CuaptTer 18 | REGULATORY MECHANISMS AND OVERSIGHT OVER THE INSURANCE INDUSTRY IN KENYA 18.1 InrRopUCTION The contractual nature of the insurance transaction notwithstanding, the essence of external regulation of the insurance industry is | undoubtedly necessary.! The principal reason for government regulation of insurance is to protect policyholders. This need arises from the fact that the government has a particular responsibility with regard to the insured to guarantee successful conclusion of insurance contract.” With the consumers being weaker in the transaction, when compared to the insurance companies, there is need to safeguard them against exploitation. Secondly, regulation is necessary on account of the role that insurance companies play in the stability of the economy. Disruptions that arise from the failure of companies has had adverse effects on the whole economy.’ As David Zaring aptly puts it: During the financial crisis, the collapse of America’s largest insurance conglomerate, the American International Group, along with the failure of a host of its bond insurers, suggested that the insurance industry was not necessarily a stable, staid keeper of our rainy day funds.”* 1 See Nigel Feetham, A Guide to Insurance: Combining Governance, Compliance and Regulation (Spiramus Press Led, 2012) 5 on why regulation is necessary. The author notes that the discussion is never about whether regulation is necessary, but on the extent of necessary regulation, 2 See Preface by Dennis Kesler, and Patrick M. Liedtke, ‘Insurance Activity asa Regulatory Object:Trends and Development and their Appreciation in the Context of Post-Crisis Global Markets’, in Patrick M. Liedtke, January Monkiewicz (eds), The Future of Insurance Regulation and Superision:A Global Perspective (Palgrave Macmillan, 2011). 3 This instability was experienced in Kenya in the 90s when most public corporations including government-run insurance companies failed due to mismanagement. See Kenya National Assembly Official Record (Hansard) of 7 June 1995 at 890. 4 David Zaring, ‘It Is Time to Rethink Insurance Regulation’ New York Times, 22 January 2014. eeJack Busalile Mwimal 246 Insurance Law and Practice in Kenya is a global business, with insurance companies Since insurance ‘ lines of business as they look for new ways entering into more exoti of growing the market, state systems are becoming more sensitive to “ and economic environment in which Jocal and international social insurance is practised, Moreover, as insurance business is required to be carried out principally by companies, the protection of company shareholders is also necessary. Indeed, many provisions of the companies, and securities laws are aimed at shareholders’ protection.$ In Kenya, insurance regulation is structured around several key functions, including company licensing, product regulation, market conduct regulation, financial regulation, and regulation of consumer services. These regulations are underpinned by various pieces of legislation including, the Insurance Act; the Companies Act; Accountants Act,’ etc. which create agencies and structures to control how insurance business is carried out. 18.2 REGULATORY AND OVERSIGHT BODIES 18.2.1 Insurance Regulatory Authority The Insurance Regulatory Authority (IRA) is the main regulatory authority in Kenya established under the Insurance Act.* The Authority is a body corporate with perpetual succession and a common seal. It is capable of suing and being sued and can take, purchase or otherwise acquire, hold, charge or dispose of movable and immovable property in its own name, ___ In order to ensure consistency of information published by insurance companies to the general public, IRA has issued specific fo insurance compani i Fmats that insurance companies must adopt for the purpose of University Pres ss Convergence in Shareholder Law (Cambrid igement, protection 2008) 174.The book notes these include protection against mu gainst hostile takeovers, protection for minority shareholders ete Chapter 486 of the Laws of Kenya, Act number 15 of 2008, Insurance Act, section 3(1),+2 Jack Busalile Mwimali Regulatory mechanisms and oversight... insurance industry in Kenya 247 reporting. These include circulars on the minimum information that should be contained in a statement of financial position, the statement of movement in deposit administration and investment contract liabilities and the statement of comprehensive income. Moreover, IRA's corporate governance guidelines set out the ground rules on the information to be disclosed by the insurer with regard to the risks that they are subject to, management information to be disclosed and other relevant corporate governance structures that the company has put in place. Further to this, the guideline gives some of the key ratios that insurance companies should compute like the claims adequacy ratio, the solvency ratio, the claims and expense ratios. This information when published in the local dailies would enable members of the general public to evaluate the financial performance of an insurance company and thus help the public make an objective decision as to which insurer should provide them with the best possible service. 