By Ian-Johnson Ondari
The nexus between regulation and innovation is a contentious one, depending on who is involved. The shift brought about by technology has made it inevitable that firms have to rethink their traditional models to survive this disruption.
At the tail end, the government is also, often, left floundering on how to suitably respond to new risks and potential opportunities. The main concern then of governance, risk and compliance space’s is to find a balance between regulatory standards that will not only protect consumers of these new products but also offer an extremely competitive market.
On January 1, 2017 while “The Donald” Trump was wishing a New Year to his haters, Kenyan insurance sector was coming of age: marine insurance guidelines were taking effect. The National Treasury had, earlier in the budget statement, invoked Section 20 of the Insurance Act whose effect was locking in premiums from the marine cargo insurance business only to insurers registered in Kenya.
The incentive to bring section 20 into play was undeniably the Sh17 billion premiums initially collected by foreign insurers. At the helm of this oh-so-righteous scheme was the taxation impact which the state would benefit from.
It has to be appreciated that for once State intervention in the market economy was mutually beneficial. Why? Section 20 prohibits placing of business with an insurer who is not registered in accordance with the Act, suggesting that importers are required to purchase insurance covers with Kenyan-registered insurers.
There will be fundamental shift in the recommended models of international shipping agreements. Normally, the most preferred agreements in transportation of goods between a buyer and a seller in the MCI business are Cost, Insurance and Freight (CIF) and Free on Board (FOB). The difference is who assumes responsibility for the goods during transit. The preferred model reflected by this policy change is that transactions will be done on a FOB basis, where the buyer assumes liability. By forbidding CIF the regulators are preventing flight of premiums which are paid to foreign insurers when cargo is insured offshore.
Benefits of “Buy Kenya” agenda
The latency of section 20 was initially credited to the compliance burden, in particular the capacity and competitiveness of domestic insurers to match up the international standards. However, this policy reform was one giant step for the insurance sector. It was a multi-sectoral issue that involved customs, revenue collection and cross-border trade relations. Already the infrastructure has been set up for the smooth transition to the new platform which has incorporated IT into its core operations.
This ambitious “buy Kenya” enterprise might be the catalyst for tremendous innovation. From past experiences, State intervention in private sector affairs is a fatal undertaking. However regulation can also lead to emergence of common standards, allowing a country to exploit its full innovative potential through fair competition. For instance, one of the pledges under this policy regime is the settlement of MCI claims within fifteen days.
The reputation of insurance in Kenya has been injured by the reluctance of insurers to settle claims, often requiring policyholders to adopt an adversarial tone. The Budget Speech for 2016/2017 reduced the statutory timescales for claim settlement to thirty days from an initial ninety days through amendment of section 203 of the Insurance Act. It’s too early to evaluate the success of the fifteen day duration in the MCI business; however, its success might lead to emergence of standards which will eventually streamline the current practices. Similarly by recognising the role of IT in this process regulators are acknowledging how vital technology has become to service delivery because coordination of policies of all relevant regulatory bodies fosters innovation.
There is the attractive annual premium loot estimated at Sh20 Billion up for grabs for Kenyan-registered insurers, a major win for the economy though foreign exchange savings.
The regulators appear unfazed by any negative concerns that might arise out of full implementation of this platform. At the outset queries would seek to determine how claims settlement will be achieved within fifteen days, being that valuation of marine cargo (bulk cargo) can at times run into the billions.
Another feature would be capacity of insurers to underwrite the same cargo independently. If they resort to co-insure, would it introduce new difficulties? Is it tenable to streamline cargo clearance, revenue collection and insurance processes long-term? Finally, what would failure of any of these objectives mean to the Kenya MCI business?