Mergers, acquisitions loom for insurers

Smaller insurers face take-overs from bigger players

Kampala, Uganda | ISAAC KHISA | A new push by the regulator to financially strengthen the country’s insurance industry is likely to trigger a wave of mergers and acquisitions as firms race to comply with new minimum capital requirements.

The new developments were communicated at the inaugural Ssebaana Kizito Memorial Lecture in Kampala on August 16.

Ibrahim Kaddunabbi Lubega, the chief executive officer of the Insurance Regulatory Authority of Uganda (IRA-U) said the rollout of the new licencing regime known as Risk-Based Supervision will ensure that insurance firms have capital at a level adequate to support its insurance business, taking into account the nature, scale and complexity of that business and its risk profile.

“We are soon inviting industry players so that we discuss and agree on how this will be implemented,” he said.

The changes follow the coming into force of the Insurance Act 2017 that requires the regulator to supervise insurers based on sensitivity of risks as opposed to the current compliant-based regime.

Kaddunabbi said it is inevitable that some companies could be forced to merge or acquire new ones to meet the capital requirements.

Though Kaddunabbi did not vividly reveal how the capital requirements are expected to go up, a source familiar with the new arrangements told The Independent that the new licencing system is likely to follow Kenya’s.

The source said whereas the regulator is seeking to implement the new regime before the end of this year, it could be pushed to early next year.

Kenya’s Insurance Regulatory Authority introduced a similar rule in 2016 requiring insurance firms to deposit 40% of the value of their property investments and 30% of their stock holdings with the regulator.

Mariam Nalunkuuma, the Senior Communications Manager at IRA-U told The Independent that the shift from Compliance Based Supervision to Risk Based Supervision is a global trend that the insurance sector in Uganda is responding to.

She said the new licencing regime seeks to offer more protection to the industry in that risks will be avoided and provided for, to ensure that investors, shareholders and policyholders’ interests are adequately safeguarded.

“Initially, Compliance Based Supervision required all players, irrespective of the risk levels of their companies to follow the same rule and meet for example the same minimum capital requirements.”

Nalunkuuma noted that with Risk Based Supervision (RBS) this shall not be the case. She said the RBS is going to facilitate the regulator have deeper understanding of the firm being regulated considering its risk profile.

This, she says, will encourage a strong risk management culture and thus reduce the regulatory burden.

“The adoption of a risk-focused supervisory framework will encourage insurance companies to develop and continuously update their internal risk management systems and foster sound risk management practices,” she said.

“This will therefore call on management and board of directors of the respective companies to provide stewardship and broad oversight of these entities.”

This new development implies that whereas most of the nation’s biggest insurance firms and foreign operators will be able to meet the requirements, the majority of the small ones might not make it onto the list.

Faith Ekudu, the public relations and Advocacy officer at the Uganda Insurers Association (UIA) said insurers are making every effort to ensure that they are ready to comply with whichever requirements RBS will come with.

However, she said the firms are yet to assess themselves on the impact of the new licencing regime to their businesses.

“As the decision to merge or otherwise will largely depend on the results of the assessment of each individual firm- which is yet to happen- it is a little premature to speculate as to which direction this will go,” she told The Independent in an email on August 20.

Uganda has 20 non-life and nine life insurance firms, one re-insurance and five health membership organizations and 33 insurance brokers.

Last year, the industry registered a 16% growth in premiums to Shs737billion, up from Shs 634 billion in 2016. In 2015 premiums were recorded at Shs 611billion.

The 2017 growth was supported by increased uptake of policies for agriculture, medical, infrastructure development projects and innovations geared towards development of customer-centric products.

Industry deals

Seven years ago, IRA-U increased the insurance firm’s minimum paid-up capital of Shs4 billion for non-life insurance, Shs3 billion for life, Shs75 million for brokerage firms and Shs10 billion for reinsurers.

This was up from Shs1 billion for both life and non-life insurance companies, Shs2.5 billion for reinsurers and Shs50 million for brokers, the lowest rate in East Africa.

This triggered a number of acquisitions and mergers. For instance, South African-based Sanlam Emerging Markets Limited acquired a 50.3 % stake in Niko Insurance Uganda in 2013. Last year, the firm acquired 100% Lion Assurance Company.

Similarly, Liberty Holdings Limited of South Africa acquired a 51% stake in Madhvani’s non-life insurance business, East African Underwriters Limited.

This followed Old Mutual, an Anglo-South African financial services company, which increased its stake in UPA insurance with a further acquisition of 37.3% to the current 60.7% stake in 2015.