CwapTer 18 REGULATORY MECHANISMS AND OVERSIGHT OVER THE INSURANCE INDUSTRY IN KENY! 18.1 InTRopucTION The contractual nature of the insurance transaction notwithstanding, the essence of nal regulation of the insurance industry undoubtedly ne ‘The principal reason f of insurance fact that the with regard to the insured f insurance contract? With the nnsaction, when compared t¢ the insurance companies, there is need to safeguard them against exploitation, consumers being Secondly; regulation is necessary on account of the role that insurance companies play in the stability of the economy, Di that arise from the failure of the whole economy,? As D: sption panies has had adverse effects on aptly puts ie During the financial crisis, the collapse of America’s largest insuranc International Group, along with the failure ced that the insurance ind not necessarily a stable, staid keeper of conglomerate the Americas of a host ofits bond insurers, our rainy day finds, eo Nigel Feehan, Grid note tha the dicts See Prefice ty Dennis Keser and Patrick M. Liedtke, ‘nsurance Activin R y Object Tend opment and their Appresaton in th 3 Pos-Ceis Global Marketi Patrick M. Lie Jamury Mon This instability was experienced in K panies fled de to msn Kenge National Assembly Official Recon (aman David Zaring,‘ Is Tine to Rethink losuran Innsary 2alle Mwimal insurance i busines, with insurance companie entering into more Dusiness as they look for new ways ving the market, state systems are becoming more sensitive t d international social and economic environment in which insurance is practised, principally by companies, the protection of company sharehold also necessary. Indeed, many provisions of the companies, and securities laws are aimed at shareholders’ protection. In Kenya, insurance regulation is structured around several ke functions, including company licensing, product regulation, ma rulation, financial regulation, and regulation of consumer These regulations are underpinned by various pieces of legislation including, the Insurance Act; the Companies Act; Accountants Act,’ etc, which ci ncies 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 regulat authority in Kenya established under the Insurance Act." The Authority is a body corporate al jon and a common seal. It is capable of suing a take purchase or otherwise acquire, hold, charge or dispose of movable nd imme Ir su ency of information published by insur neral public, IRA has issued specific formats that insurance nust adopt for the purpose of picartoe onteasy eealle Mwima reporting. These include circulars on the minimum information that should be contained in a statement of financial position, th fatement of movement in deposit administration and investm contract liabilities and the statement of comprehensive income Moreover, IRA’ corporate ound rules on the information to b ed by the insurer with ard 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 plac 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 Dir Authority. The duties of the Commissioner und the ontracts of compulsory insuranc or a reinsurer, where he is satisfied that the wording of a particular contract of insurance issued by the insur or reinsurer is obscure or contains amb term or tert and conditions which are unfair or oppresive to the polic holders, to clarify simplify, am ding, ‘of conditions, as the case may be, in respect of future contrac: Approval of tariff and rates of insurance in respect of am 3 of insurance; andthe board may assign to him. wer to call for information and production any member of the insurance in The Commissioner n xy reinsurance treaties and other reinsurance contracts en surer, and if on scrutiny he finds that any reinsurance treaty ment 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 daimant under the policy and the insurer may, at the option of the claimant be referred to the Commissioner for decision. Th Commissioner may, after giving an opportunity to the parties to be ard and after making such further enquiries as he may think fit, cide the matter and the decision of the Commissioner shall b 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 Cout which would have been competent to decide the dispute if it had not been referred to the Commissic 18.2.3 Cabinet Secretary The C: of powers ers the Insurance A¢ or permits to be prescribed, or whic lesirable or convenient to b ‘bed, for giving effect to this The Minister may also exempt any person from any of the ions of this Act. nsarance Act ection 1. fe indy tn gence an re deren Sarton 10 Seas th fe erica power of Commisioner with rgd to long tem insurance businJack Busalile Mim 18.3 REGULATORY REQUIREMENTS ON INSURANCE BUSINESS In the insurance busin include: register Insurance Act may carry on insurance business in Keny Application for registration and renewal of registration of insurer tandard forms under the Act and a prescribed fe: ble 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. "Th also have a prescribed minimum admitted assets in Ke Provisions and renewal of registration for intermediaries, cla insurance surveyors, medical insurance providers, loss adj motor assessors, insurance inves and risk managers.” Fees ar payable for the application. he Imurance Ad ion 157-163 which ws epcled by Act {1 of 2006, Ths ‘may direc relly place any busines other than reinsurance busines with an thou he prior approval, whether indvial the Commisioner. Ths i subject fo some excepons Tasurance Act secon 30 and Insurance Regulations, Regulstion Tnsurance Act, section 27. Under section 27A, the board of decors om a leat ive member with kn nd © response Minister may, by 0juste Mima 2 Regulation on Deposits er applying for registration must deposit Kenya Government Ach