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Recapitalization and implementation of compulsory insurances

13 November 2019 at 05:14 | 629 views

Recapitalization and implementation of compulsory insurances in the Sierra Leone Insurance Industry: A review and impacts of the Insurance Act, 2016 on the Insurance industry and the economy.

By Kortor Kamara, Special Contributor, USA

The Sierra Leone Insurance Act, 2016 ushered in very stringent compulsory recapitalization requirements, on both existing and new Insurance companies operating in Sierra Leone, coupled with codification of several new compulsory insurance coverages, such as professional liability for medical practitioners.

This article is designed to review both the economic and industry impacts of the recapitalization and efforts, if any, towards implementation of the various compulsory insurances.

Recapitilization Overview

While voluntary and regulatory-mandated recapitalization of Insurance businesses are generally a sound corporate capital reorganizational strategy or tool - designed to effectuate reforms by instilling public confidence in the industry’s financial strength - it’s use by regulatory fiat and directives without a sound risk based macro economic market analysis, can have negative unintended consequences, such as industry consolidation, constriction, additional debts and forced mergers and acquisitions.

Prior to passage of the 2016 Insurance Act, the sum of 25 million Leones as paid-up capital for each class of insurance business, was the amount required payable for registration by insurance companies. In addition, the 2000 Insurance Act, provided for a deposit of 15 million Leones at the Bank of Sierra Leone. The total sum of 280 million Leones was the amount required for paid-up capital, licenses and deposits for the seven classes of insurance business.

The 2016 Insurance Act however increased the paid-up capital requirements from 25 million per class to 480 million Leones per class of insurance business. In addition, a statutory deposit of 300 million Leones per class of insurance business was imposed.

Thus, for a company to fully participate in the Sierra Leone insurance industry, a total amount of five billion four hundred and sixty million Leones, to cover paid-up capital and deposits will be required to obtain an annual insurance license, covering all seven classes of business, viz:
(a) life insurance business and long term insurance business;
(b) fire insurance business;
(c) marine and aviation insurance business;
d) motor insurance business;
(e) miscellaneous insurance business;
(f) re-insurance; and
(g) oil and gas insurance business.

Economic impacts of high recapitilization

Barely two years since implementation, the grossly increased recapitalization requirements enshrined in the 2016 Insurance Act, are already having a debilitating economic impact on especially locally owned private insurance businesses.

Firstly, despite great potential for penetration and growth in the industry, especially with the addition of the several new compulsory insurances, the current recapitalization regime has resulted in a radical curtailment of multi class registered companies. Several insurance companies have since implementation of the 2016 Insurance Act, elected to become single class carriers, mostly offering only the lucrative motor third-party insurances, with no concomitant claims payments, to remain afloat.

Secondly, the intended public confidence the very high paid-up share capital and statutory deposits, the recapitalization was intended to generate, have largely failed as insurance penetration rate still remains abysmal in the country.

Thirdly, with the expected consolidation, closures, mergers and acquisitions due to the inability of smaller and financially less viable carriers to raise the required high paid-up capital and statutory deposits, unemployment is likely to occur in the industry.

Fourthly, with the aggressive expansion of foreign insurance companies, mostly from the West African Sub region over the past decade, the increased capitalization rates, while onerous on some of our local businesses, are however still very
attractive to companies from say Nigeria or Ghana.

Finally, the upcoming years are destined for failure, unless a risk based and sustainable macro economic realistic regulatory based recapitalization, consistent with the economy and shareholding in the Insurance marketplace is taking into consideration.

Have all insurance companies complied with recapitlilization directives?

Generally the lifeblood of any financial or regulatory institution is the ready availability of data for business and public consumption.

However, the Sierra Leone Insurance industry has consistently failed to provide adequate and timely data on its financial condition to both governmental regulators and the general public. Compounding this has been the inability of the SLICOM to enhance compliance, consistent with international best practices.

