriting and the other investments made with cash held before settling claims.