Revisions to Insurance Act herald deeper penetration

Traditional indemnity-based insurance was characterised with high costs of loss assessment, adverse selection and moral hazards.

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By Shadrack Muyesu

Two months ago, the National Assembly passed the Insurance (Amendment) Bill 2018. The main object of the Bill is to amend the Insurance Act to promote agriculture insurance in line with the proposals contained in the Budget 2018/2019. The Bill introduces index-based insurance as an alternative to the traditional indemnity based insurance.

Unlike the traditional indemnity based insurance which assesses losses on a case by case basis and makes pay-outs based on individual policy holder’s loss realisations, the index-based insurance offers policyholders a pay-out based on the external indicator (linked to poor agricultural production outcomes such as poor rainfall, insects and pest invasion, disease breakouts or price loss) which triggers a payment to all insured clients within a geographically defined space.

The traditional indemnity-based insurance was characterised with high costs of loss assessment, adverse selection (more risk prone individuals would self-elect into the contract) and moral hazards (negligence of farmers in protecting their insurance against loss due to the guarantee of payment in the event of loss).

For insurance companies, the amendment would enable them to reduce the cost of assessment and investigations in cases of loss. It will also remove the problem of dealing with subrogation rights because the pay-out is made for loss occurring once the trigger is crossed and the insured property remains with the policyholder.

Accordingly, this amendment, contemplated by micro-insurance solutions that would be enabled by the concurrent introduction of micro-insurance business as a new class of insurance, agricultural insurance is likely to be the fastest growing insurance segment in the next few years.

Micro-insurance business

The Bill provides for a micro-insurance segment in addition to life and general insurance. The Bill provides the general definition of micro-insurance to mean insurance that is accessed by or accessible to low income population including underserved markets. It contemplates a variety of amendments to provide for micro-insurance and suggests a separate regulation for micro-insurance with a view to avoid encroaching or distorting other insurance markets. So far, insurance laws and regulations in Kenya have developed with traditional insurance in mind, which is inaccessible to the low income population. Micro-insurance is tapped as a key initiative to increase insurance penetration in Kenya.

Currently micro-insurance products are done in partnership with Mobile Network Operators to take advantage of the large mobile penetration rate in Kenya (Kenya has reached 100 percent mobile penetration according to the first quarter sector statistics report for the financial year 2018/19 by the Communications Authority of Kenya) and ever-growing number of mobile money users. Collaboration between micro-insurance providers and MNOs is expected to drive micro-insurance business due to various advantages, including reduced costs of administration, convenience and ease of use by customers.

In terms of implementing the amendment once the Bill is signed into law by the President, the Insurance Regulatory Authority of Kenya (IRA) is most likely to publish regulations that are in line with the Kenya Micro-insurance Policy Paper published in 2014. The framework covers various issues that include the type of institutions that the Authority will allow to underwrite and sell micro-insurance products; consumer protection requirements that micro-insurance underwriters and agents will have to follow; prudential regulations that should apply to micro insurers; tax benefits; consumer education programs and transition arrangements that will apply to current formal and information underwriters and distributors who want to transition to the micro-insurance license.

Enhanced powers

The Bill seeks to amend the Insurance Act to grant the Commissioner power to request any member of the group to provide any information necessary for effective group-wide supervision. The Insurance Act defines an insurance group to include a registered insurer and its subsidiary, or an insurer’s holding company, whether operating or non-operating, and its subsidiary. This means that the Insurance Authority of Kenya would have the power to send an information request to any group member including those registered outside Kenya.

The Bill proposes to amend the Act to require insurance premiums to be paid directly to the insurer. Intermediaries shall be prohibited from receiving any premiums on behalf of and insurer. This will effectively cut out the middlemen and hopefully result in cost savings that can be passed on to consumers.

The losers in this amendment are the insurance agents and brokers as the amendment promotes direct channels between insurers and customers. Insurers will now have the opportunity to adopt e-commerce in distributing their products, including online sales. There is likely to be an outcry form these intermediaries but under the new framework, insurance brokers and agents will now have to provide real value to their clients beyond just policy sales.

The winners on the other hand are banks – as relates to bank assurance services. According to a study undertaken by the Association of Kenya Insurers in 2017, the most popular bank assurance model is the distribution model where the bank simply behaves as an intermediary offering products of more than one insurance company. The drawbacks however, are that the banks generally do not have a proactive approach in marketing insurance products, rendering it ineffective. The study recommended the adoption of more strategic and integrated models that would promote integration of insurance products into a bank sales management framework and benefit from more aggressive marketing and improve procurement turn-around time; encourage expansion of products to cater for more bank customer segments; increase premiums collected; and open banks’ branch networks to insurance companies.

The Bill proposes to amend the Insurance Act to provide an initial administrative dispute resolution avenue with the Commissioner for Insurance. Any insurance customer would be entitled to lodge a complaint against a regulated entity with the commissioner for insurance. The Commissioner will have the power to determine the dispute and an appeal will lie with the Insurance Tribunal.

Criminalisation of Insurance Fraud

The Bill seeks to amend the Insurance Act to criminalise insurance fraud and provides hefty fines and imprisonment terms as punishment for those found culpable of insurance fraud. The proposed criminal sanctions are a fine of ten times the amount defrauded or intended to be defrauded; or imprisonment for a term not exceeding five years or both.

Stiff penalties on insurance fraud will have a positive impact on risky classes such as motor vehicle insurance, which have been loss making and generally shunned by many providers.

The amendments proposed by the Bill are in line with global insurance practice and are expected to have a positive impact on overall insurance penetration in Kenya.

The Bill has been passed by parliament and is awaiting presidential assent. (

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