18.2.2 Commissioner of Insurance ‘The Commissioner of Insurance is the chief executive officer of the Insurance Regulatory Authority.” He is conferred with particular duties that he performs subject to the directions of the Board of Directors of the Authority. The duties of the Commissioner under the Act include: () Directing an insurer or a reinsurer on the standardization of contracts of compulsory insurance; (ii) Directing an insurer or a reinsurer, where he is satisfied that the wording of particular contract of insurance issued by the insurer or reinsurer is obscure or contains ambiguous term or terms and conditions which are unfair or oppressive to the policy- holders, to clarify, simplify, amend or delete the wording, terms or conditions, as the case may be, in respect of future contracts; (ii) Approval of tariffs and rates of insurance in respect of any class or classes of insurance; and Insurance Act.Jack Busalile Mwimaj 248 Insurance Law and Practice in Kenya (iv) Such other duties as the board may assign to him.” ‘The Commissioner has power to cal for information and production of books or papers from any member of the insurance industry The Commissioner may call for any reinsurance treaties and other reinsurance contracts entered into by the insurer, and if on Scrutiny, he finds that any reinsurance treaty, contract or arrangement or any terms or conditions therein are not favourable to the insurer or are not in the interests of the economy or the insurance industry or in the public interest, he may direct the insurer either to modify it at renewal or not to renew that treaty, contract or arrangement at all," Disputes relating to claims on small life policies arising between a claimant under the policy and the insurer may, at the option of the claimant be referred to the Commissioner for decision." The Commissioner may, after giving an opportunity to the parties to be heard and after making such further enquiries as he may think fit, decide the matter and the decision of the Commissioner shall be final and shall not be called in question in any court.That decision has a force of a court order and may be executed by the Court which would have been competent to decide the dispute if it had not been referred to the Commissioner. 18.2.3 Cabinet Secretary The Cabinet Secretary/Minister has been conferred with a lot of powers. He can prescribe all matters which the Insurance Act “requires or permits to be prescribed, or which are necessary, desirable or convenient to be prescribed, for giving effect to this ‘Act."™ The Minister may also exempt any person from any of the provisions of this Act.!S 10 Per Insurance Act, section 5(1). 11 Insurance Act, section 10. 12 Insurance Act, section 8, Section 9 also empowers him to carry out investigations on the industry in general and give directions. Section 10 deals with the particular powers of Commissioner with regard to long term insurance business. 13 Under the Insurance Act, section 112. These are in relation to policies oflife assurance not exceeding one hundred thousand shillings exclusive of any profit or bonus not being a guaranteed profit or bonus. 14 Insurance Act, section 180, 15 Insurance Act, section 181.This can only be done on the advice of the Board and PY notice in the Gazette, and is subject to such terms and conditions as he may on HePik ee 2 Bl Jack Busalile Mwimali Regulatory mechanisms and oversight ... insurance industry in Kenya 249 48.3 REGULATORY REQUIREMENTS ON INSURANCE BUSINESS In the insurance business, regulations exist on various fronts. These include: 18.3.1 Regulations on Registration Regarding registration, it is required that only a person registered under the Insurance Act may carry on insurance business in Kenya." Application for registration and renewal of registration of insurer must be done in standard forms under the Act and a prescribed fee is payable for such application.” For an insurance company to be registered, it is required that at least one third of the members of his board of directors or managing board be citizens of Kenya.*The company must also have a prescribed minimum admitted assets in Kenya.” Provisions have also been made for application for registration and renewal of registration for intermediaries, claims settling agents, insurance surveyors, medical insurance providers, loss adjusters, ‘motor assessors, insurance investigators and risk managers.*” Fees are payable for the application. advice of the Board specif: Notable, The Insurance Advisory Board of Kenya was provided under section 157-163 which was repealed by Act 11 of 2006. Thus, there is no statutory advisor to the Minister. 16 Insurance Act, section 19. Under section 20, no insurer, broker, agent or other person may directly or indirectly place any business other than reinsurance business with an insurer not registered under the Act without the prior approval, whether individually fr generally, in writing of the Commissioner. This is subject to some exceptions eg. in section 21 17 Insurance Act, section 30 and Insurance Regulations, Regulation 6. 