The capital composition of insurance companies will be expanded, making it easier for insurers to raise new cash to enable them to comply with the recently introduced higher financing requirements.
Treasury secretary Henry Rotich has proposed to include preference shares, subordinated loans, share premiums and reserves in the calculation of an insurer’s capital position in the published Insurance Act amendment bill.
Preference shares come with a stated dividend rate that makes them more attractive to incoming investors as opposed to common stock (ordinary shares) that receives a dividend only when it is declared.
Preference shares are entitled to other benefits such as ranking ahead of ordinary shares during liquidation.
More than 10 of the industry’s 44 licensed insurers are expected to go to the market for cash in order to comply with new minimum capital requirements slated to be operational in the next 24 months.
Currently, the Act only recognises ordinary share capital limiting the sourcing options of the insurers. Both existing and new insurance companies can use preference shares to raise cash.
“The capital of the insurer may consist of, in the case of a new company, ordinary shares, each of which has a single face value with voting rights and shall be irredeemable and non-cumulative preference shares,” reads the proposed amendment.
For companies that are already in operation, reserves that have been accumulated over time will also be counted as capital making it unnecessary for a company to go through the bureaucracy of converting them into shares.
“In the case of existing companies... subordinated loans as may be approved by the authority, share premiums, reserves and any other forms of capital as may be determined by the authority,” add the new proposed amendment.
Subordinated loans rank below other loans when it comes to claims on assets. “This opens a window for insurance companies to go to the capital markets to raise money,” said insurance expert Isaac Ng’aru of Ngaru and Associates.
Corporate bonds previously issued by insurance companies had not been factored in their capital. Some of the insurers that have issued bonds include Britam and CIC that raised Sh6 billion and Sh5 billion in 2014.
Banks have a wide array of capital sources allowing them to absorb more business. The capital sources are ranked with shareholders cash dubbed core capital while debt and other sources is classified as tier two capital.
The CS has sought to ensure continuity in the ownership of the insurance companies by making it mandatory that the preference shares are irredeemable.
Classifying them as non-cumulative implies dividends will only be paid to the preference shareholders only in the year the company has announced a sharing of profits protecting the financial position of the insurer from being drained by historical obligations to such investors.
Policyholders will be paid first ahead of suppliers of capital in case an insurance company is liquidated, reads part of the amendment.
Under the new rules taking effect at the end of June 2018, minimum capital will be based on three parameters that include capital covering the risk carried by an insurer relative to size, the type of business booked and a minimum capital set for each business class.
For general insurance the minimum capital will be Sh600 million while life insurers will hold a minimum of Sh400 million.
At the moment, life insurers must maintain a paid-up capital of at least Sh150 million while those underwriting general business must have a minimum paid-up capital of Sh300 million.