The 2016 Insurance Act provided a 2-year period for compliance with the new recapitalization laws by existing insurance companies, ending in 2018.
However, we have as yet to officially see published reports of compliance, especially among locally owned insurance companies. Since it’s anticipated that not all insurers are financially able to meet the statutory deposits and recapitalization requirements, consolidations, mergers and acquisitions or industry constriction are mostly likely in the short to medium term.

The lack of compliance, monitoring and enforcement of laws and regulations has always been the bane and catalyst of our nation’s underdevelopment.

A school of thought is gradually emerging in the insurance industry on the continent-the proponents of which advocate the utilization of risk management, insurance and micro insurance solutions-as a catalyst and vehicle for governance, poverty reduction and socio-economic development in African countries.

The proponents contend that risk management and insurance can play a major role in advancing the development of Africa, in areas encompassing not only how we govern ourselves, how business is done, how we market our mineral resources and other assets, but how governmental policy programs such as health care delivery and management, procurement and contracting are implemented according to international best practices.

How is the SLICOM ensuring compliance with compulsory insurances?

In addition to the prior compulsory motor vehicle liability insurance, the 2016 Insurance Act has further codified the following as compulsory insurances in Sierra Leone:
1) Compulsory tenantable or public properties insurance against fire by colleges, hospitals, entertainment centers, office buildings, dwelling houses, factories and shops.
2) Employer’s liability insurance, for any employer with 5 or more employees.
3) Building insurance: All over 2 storey buildings under construction must be insured against public liability, such as injury or death to the public and or damage to neighboring property as a result of falling objects or excavation.
4) Compulsory professional indemnity for medical professionals, dentists, pharmacists, nurses in private practice only.

Case study on the medical professional indemnity coverage

Such is the case with the lack of implementation of the Sierra Leone Insurance Act, 2016 relative to the compulsory mandate for all private practicing hospitals and medical professionals to obtain professional liability insurance as a prerequisite to practicing medicine in Sierra Leone.

Specifically, Section 108 of The Insurance Act, 2016 quoted below, mandates compulsory indemnity insurance for medical professionals, inter Alia:

“(1) Every medical practitioner, dental surgeon, pharmacist, nurse, laboratory technician practicing in Sierra Leone shall within such time after the coming into operation of this Act as the Minister after consultation with the Minister responsible for health shall determine, insure the practice.

(2) Subsection (1) does not apply to medical practitioners, dental surgeons, pharmacist, nurses and laboratory technicians practising in public institutions.

(3) Any person who contravenes subsection (1) commits an offence and shall be liable on summary conviction to a fine not exceeding Le 10,000,000.00 or to a term of imprisonment not exceeding two years or to both the fine and imprisonment”.

The above provisions of the Sierra Leone Insurance Act, 2016 however provide a double-edged sword, as while medical practitioners are subject to the mandates of section 108(1), subsection (2) essentially precludes nearly ninety percent of the same medical professionals, as most of them are employed by and practice in public institutions, owned and managed by the government.

Conclusion

In conclusion, a review of the recapitalization amounts need to be embarked upon with active participation of the industry stakeholders, utilizing applicable market research based data analytics that the market can support. The very low premium and penetration rate generated by the industry does not seem to justify such a huge increase in share capital and deposits capitalization.

While acknowledging the role of the regulator in protecting insurer solvency so that contractual commitments to insureds and claimants are appropriately adhered to and can be met, the actuarial, market and risk-based analytics employed in raising the recapitalization share capital and deposits appears unjustified.

With the current government’s emphasis on data based solutions to drive national development, insurance regulatory analytics use by the regulators would greatly be beneficial in identifying penetration and growth potential of insurance in Sierra Leone.

Finally, enforcement of the compulsory insurances mandated in the 2016 Insurance Act lies squarely on the Sierra Leone Insurance Commission (SLICOM). Compliance checks, procedures and processes to ensure that the segments of society targeted for compulsory insurances are adequately complying to forestall the risks intended to be mitigated.

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