18 Insurance Act, section 27. Under section 27A, the board of directors or managing board must comprise of at least five members with knowledge and experience in matters relating to insurance, actuarial studies, accounting, finance or banking, All the ‘members of such Board must write to the Commissioner signifying their acceptance to serve on the Board 19 Insurance Act, section 28. The responsible Minister may, by order published in the Gazette,amend the Schedule on minimum asset requirement, Insurance Regulations, Part X. yrsJack Busalile Mwimati 250 Insurance Law and Practice in Kenya 18.3.2, Regulation on Deposits An insurer applying for registration must deposit Kenya Government securities with the Central Bank of Kenya."' Where the application is in respect of long term insurance business, a deposit of five million shillings or five percent of the admitted assets, whichever is the higher, must be kept, while in respect of general insurance business, a sum of five million shillings or five percent of the admitted asset whichever is required to be kept. If any part of a deposit made is used to discharge any liability of the insurer, the insurer is required to deposit an additional sum as will make up the amount within two months from the date when the deposit or any part thereof is used. A deposit made by an insurer is deemed to be part of the assets of the insurer, but cannot be capable of being transferred, assigned, or encumbered with a mortgage or other charge, by the insurer. It is not available for the discharge of a liability of the insurer other than liability in respect of a policy of insurance nor is it liable to attachment in execution of a judgment except a judgment obtained by a policy holder of the insurer in respect of a debt due upon a policy of insurance issued in Kenya in which the policy holder has been unable to recover in any other way. Where a deposit is made in respect of long term insurance business itis not available for the discharge of a liability of the insurer other than a liability arising out ofa policy of long term insurance issued by the insurer.* 18.3.3. Regulation on Solvency Margins and Investments Ie is required that an insurer carrying on long term insurance business in Kenya but not general insurance business must at all times keep total admitted assets of not less than his total admitted liabilities and ten million shillings or five percent of the total admitted liabilities, whichever is the higher2? For an insurer carrying on general 21 Insurance Act, section 32. 22 Insurance Act, section 38. 23 Admitted assets are described in section 42 of the Act to include any property ¢ does not security, item or interest of a person approved by the Commissioner but secured include an unsecured of, in the opinion of the Commissioner inadequately Joan; an asset that is mortgaged or charged for the benefit of a person other than the aee Jack Busalile Mwimali Regulatory mechanisms and oversight ... insurance industry in Kenya 251 insurance business which is not long term insurance business, the insurer musk keep, at all times, admitted assets of not less than the aggregate value of his admitted liabilities and ten million shillings, or fifteen per cent of his net premium income during its last receding financial year, whichever is the greater. Insurers carrying on both Jong term and general insurance business must maintain at all times separate margins of solvency in each of the areas of business." An insurer carrying on long term insurance business in Kenya is also required to establish and maintain a statutory fund under an appropriate name in respect of the long term insurance business carried on by him. An insurer may establish and maintain a separate statutory fund, under an appropriate name, in respect of any class or classes of its long term insurance business, and where an insurer carries on long term insurance business of more than one class, the Commissioner may direct the insurer to establish one or more separate statutory funds in respect of any class or classes of long term insurance business.* The assets of each statutory fund must be kept distinct and separate from all other assets of the insurer. 18.3.4 Regulation on Auditing and Reporting The Insurance Act requires all insurance companies to prepare their financial statements in accordance with the International Financial Reporting Standards. This is with respect to the revenue account, balance sheet, profit and loss account and financial statement.” insurer to the extent that it is so mortgaged or charged alo, share in any insurer who is related to such a person; a guarantee given to the insurer other than a bank guarantee issued by a bank licensed under the Banking Act or a guarantee given by a reinsurer in that course of reinsurance transactions; an intangible asset; unsecured loans to intermediaries; and prepaid preliminary and organizational expenses. The Act also defines liabilities in section 43. 24 Insurance Act, section 41 25 Insurance Act, section 46, 26 ‘The Insurance Act in PartV makes provision generally on assets, liabilities, solvency ‘margins and investments. 27 Insurance Act, section 54(1A). 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