Insurance companies with low capital bases are unlikely to survive competition, a situation that may trigger mergers and buy-outs.
This will require insurers to seek additional capital to underwrite risks and take advantage of emerging sectors like mining and oil exploration.
Experts say the buy-out of Shield Assurance, an offshoot of the financially troubled Blueshield Insurance Company for Sh1.5 billion by the British firm Prudential Plc last week is an indication of the direction in which the insurance industry is heading.
“Insurance companies should consider changing their shareholding structure through mergers, equity and buy-outs. We need well-capitalised companies that can mobilise resources for long-term investment in infrastructural projects,” said National Treasury Secretary Henry Rotich.
He said a new insurance bill will soon be taken to Parliament as the government moves to align the supervisory role with the international best practices.
There are 48 registered insurance companies in Kenya, but about 10 take up 75 per cent of the premiums with the rest sharing the remaining 25 per cent.
The more stringent risk-based supervision of insurance companies that took off this year is expected to trigger the need for higher capital thresholds as each transaction should be justified on account of the ability to pay for the risk.
Earlier this year the Insurance Regulatory Authority said about five international companies had expressed interest in buy-outs and equity buy-ins into existing insurance companies.
The progress of the negotiations is yet to be made public, except for the Prudential Plc deal last week.
According to IRA chief executive Sammy Makove, each insurance company would have risk profiles assessed to enhance supervision in the industry, a departure from the system used for years based on the company’s ability to meet certain benchmarks, particularly capital base.
“This is a Basel International Standards requirement, and firms will have to comply. The face of the industry is changing with the entry of international players. We have been encouraging the international companies to invest in local companies and avoid opening greenfield (from scratch) operations. The industry will definitely see mergers,” Mr Makove said.
He said there is a disconnect between the minimum capital requirement and the risks covered by the insurance companies.
Experts say companies that have resisted mergers may have no alternative but to sell part of their shares to leverage on their different strengths and handle bigger business and meet supervisory requirements.
“The only way to grow is to consolidate and go to the East African region and other African states. Some of the companies are family outfits, but we need companies that can list at the Nairobi Securities Exchange to mobilise requisite capital for long term funding of projects,” Mr Rotich said.
The introduction of bancassurance (sale of insurance cover by commercial banks) will also see insurance subjected to supervision similar to that of banks.
The new changes include reducing individual ownership to less than 25 per cent to prevent mismanagement.
The regulator has also been given powers to force the resignation of executives and directors who are bankrupt or guilty of fraud and other malpractices in their business as well as in personal transactions.
Those controlling 10 per cent or more shares in a firm, directly or indirectly, will undergo integrity tests, and those found unfit will be forced to sell their shares.
The new regulations are intended to curtail the influence and power of major shareholders and ensure that those appointed to the boards and executive posts are people of high integrity.