the Central Bank of Kenya." Where the application is in respect of long term insurance business,a deposit of five million shill five percent of the admitted assets, whichever is th 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 Ifany part of a deposit made is used to discharge any liability insurer, the insurer is required to deposit an additional sum as will make up the amount within two months from the date wh 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 transf 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 judy nt obrained 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, it is not available for the dischar liability of the insurer other than a liability arising out Regulation on Solvency Margins and Investments required that an insurer carrying on long term insurance busines 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 coral admitted liabilities, whi s an insurer carrying on generalinsurance business w long term insurance business, the insurer musk keep, at all times, admitted assets of not less than the cgate value of his admitted liabilities and ten million shilln n per cent of his net premium income during its lst re sth mce business must maintain at all time in each of the areas of business. 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 busin. carried on by him, An insurer may establish and maintain a s statutory fiznd, under an appropriate name, in respect of any class 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 finds in respect of any class or classes of long term insurance business 5 h statutory fund must be kept distinct and from all other assets of the insurer.” 18.3.4 Regulation on Auditing and Reporti The Insurance quires all insurance companies to prepare their financial st s 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.” ‘other than a bank gu an licensed under the Banking Ac unsecured oa o intermediaries; and prepaid preliminary and organi expense defines Habe in wction Titers Ac sca jonJack Busalle Mwimal ‘The Act further prescribes the appropriate financial repor period of an in smpany licensed in Kenya. It requires that the financial statements of an insurance company are to be audited on an annual basis, The Companies Act also sets specific disclosure requirements for com jorated in the country which would include insurance companies (as insurance business must necessarily be carried out by incorporated companies Other pertinent ined by the Companies Act are disclosures on ¢ <' remuneration for che year; depreciation and amortizatio pital and reserves e ct also deals with share capital, provi axation matters, Section 198 requir 4 party borrowing. Further to this, jorates on section 162 of the Companies Act. xt the matters that should be expressly stated on ort including whether they have obtained all the nd explanations which tc their knowledg ief were necessary for the purposes of their audit; v ‘heir opinion, proper books of account have been kept bi pany, so far as appears from their examination of those b peseribe Insurance Act, section 56. The section p ser th cnflicting requirements between the Companies Act nd the Ine Ill ofthe Sach Schedule to the Companies Act geanis nptions for eened a scheduled Banks and Teurance Companies. Paragraph tll ofthe Sint Schedale of the Ac states hat" A insurance company sin the Insurance Companies Act, whichis sbjet 0 the requizements of that pecs the pee tar of ineance companJack Busalle V Regulatory mechanisms and d for the purposes of their at visited by them The Insurance Core Principles (ICPs) develop: International Association of Insurance Supervisors (AIS guidance to insurance supervisors on how to enhan individual supervisory systems for their respective jurisdictior ply to all insurance supervisors regardless of their le opment or sophistication. ICP 20 deals with disclosure of information. It supervisor to require insurance companies to disclo hensive and adequate information on a timely ba order to give policyholders and market participants a clear view of business activities, performance and financial position, This is expected to enhance market discipline and understanding of the risks to which an insurer is exposed and the manner in which those risks are managed. Further, the ICP 20.0.2 touches on the matter of the appr financial reporting framework for a jurisdiction. It states that so far as practicable, information should be presented in accordance with any generally applicable accepted national and international standards and practices so as to aid comparisons between insurance companies. Other relevant ICPs include, ICP 14 on valuation, which requires the supervisor to establish requirements for the valuation of assets and liabilities for solvency purposes; and ICP 17 on Capita Adequacy, which requires the supervisor to establish capital adequa \cy purposes so that insurance companies c b significant nfo losses and to provide for degrees of The International Financial Reporting Standards (IFRS) ar appropriate rting framework for insurance cor in Kenya, Under the Accountants Act,” the Council of the I of Certified Public Accountants of Kenya (ICPAK) adop ane Act, section 10 authorises the Council testIERGs as an appropriate financial reporting fram January 1999 f¢ anies. 