In Summary
Players in the industry say large insurance companies are likely to raise their capital position in the near term as a result of the upcoming legislation.
The upcoming law is meant to bring stability in the sector where previous failure of several firms eroded public confidence, partly contributing to the low insurance penetration at less than five per cent.
Insurance companies covering high-risk businesses will be forced to raise their capital levels as per the regulator’s stipulation according to a draft Bill that gives the incoming watchdog, the Financial Services Authority (FSA), sweeping powers.
The Insurance Bill 2014, which seeks to replace the current Insurance Act, gives the FSA powers to set unique capital levels for an insurer based on its risk profile.
"The authority may issue a directive requiring the licensed insurer to increase its paid-up capital to an amount higher than the minimum specified in the regulations," reads part of the proposed law.
READ: Bill seeks to lower hurdles for insurers
The current law only requires insurance companies to meet flat minimum capital levels that may not reflect the actual risks for all the underwriters.
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.
Exposure
Composite insurers must have Sh450 million as the minimum paid-up capital while reinsurers need Sh800 million comprising Sh300 million for life business and Sh500 million for general business.
Players in the industry say large insurance companies are likely to raise their capital position in the near term as a result of the upcoming legislation.
"There will definitely be an increase in capital above the current numbers," said Nelson Kuria, the chief executive of CIC Insurance. "It means that we are heading to risk-based supervision environment where the capital should reflect the actual exposure."
The upcoming law is meant to bring stability in the sector where previous failure of several firms eroded public confidence, partly contributing to the low insurance penetration at less than five per cent.
Concord Insurance, Blue Shield, and Standard Assurance are some of the firms that have collapsed in the past decade.
The move to raise more capital means the affected companies will have to either distribute less of their profits to shareholders or raise more funds through rights issues or sale of equity.
The firms may sidestep such a fundraising by diluting their risks, either through exiting or reducing their presence in the businesses with the greater exposures.
The current capital requirements represent less than five per cent of the premiums collected by several insurers.
Source: Business Daily
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