As the disposable income basket gets smaller and smaller, insurance is relegated to the luxury basket and is no longer a priority for the average Joe. Consequently premiums written by insurance companies decrease and for some who have a small pool of clients, they risk not being able to cater for their day-to-day expenses and ultimately fail to honour claims as they come in. Three weeks ago the Insurance and Pensions Commission (IPEC) withdrew operating licences of three short-term insurance companies due to financial going concern problems and failure to meet minimum capital requirement of $1.5 million. The three companies: KFMS, Heritage and Excellence have had their licences revoked in terms of Section 23 of the Insurance Act (Chapter 24:07). All three companies had been suspended from writing new business at the beginning of the year whilst IPEC monitored their finances but they failed to secure new funding or investors to bolster their balance sheet positions. They join the likes of Altfin Insurance which also had its operating licence withdrawn last year due to similar reasons.
SMEZIM: Why has IPEC withdrawn the operating licences for KFMS, Heritage and Excellence?
ICZ: In 2013, IPEC passed a statutory instrument to increase the invested capital in short term insurance businesses from $750,000 to $1.5 million dollars. This was effective 30 June 2014 but the IPEC Commissioner gave non-complying companies in the sector up to 31 December 2014 to comply. Sadly, for these three, they have failed to meet the minimum capital requirements and according to the law, their registration certificates where withdrawn, effectively closing shop. Another statutory instrument was passed in 2016 to increase the minimum capital requirement for short term insurers to $2.5 million effective 31 December 2016. This was to align the law with Minister Chinamasa’s remarks during the 2015 mid-term budget to increase the capital requirement in-order to protect the public and increase confidence in the sector.
SMEZIM: What happens to clients who had policies with the companies?
ICZ: Due to its nature, short term insurance issues short term cover, thus not exceeding 12 months. In this unfortunate case, the insurance contracts become worthless and clients may have to seek new cover from the remaining registered insurance companies. Typically when a company is de-registered; it is forced to go into judiciary management whereby an estate manager handles the affairs of the company until all assets have been utilised to cover all liabilities including claims. We do not have a DPC (Deposit Protection Corporation) equivalent in our sector unfortunately but as you know in the process of liquidation you may get something, you may not, it’s a gamble.
SMEZIM: Are there any other insurance companies at risk of losing their licences?
ICZ: I can confirm that this new minimum capital requirement of $2.5 million might see smaller companies in our sector fold. We have urged small companies to merge where they cannot identify a suitable investor but this has failed, primarily due to clash of egos at the top. I however feel it would be a good move for those who can put their differences aside and merge to form a larger more stable company which meets the requirements and can continue to trade.
SMEZIM: What is your opinion on the current capitalisation levels of non-life insurance companies. Are they adequate?
ICZ: I think the new capitalisation of $2.5 million is adequate given that in South Africa their minimum capital requirement is R5 million which is about $400,000 and ours is way above that. However you will find that all insurance companies in South Africa have way above the minimum figure in terms of their capitalisation. I think the problem is not about the figure per se but the space is currently crowded with many small players who have done little to attract new business or diversify therefore making it hard for them to grow. This is why the regulator, IPEC has seen it necessary to have adequate levels of capitalisation to try and force small companies to come to the party.
SMEZIM: What do insurance companies in trouble need to do to turn around their fortunes?
ICZ: I think for now what is key is to ask shareholder to inject new capital which is liquid as those who are currently struggling are failing to pay claims as they arise. This has led to several complaints being reported to IPEC with clients complaining that they feel like they have been reaped off by insurance companies who have denied their claims for unworthy reasons. So if they sort out their liquidity positions, get their capitalisation levels in order I think they will be fine.
SMEZIM: So would you say there is a storm brewing in the insurance sector?
ICZ: Lol. The only storm brewing is these new capitalisation levels and if our players survive this storm then they are in the clear. However, they will need to keep looking at other ways they can grow their business either through new marketing strategies, mergers, diversification or other ingenious means for them to survive in the long run.