IRA’s Capital Adequacy Requirements Trigger Insurance Firm Mergers
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IRA’s Capital Adequacy Requirements Trigger Insurance Firm Mergers

IRA’s Capital Adequacy Requirements

IRA’s Capital Adequacy Requirements Trigger Insurance Firm Mergers

IRA’s Capital Adequacy Requirements Trigger Insurance Firm Mergers
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IRA’s Capital Adequacy Requirements

The insurance sector in kenya is undergoing one of the most challenging changes in its operating environment occasioned by a new IRA’s Capital Adequacy Requirements for insurance companies to raise their capital.

Short-term insurers are required to raise their capital from Ksh 300 million to Ksh 600 million.

Long term players will now be required to have a minimum capital of Ksh 400 million, up from Ksh 150 million.

These developments are meant to make insurance sector in Kenya more stable and to bolster the capacity of insurance companies in Kenya to absorb economic shocks.

The main challenge the sector is dealing with is dwindling profitability in a very competitive market. Some insurance classes such as health and motor insurance posted net losses in the last year.

The overall profits for the sector have also not been impressive, a fact reflected in the stock prices of most insurance companies.

Mergers, Acquisitions and Buy-Outs in Kenyan Insurance Sector

This is the backdrop of many corporate strategy meetings taking place in the boardrooms of insurance companies in Kenya. The options available for insurance companies are as follows.

Mergers

Old Mutual and UAP successfully negotiated a merger in 2015, a move that gave the two companies a stronger financial position coupled with expanded access to markets.

The merger was the first one likely precipitated by the new capital rules. The Oxford Business Group projects that the Kenyan insurance sector will see more mergers as companies work to meet the new capital requirements imposed by the Finance Act no 14 of 2015.

Old Mutual and UAP have already started operating jointly as a new single entity.

Acquisitions

Media reports in Kenya indicate that Jubilee Insurance had plans to acquire three car insurance companies in an effort to boost its market share. Jubilee insurance is one of Kenya’s largest and most profitable insurance firms.

In a past press briefing, the company’s CEO Patrick Tumbo indicated that the company was seeking to acquire the firms in a bid to strengthen the position of the company.

While jubilee attributed its acquisition intentions to market share, there is every possibility that other companies will consider acquiring other firms to boost their capital in a way that also boosts their market presence.

Buy-Outs

It is perfectly logical to expect some companies to wind down their operations if they see no real opportunities to raise their capital, or find that it will not make business sense for them to commit more capital to their businesses.

This is a reality especially for smaller firms that are currently struggling to turn a profit in the highly competitive sector. Some of them may transit to other strategic businesses, while others will possible sell their business to larger firms or those with the financial muscle to buy them out.

The next two years will redefine the insurance landscape in Kenya as firms seek ways of raising their capital and also seek market share to justify the new capital.

As the 2018 deadline set by the IRA approaches, players in the sector will become more frantic in their efforts to secure the capital needed to carry on operating. We can be sure that not all insurance companies currently operating in the Kenyan market will survive in their current forms.

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