18.3.5 Regula Registered insurers, reinsurers, brokers, agents, mi rovid ce surveyors, risk managers, loss assesso adjusters and ccling agents are required to h officer Jdent in Kenya who are responsible for the general tion and supervision ofthe insurance business." Insurer cstricted from being directed or managed byaperson mneration ot any part thereof takes the form of commission or bonus or ofa share in the valuation surplus in respect ance business. To avoid a conflict of interest or employee of an insurer cannot manage ot b + insurer of of a bank or financial institution. oo agent or broker (and where the agent or s company or firm, no managing or other of th firm) may be appointed 2s a director of an insurance in Kenya. These persons cannot aso directly or indirectly hold more than one per cent of the shares or controlling, ompany, Conversely, no insurer and no of an insurer may directly or indirectly hold her financial or controlling interest in the mn of these isan offence we been imp xpenses of insurance mpanies.®® No insurer can spend as expenses of management in sancial year an amount in excess of the prescribed limits sion 69, This do crappy to the employment of ges the employment of persons who share in th general mee rete or oher The los on 70 sr const Aleisory Hous, In prescelbing the limi the den and age 0 the insure and the provision generally made for anagem> Busia Mvimal Other restrictions under the Insurance Act inclu on loans, advances, etc. by insurer; limitation on em managing agents; restrictions on rebates, brokerage etc 18.4 PROTECTION OF POLICY HOLDERS 18.4.1 Protection by the Court The principal way in which a policy holder or a beneficiary thereof can get protection against exploitation by insurers, or even th existing regulatory authorities, is through civil litigation in court, In Kenya, an application will be made under the provision of the Civil Procedure Act. It should, however, be understood that litigation is expensive and the cost of pursuing one’ rights in court faces the challenge of delays. An example is apt Consider the plight of an employee who is forced to sue his or her insurance company because ic refuses to pay for certain medical cost due to a dispute over whether hospital procedures an insurance policy After a long and time-consuming legal batle, even if the employee ultimately wins, the attorney's fees incurted along th ‘way may equal or even dwarf the recovery. The same can be said of a contractor who is forced to sue its insurance carrier because it refs to defend and indemnify the contract ¢ water dan that arose during a cons contractor + damage was acd "under its comprehensi al liability policy, the carrier disagrees and litigation ensues dlotermitie what is (and is not) covered. At the end of the day, even the contractor prevails, the contractor will never be made whole and ethaps the contractor’ dollars would have been better directly with the building owner rather than [Neal M. Bieman, Who Will Seep U 1 Plicyholder?* 2012)18.4.2 The Insurance Appeals Tribunal The Insurance Act provides for the establishment of a quasi-judicial tribunal for the purpose of arbitrating on cases and appeals arising from decisions mad Insurance Regulatory Authority.” The Tribunal consists of a chairman and between two and four other members appoint nist met if the chairman and two othe The Insurai cals Tribunal) Rules provide that smplaint to the y way of memorandum of appeal th the grounds of appeal. Thi nied by the a The Tribunal has the power to make such orders as may be the ends of justice ot to the abuse of the Tribunal.” The Rules set out how service of the Commissioner of Insurance is to be done take place in a matter before the Despite the existence of this Tribunal, it has been noted that nts still file insurance related cases and disputes in the ing arbitration, according to the tribunal's Protection of Consumers the Insurance Regulatory Authority which consumers can be protected is the zulatory Authority. Indeed, one of the functions of the _gulatory Authority is to r and handle complaints AppealsTribunal) Rus rane (assrance Appeal Tribunal) Res, 2013 rule 3. Oa nsrance Tribunal dle As Cases Plein Cours The Star, 5 March 2013ed with it." Individuals and bodies such as agents can ask the Insurance Regulatory Authority to intervene in matters relat rance_policie by insurance companies which ai c rights and interests of policyholders Complaints can invol ment concerning liability issued, or amount offered for settlement. It can also be in respect of a delay in settlement of a payable claim. ® Complaints to the Authority must be that the insurance company or othe bodies complained against ha Asa general rule,complaints and disputes should usually be made iting within three the act or omission complained about or disputed, 18.4.4 Payment from the Policy Holders’ Compensation Fund For the protection of policyholders, the Minister is required to establish apolicyholder’s compensation fisnd to provide compensation to policy holders ofan insuret wound up. * The Minister may require ment ofa monthly contribution to the Fund to be paid policyholder and insurer, in such amount and at such times as the Minister may, in consultation with the Board, prescribe. The Minister appoints the Board of Trustees for the management and administration of the Fund. The Board is a body corporate with perpetual succession and a common seal, capable of suing and being ued; taking, purchasing or otherwise acquiring, holding, charging disposing of movable or immovable property; borrowing or lendit money, and doing or performing all such other acts ne orgs oe and power are vested init by weve the IRA will ot han compints submited IE complinane didnot know about the mate iimal the proper performance of its functions under this Act which may lawfully be done or performed by a body corporate in its corporate name. A Managing Trustee appointed by the Minister is the chief ative and secretary to the Board, The fanctions of the Board shall be to provide compensation to ders of vent insurer; monitor, in consultation with the Commissioner where necessary, the risk profile of any insurer; advise the Minister on the