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Insurers differ over paid up capital benchmark

NAIROBI, August 5 – There is a widespread apprehension in the insurance industry over the ministerial directive to increase the paid-up capital of insurance firms, read out by the former Finance Minister Amos Kimunya during the 2007/2008 financial budget speech.

A section of small insurance companies say they plan to lobby for the withdrawal of the directive, which seeks to increase their minimum capital before 2010.

In his budget speech, Kimunya introduced amendments to the Insurance Act by raising the paid capital for Life Insurance companies from Sh50 million to Sh150 million; general insurance from Sh100 million to Sh300 million and composite insurance companies from Sh150 million to Sh450 million.

A player, who spoke to Capital Business News on condition of anonymity, said there are questions among players as to what criterion was used to determine the various capital requirements.

The source complained that players believe Kimunya did not consider the liquidity ratio and the liabilities of the companies relating to the underwritten business, all of which contribute to a company’s competitiveness.

While stating that the firms were not entirely opposed to raising the capital base, he wondered how Kimunya arrived at the decision without regard to the retention in every company, since “whatever is over and above the retention is transferred to the re-insurers.”

“Without taking due regard to the three factors, I do not think that the basis for raising the capitalization was warranted. Unless the objective was consolidation, which I don’t think is the solution,” he said.

He was of the view that the best basis would have been to peg any premium written by any company on its asset base, which would force them to plough back profits into retained earnings and this would also enable them to minimise the siphoning of money out of the organisation.

“Whatever is retained (by the companies) is what should concern anybody and what is ceded out to the re-insurers should not be a real bother to the local firms,” he argued.

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He stated that what the Insurance Regulatory Authority should be concerned about is how this injection of capital would translate into better services.

The player lamented that he suspected the involvement of the “big boys” in pushing for the law, claiming that it was in their best interest to have the legislation in place so that they can initiate take-overs and mergers in the industry.

Asked why it took them more than a year since the introduction of the directive to raise any concerns, the source said they needed time to strategise.

He revealed that they are going to petition the Association of Kenya Insurers (AKI), Association of Kenya Re-insurers and the Association of Kenya Brokers to see whether they can have the law reversed.

He expressed confidence that this would happen, citing a move by legislators to shoot down a similar proposal for the banking sector in October 2007.

“We believe that the change will come regardless of how long it takes,” he added.

And as for what strategy they have in place in case their demand is denied, the source said: “We are there to manage risks, so we have a plan B.”

But in a quick rejoinder, CIC Managing Director Nelson Kuria faulted his colleagues for having what he termed as a ‘defeatist attitude’, saying the competition at the global level requires businesses to consolidate in order to survive.

“It is purely a question of business logic in an environment where there is a lot competition at the global level,” he said. “It can only be at our own peril if we think that we are going to remain small and survive.”

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On his part, Association of Kenya Insurers (AKI) Executive Director Tom Gichuhi said he had not received any concerns from the players but pointed out that all issues would be adequately addressed.

“Both the small and big players are our members. We should be able to handle any concerns they have,” he affirmed.

Gichuhi also vehemently denied accusations that the big players had pushed for the amendment of the law and explained that the recommendations to change the Insurance Act were made by a taskforce appointed by the Kimunya, to address challenges facing the sector.

He was non-committal on whether the law would be revised to favour the small players saying that would be the prerogative of the government.

However the Director said that any changes to be made would have to be for the common good.

“Our responsibility (AKI) is to articulate the concerns of our members and advance their interests and at the same time, we have to look at the bigger good,” he concluded.

It remains to be seen what action will be taken.

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