On 13th January, 2017, the Insurance (Amendment) Act, 2016 (the Act) which was published in the Kenya Gazette Supplement of 30th December 2016 came into force. The Act has amended various provisions of the Insurance Act Cap 487 Laws of Kenya (the Insurance Act). These changes are highlighted below:
a) Recognition of Takaful Insurance business
The Act has amended the interpretation of insurance business under the Insurance Act to include takaful insurance business. Takaful insurance, which is insurance premised on Islamic sharia law, is based on group participation where the members in the group (policyholders) agree to guarantee each other against defined loss or damage. The group members make contributions to a common fund that allows each participant to be indemnified in the case of loss or damage. All aspects of the insurance must strictly conform to sharia principles including the prohibition of interest and gambling. With this amendment, adherents of the Muslim faith can now take up insurance that does not go against their faith. The Act further stipulates that an insurer who undertakes takaful insurance must receive a license to do so from the Insurance Regulatory Authority (IRA).
b) Capital Structure of the Insurer
The Act has amended the provisions of section 25 of the Insurance Act to provide that the capital of the insurer may consist of ordinary shares each of which has a single face value with voting rights and shall be irredeemable and non-cumulative preference shares in the case of a new company. In the case of an existing insurer, the capital may include the ordinary shares as well as any subordinated loans that have been approved by IRA, share premiums, reserves and any other form of capital that may be approved by the IRA. The Act further includes a new provision under section 25 of the Insurance Act to protect policyholders in the event of the liquidation of the insurer by providing that the capital provided shall not rank in priority to policyholders.
c) Capital Adequacy Ratio
The Act has also repealed and replaced section 41 of the Insurance Act which now requires all insurers to maintain the capital adequacy ratio, which is a measure of the available capital in relation to the required capital, of one hundred per centum (100%). In determining the capital required the insurer shall consider the capital for insurance risk, market risk, credit risk and operational risk as well as apply such capital charges on assets and liabilities as shall be determined by IRA from time to time.
The repealed section 41 of the Insurance Act provided for margin of solvency which required all insurers carrying on long term insurance business but not general insurance business to keep total admitted assets not less than the total admitted liabilities and Kenya shillings ten million (Ksh. 10,000,000) or five percent (5%) of the total admitted liabilities, whichever is higher. On the other hand, an insurer carrying on general insurance was required to keep admitted assets of not less than the aggregate value of the admitted liabilities and Kenya shillings ten million (Ksh. 10,000,000) or fifteen percent (15%) of the net premium income during the last preceding financial year, whichever is greater. An insurer carrying on both long term insurance and general insurance was required to maintain separate margins of solvency as described above.
Accordingly, by repealing and replacing section 41 of the Insurance Act, the Act effectively replaced the concept of margin of solvency with capital adequacy in determining the financial position of an insurer.
d) Actuarial Investigations and Valuation
The Act has made amendments to sections 57 and 58 of the Insurance Act to effectively require actuarial investigations to be conducted in respect of both general and long term insurance business and not just long term insurance business as earlier indicated. Further, the Act has introduced the requirement that the investigation should include a financial condition report providing an assessment of material risks and issues impacting on the financial condition of the insurer. As regards actuarial valuations, the Act has empowered IRA to prescribe the basis of valuation of technical reserves to be adopted in the valuations.
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