Banks running insurance businesses will have to clear all outstanding premiums before getting new licences for their bancassurance operations amid suspicion they are holding on to cash from customers in what could render policies invalid.
The Insurance Regulatory Authority (IRA) has written to all bancassurance intermediaries—the banks and microfinance banks that sell insurance in partnership with insurers— to clear any unremitted premium or risk being locked out of the business.
The regulator reckons that banks are sitting on insurance premiums received from people seeking cover against risks like fire, accidents and death.
This signals that insurance firms could decline to honour claims for cash not received from banks and microfinance institutions, exposing policy holders to risks.
The IRA’s warning means that bankers and microinsurers must clear the balances within days because they require new licences before the end of September for the year starting January.
“Evidence of clearance of outstanding premiums for the period ending December 2023 as per section 55 of the Insurance Act,” says the August 9 circular from Godfrey Kiptum, IRA chief executive, without specifying how much is outstanding.
Section 156 of the Insurance Act requires insurers to only recognise risks coming from customers whose premiums have been received, making it crucial for the regulator to push for a reduction in pending payments.
Banks and microfinance firms have protested the IRA conditions tying licence renewal to settlement of the unpaid premiums, arguing that customers are yet to remit the full premiums.
Besides the outstanding premiums, the insurance regulator is seeking Sh20,000 licence renewal fee and a bank guarantee or government bond of Sh10 million.
“The only premiums that are outstanding are outstanding from customers. We should not be penalised for customers not honouring their premium payments,” said Aggrey Mulumbi, chairperson at Bancassurance Association of Kenya.
“Bancassurance regulations stipulate that premiums should be paid to underwriters so when banking entities collect, they pay.”
IRA data shows 17 banks and six microfinance banks are licensed to offer bancassurance. The licences will expire in December.
Mr Kiptum yesterday clarified in a phone interview that the unremitted premiums that IRA is seeking from banks have been received by the bancassurance intermediaries and need to be wired to insurance firms.
The IRA has in the past issued similar conditions to insurance brokers for outstanding premiums that had piled and left customers exposed.
Outstanding premiums linked to the brokers had risen to Sh41.77 billion in 2018 and dropped to Sh35.73 billion at the end of 2019 after the regulator warned the agents that it would not renew licence pending clearance of the unremitted amounts.
The figure has, however, been building up for the past four years, hitting Sh45.25 billion at the end of 2022 and Sh52.25 billion at the end of June 2023.
All the bancassurance players must renew their permits this month or pay a penalty of Sh20,000 for any late application. Trading without a valid licence attracts a penalty of Sh200,000 for every established incident.
In addition to leaving customers exposed, unremitted premiums also hurt the liquidity of insurers and reinsurers, compromising the ability of some of them to honour claims.
Some insurance firms have also been culprits, delaying payments to reinsurance firms who assist in settling a share of larger and riskier claims. This points to the extent of the problem of outstanding premiums in the sector.
Latest financial results indicate that the bancassurance business is one of the fastest-growing for banks. Most of the listed banks posted double-digit percentage growth in pre-tax profits from their bancassurance subsidiaries in the financial year ended December 2023.
For instance, Absa Bancassurance Intermediary Limited, a fully owned subsidiary of Absa Kenya, posted a 41 percent jump in pre-tax profit to Sh1.32 billion to top the bancassurance profitability chart.
Last year also saw Stanbic Bank Kenya’s bancassurance subsidiary post a 97 percent rise in gross profit to Sh308 million as that of I&M Group increased by 10.4 percent to Sh260 million.
KCB’s bancassurance subsidiary saw its pre-tax profit rise by 16 percent to Sh737 million last year while that of NCBA grew by 83 percent to Sh292 million.
Group credit life business has been the low-hanging fruit for banks entering insurance, especially through bancassurance, since customers coming for loans are easily sold the mandatory cover.
Banks also have an upper hand on motor insurance because they get to know customers who want to buy vehicles before insurers do and can use such an opportunity to sell motor insurance as well as offer asset financing.
Given that insurance premiums are paid up front, banks also have an upper hand in relying on their own loan book to offer premium financing.
