Banks that run insurance businesses will have to pay all outstanding insurance premiums before getting new bancassurance licenses amid suspicions that they are holding cash from customers, which could render policies invalid.
The Insurance Regulatory Authority has written to all bancassurance intermediaries – banks and microfinance banks that sell insurance in partnership with insurance companies – to settle any unpaid premium or risk going out of business.
The regulator believes banks are keeping insurance premiums they receive from people seeking coverage against risks such as fire, accident and death.
This suggests that insurance companies may refuse to accept claims for cash they have not received from banks and MFIs, exposing policyholders to risks.
The IRS warning means banks and small insurance companies will have to pay off the balances within days because they require new licenses before the end of September for the year that begins in January.
“Evidence of settlement of insurance premiums due for the period ending December 2023 in accordance with Section 55 of the Insurance Act,” reads the August 9 bulletin from Godfrey Kiptum, CEO of the Individual Retirement Account, without specifying the amount due.
Section 156 of the Insurance Act requires insurers to only recognise risks from customers whose premiums have been received, making it necessary for the regulator to push for a reduction in outstanding payments.
Banks and microfinance companies have protested against individual retirement account terms that link license renewal to settlement of unpaid insurance premiums, arguing that clients have not yet transferred full insurance premiums.
In addition to the insurance premiums due, the insurance regulator seeks a license renewal fee of Sh20,000 and a bank guarantee or government bond of Sh10 million.
“The outstanding premiums are those due from customers. We should not be penalised for customers not paying their premiums,” said Aggrey Mulumbi, chairman of the Bancassurance Association of Kenya.
“The bancassurance regulations apply to the requirement to pay insurance premiums to insurance companies, so when banks collect insurance premiums, they are paying.”
Data from the Indian tax department shows that 17 banks and six microfinance banks are licensed to offer bancassurance. The licenses are set to expire in December.
Mr Kiptum explained yesterday in a telephone interview that the unremitted insurance premiums requested by the IRA from banks had been received by the bancassurance brokers and should be remitted to the insurance companies.
The IRA has in the past issued similar terms to insurance brokers regarding unpaid insurance premiums that accumulated and left clients exposed.
Outstanding insurance premiums linked to brokers rose to Sh41.77 billion in 2018 and fell to Sh35.73 billion at the end of 2019 after the regulator warned agents that it would not renew their licenses pending settlement of outstanding amounts.
However, the figure has increased over the past four years, reaching Sh45.25 billion at the end of 2022 and Sh52.25 billion at the end of June 2023.
All bancassurance companies must renew their licenses this month or pay a fine of Sh20,000 for any late application. Trading without a valid license attracts a fine of Sh200,000 for each proven incident.
In addition to leaving customers exposed, the failure to remit premiums also hurts the liquidity of insurance and reinsurance companies, jeopardizing the ability of some to meet claims.
Some insurers have also been responsible for delaying payments to reinsurers who help settle a share of the larger and more serious claims, indicating the extent of the premium problem in the sector.
The latest financial results indicate that the bancassurance sector is one of the fastest growing sectors for banks. Most of the listed banks recorded double-digit percentage growth in the profits before tax from their bancassurance subsidiaries in the financial year ending December 2023.
For example, Absa Bancassurance Intermediary Limited, a wholly owned subsidiary of Absa Kenya, recorded a 41 percent rise in pre-tax profits to Sh1.32 billion to top the bancassurance profitability chart.
Last year also saw Stanbic Bank Kenya’s Bancassurance subsidiary, KPMG, surge 97 per cent in gross profit to Sh308 million, while I&M Group’s profit increased 10.4 per cent to Sh260 million.
KCB’s bancassurance subsidiary saw its pre-tax profit rise 16 per cent to Sh737 million last year, while NCBA’s profit grew 83 per cent to Sh292 million.
Group life insurance business has been the low-hanging fruit for banks that have entered the insurance business, especially through bancassurance, where mandatory cover is easily sold to customers who come for loans.
Banks also have the upper hand in auto insurance because they know which customers want to buy vehicles before the insurance companies do, and they can use this opportunity to sell auto insurance as well as offer asset financing.
Since insurance premiums are paid in advance, banks also have the upper hand in relying on their own loan book to provide premium financing.
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