Resolution Insurance collapsed with over Sh6.5 billion in client cash, insurance claims, and creditor funds after its shareholders failed to recapitalise the business.
The Insurance Regulatory Authority (IRA) said the insurer had collected Sh4.1 billion in premiums from policyholders out of which 90 percent were medical customers.
The firm also owed creditors and had claims from the insurance business totalling Sh2.5 billion, an indication of the long list of clients and suppliers eager to recover their funds from the failed insurer.
The Policyholders Compensation Fund (PCF), which has taken over the firm as the statutory manager, said the company presented the liabilities to the regulator but it will conduct an independent audit to verify the actual size of the claims.
PCF is expected to announce next week the total value of compensation to policyholders –which will be capped at Sh250,000 for each client.
Creditors and policyholders with higher value claims will wait for the liquidation of the business to see how much more they can recover.
“Resolution Insurance owed creditors, had incurred claims worth Sh2.5 billion, and had collected premiums worth Sh4.1 billion as of December 31, 2020. The majority around Sh3.5 billion comes from medical business,” the IRA said.
Resolution’s clients with the biggest exposure include those who had insured high-value assets such as motor vehicles, houses, and industrial properties.
Customers with medical bills will also suffer as they will be forced to pay out of pocket.
Resolution becomes the first underwriter to fold up after relative stability in the sector since the collapse of Concord Insurance in 2013.
The sector witnessed a spate of collapses, including United Insurance in 2005, Standard Assurance in 2009, Blueshield in 2011, prompting the formation of the PCF 17 years ago to cushion holders of insurance policies where companies are unable to meet their obligations.
Resolution was founded by Peter Nduati and its collapse comes after the company raised money from several investors and expanded into the medical and general insurance business.
Mr Nduati said he had sold most of his stake, remaining with only 20 percent shareholding, and had ceded the role of principal officer at the time of its collapse. Bernard Githinji has been the acting managing director and principal officer.
Mr Nduati owned 80 percent of the business after he acquired the stake of original shareholders in 2014 and owned the firm alongside former Equity Bank chief executive John Mwangi.
Later that year he sold a majority stake to Leapfrog Investments. Trouble started in 2017 when the regulator introduced changes in the insurance law requiring additional capital to meet the risk of the business.
Mr Nduati said he had approached Linkham Services Limited to invest in the business and entered into the deal after the UK Group demonstrated proof of capital to be injected into the business.
The source of the said capital was disclosed to be New Point Capital Limited.
The transaction that was supposed to be completed last year, saw UK-based Linkham Group acquire a 55 percent stake in Resolution after buying out LeapFrog Investments.
The deal also saw Mr Nduati’s combined stake rise to 20 percent from 15 percent.
The regulator approved the deal on the condition that the funds could not be drawn from New Point Capital due to its material non-compliance with Insurance Act.
Mr Nduati blames his business partners, Linkham Services, Dominic Persad and Michael Cranfield for the collapse, claiming they failed to inject the balance of Sh346 million after acquiring the majority stake in the company. He claimed the company was supposed to inject $6 million (Sh692.8 million) into the business to execute the deal with LeapFrog but only paid half the amount.
The money was to be held at the IRA until the deal was concluded but Linkham Services, Dominic Persad and Michael Cranfield failed to pay up the difference, leading to cash flow constraints, regulatory breach, and eventual collapse.
Meanwhile, cash flow problems saw the insurer’s cover rejected by some hospitals for late settlements of bills.
Clients poured out their frustrations on social media over their inability to access medical care as a result of their cards being rejected. Complaints piled at the regulator, with the company getting the second-highest number of reports as of June last year.
The IRA recently placed Resolution under statutory management because of its financial problems, stating that efforts to rescue the insurer, including injection of additional capital, had failed.