Markets & Finance

WB faults Kenya on foreign stake cap of insurance shares

CAK

CAK director-general Wang’ombe Kariuki: The report says freeing sectors like insurance, professional services and telecoms could spur Kenya’s production yearly by up to Sh28 billion. PHOTO | FILE

Kenya should remove the legal restriction on foreigners owning more than two-thirds of an insurance company, a new World Bank study on competition backed by national competition watchdog has recommended.

On the basis of the study done by the World Bank’s private lending and investment arm International Finance Corporation (IFC), the Competition Authority of Kenya (CAK) Wednesday released a report supporting the recommendation.

“Foreign equity participation in an insurance company has a ceiling of 66.7 per cent and this could affect the prospects on entry and expansion of insurance companies,” said the CAK in a report based on the Bretton Woods institution study.

The report noted liberalisation of various markets – including insurance, cereals, professional services and telecommunications — in Kenya could lead to a Sh28 billion addition to the gross domestic product annually.

The CAK report noted that a market dominated by domestic insurance firms was unlikely to encourage global best practices.

“In principle, domestic ownership of insurance companies needs to be encouraged so far as possible but domination of domestic ownership generally leads to deep stagnation in developing best industry practices,” said the report.

Further, the CAK said it would seek to have the minimum premiums specified under the current insurance law for vehicles scrapped.

The CAK director-general Wang’ombe Kariuki said he would be propose to have the recommendations included in the 2016/17 Budget although legislators have the final say.

The recommendations of the World Bank and the CAK give new impetus to the need to enact the insurance Bill that has been pending since last year.

READ: Fitch says insurers ripe for foreign investment

It includes clauses seeking to remove caps on foreign ownership and minimum premiums for the underwriting business.

The report noted that liberalising ownership controls would enable the local firms to have access to international capital.

It further noted that removing controls on the prices would lead to a decline in the cost of insurance in the long run even though there could be price increases in the short run.

“The history of insurance pricing in the EU [European Union] countries shows that, while in the short run premiums generally rise, in the long run liberalisation leads to a progressive decline in the cost of insurance,” said the study.

To further ease controls, the Insurance Regulatory Authority does not need to approve changes in the premiums of underwriters and the brokerage fees as is the case currently, the report recommended.

However, the it noted there was a likelihood of collusion among underwriters who are out to maximise profits.

“A potential drawback of deregulating is that market players may be tempted to avoid a price war by explicitly or implicitly colluding on prices,” said the report.

The final consumers would enjoy the benefits of deregulation if the regulators strictly monitor collusion and ensure market discipline, the study said.