national policy to be followed with relating to compensation of policyholders and. to impleme vernment policies relating thereto; and pei stich other functions as may be conferred on it by written law. 18.5 INTERVENTION IN| MANAGEMENT OF INSURANCE COMPANIES IN CERTAIN CASES Due to the economic impact that failure of insurance companies has had, it has become necessary for state intervention on the ‘management of insurance companies. In Kenya, the power of the Insuirance to intervene in management is provide in section 67C of the Insurance Act 5.1 When the Power is Exercisable fers may be exercised in the following circumstance () If the insurer is found to ¢ minimum sney margin required under sec the Act If the insurer has filed to submit any of the accounts, return: atements, actuarial valuations or other reports under Part VI f over six months after che end of the financial year to which thi ¢ insurer has filed co comply with any requirement of thi Act, or has continued to contravene the Act for a period of ths after notice of such failure or contravention has been given to him by the Commission Commissioner is satisfied that the person cann ‘or any part of the business, for which he may be, in a satisfactory and efficientmanner having regard to the financial circum () an amount insu in an action in Kenya arising out of a py by the insurer or a contract of reinsuranc reinsurer, has remained unpaid for three mot the final adjudication in that action: i) lf the business of the insurer is wholly or is un-prop vii) If an insurer is unable to pay his debts within the meaning of (if) Ifthe insurer is found to have ma un d the level of his liabil (és) If the insurer is discovered to have submitted or provided am accounts, returns, statements, books, records, correspondence, documents or other information n business which is false ot misleading; or (9) If the Commissioner whether on an inspection or otherwise, or becomes aware of any fact ot circumstance which, in his opinion, warrants the exercise of the relevant power in the interests of the insures, its sharchol reinsurer or in the public in 18.5.2 How the Power is to Be Exercised Intervention on management is initiated by the Commi Insurance, who may (Appoint 2 manager co assume the management, control and conduct of the affairs and business of an insurer, and to exerci all the powers of the insurer to the exclusion of its board directors, including the use of its corporate seal; (ii) Remove any officer or employee of an insurer who ha or contributed to any contravention of any provisio Act, or any regulations or directions made thereunder deterioration in the financial stability of the insurer guilty of conduct detrimental to the inten(ii) Appoint three competent persons familiar with the business of the insurance to its board of directors to hold office as dir who shall not be removed fiom office without the appr (iv) By notice in the Gazette, evoke or cancel any existing power of attorney, mandate, appointment or other authority by the insur in favour of any officer, employee or any other person. ‘The appointment ofa manager by the Commissior ‘welve months, but this period may be extende upon the application of the Commissioner. Upon assuming the management control and affairs and business of an insurer, the Mana o discharge his duties with diligence and in accordance with sound insurance, actuarial and financial principles and, in particular, with due regard to the interests of the insurer, y-holders and the insuring include ceuring all the asets and property of the bis and other sums of money due to and owing to the insurer i)_Evaluating the solvency and liquidity of the insurer; ) Assessing the insurer’ compliance with the provisions of he Insurance Act and regulations made or directions issued hereunde mining the adequai management of the insurer him on behalf of the Dbraining from any former principal offic nployee of the insurer any accounts orrespondence or informationager has power to declare a moratorium on the payment by the insurer of its policy holders and other creditors. The declaration of a moratorium shall be applied equally to all classes of policy holders and creditors, subject to such f insurance as the Man; specify The moratorium ceases to apply upon Manager's appointment. Thereafter, the rights and obligations of the i its policyholders and creditors revert to the position before the declaration of moratorium. The moratorium, however, has the effect of suspending the running of time for the purpose of any lav imitation in respect of any claim by any policyholder or cr the insurer. Within a period of twelve months fiom the date of his appointment, the Manager is required to prepare and submit to the Commissioner a report on the financial position and the ‘management of the insurer with recommendations as to whether (The insure ie capable of being r i) The insurer should be liquidated. After taking into account the report of the Manager, the Commissioner shall make appropriate recommendations to. th Board, who shall then take a decision on the mutter. Where the Board decides that the insurer should be liquidated, the provisions of section 123 (on petitions for winding up) shall apply ‘Acts or omission in this part will not make the individual iabl if it is done in good faith in the execution of the duties. nsurance re ystems has on the local market 50 as to protect the policyhol the global market and ¢ of the br“Insurance supervision is focused on the wrong problems.” He note that ‘omtnissioners focus on the solvency of insurers, they do so from ynsumer protection perspective, ‘means they consider whether firms are likely to be ab their policies, rather chan on the effect th they have on the finaneial