1st

Annual Bancassurance

Conference Kenya / 2015

at

Villa Rosa Kempinski, Nairobi,

24th March 2015

REGULATORY PERSPECTIVE: POLICY DIRECTION

Presentation by:

Isaac P. Ng’aru

Ng’aru & Associates

.o

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“ A regulator must realize that better

regulation is more beneficial than more

regulation. This is because we must

ensure that innovations are not stifled by

heavy regulatory regimes.”

- Professor Njuguna Ndung’u, Emeritus Governor

CBK, 2013.

Overview on convergence of financial

services

Developments in the regulatory

Environment – Specific reference to Kenya

Possible future policy direction

Agenda

OVERVIEW ON CONVERGENCE

OF FINANCIAL SERVICES

FORCES DRIVING CONVERGENCE

Financial convergence relates to all kinds of

interfaces between financial suppliers and the

demands of all kinds of financial products or

services: Financial convergence is taking place at

different levels, namely:

Product

Financial

Investment

Distribution

Institutional

Regulatory

Convergence of Banking and Insurance

Risks Scenario

Important to distinguish between activities that supply

third party services, such as asset management and

brokerage, and activities that supply balance sheet

products, such as banks and insurance.

Third party service suppliers do not bear market risks,

but

Banks and insurance bears the risks fully or partially

(credit default risks for banks and technical risk of

insurers.)

There are five differences between banking and insurance, namely:

Banks mainly face Financial Risks (market, liquidity and credit risks)

while Insurers face Real Risks (underwriting risks) associated with

financial risks. For insurance, concentration of risks occurs on the

liability side of the balance sheet whereas concentration of risks occurs

on the asset side in banking.

Banks create economic liquidity from their assets: “money to lend

comes primarily from deposits”. In banking, social wealth is created ex

post facto to monetary creation. In insurance, the reverse holds.

Insurers do not create money; merely transfers existing money. In

insurance, creation of social wealth precedes the transfer of funds but

can also be ex post facto to the extent of insurers’ investment activity.

Insurer, unlike the banker, can leverage its liabilities to improve,

economic liquidity - enhance optimal allocation of resources. Hence,

regulators pay more attention to the liability side of the balance sheet

for insurers while they should concentrate on the asset side of the

balance sheet for banking.

Differences of Banking and Insurance

(1)

The fourth difference is that Insurance is a weaker source of systemic risk

(i.e. a risk of contagious liquidity crisis) than banking for four reasons:-

Liquidity from Insurance is transfer from prior creation of wealth but liquidity

injection from banks not dependent on this. Therefore, failure of an insurer

impacts policyholders, whereas insolvency of bank impacts a large number

of individuals, which can lead to panic.

Bank depositors use funds to cover daily cash needs. Only small portion of

claim policyholders have short-term liquidity needs. Situation aggravates

risk of panic in banking.

Bank depositors can withdraw all their money at any time, and immediately

without any penalty. Policy surrender in life insurance is more gradual and

more costly for policyholder.

Web of financial relationships of an insurer not tangled, but banks are part

of dense and interlocking network. Insurance, hence seen as risk absorber

and hardly would insolvency of an insurer trigger a macroeconomic crisis.

Differences of Banking and Insurance

(2)

The fifth difference is that the pooling of insurance

risks includes a specific inter-temporal dimension

apparently absent from banking. This relates to the

possibility of smoothing out impact of claims over

several generations of policies. Offers insurers

degree of flexibility strengthening ALM and ability to

deal with unexpected shocks. The drawback of this

dimension is that an insolvent insurance company

liquid, even for a number of years and illiquidity last

step of insolvency. Situation not thinkable for a bank.

As a result, regulators judge insurers on a long-run

basis while short-run consideration is more

constraining for banking supervision.

Differences of Banking and Insurance

(3)

DEVELOPMENTS IN REGULATORY

ENVIRONMENT

Issued under Section 3A (a), (b) and (g) of the Insurance Act

Cap 487 of the Laws of Kenya

(Still in draft form and being refined)

Contents include:

Introduction, Definitions, Objectives

Scope

Bancassurance Models

Approval and Licensing Requirements

Bancassurance Operations

Consumer Protection

Reporting Requirements

Enforcement

Effective date yet to be designated

IRA Guidelines on Bancassurance

Specialist Bancassurance Model

- Products distributed through insurance experts generally employees or

representatives of an insurance company.

- Bank identifies prospects contacted subsequently by the expert (Minimum

qualification: COP)

- Customer database of bank/financial institution made available to insurance

company to assess needs and provide required products.

(Basically, a referral system)

(No mention of : 1. Allowing use of F1’s premises and existing infrastructure.2.

Duration of agreement, for example, 3 years)

Integrated Bancassurance Model

- Distribution through existing branch network and employees sell products

In this model, a wholly - owned subsidiary to distribute insurance may be

formed.

Bancassurance Models

Under either model, applicants to submit :-

Application Fee

Agreements with an insurer

Appointment letter by Insurer

Relevant Board Approvals/Resolutions

Current Licence from CBK

Details of Principal Officer

Incorporation documents for a subsidiary

In addition, Customer Service Charter; Business Plan and Risk

Management Framework also required.

(C. F. In Uganda, in addition to orporate agency fee and Licence,

‘Designated Persons’ must also be licensed as Sub-Agents).

Licensing Requirements

Bank can use either model or both

Stresses Bancassurance is distribution channel

Not undertake underwriting risks or give impressions of

being underwriter

Principal Officer required

Technical Management Staff both with relevant qualifications

Products – Personal lines insurance policies only

Repackaged products must be approved by IRA

(C. F. in India: Clearly stated that the risks in insurance agency

should not get transferred to the core business of the bank. In

Uganda, a bank not allowed to be agent for own business.)

Bancassurance Operations

Client’s right of choice of product or insurer; no

coercion

No debit for premiums without client approval

Market Conduct Rules for Intermediaries apply

Policy document issued in 14 days and to be sent

to client

Policy terms and conditions to be explained

Credit insurer’s bank account on receipt from

client

Confidentiality of consumer date and information

Appropriate complaints redress mechanism

Consumer Protection

Quarterly Reports

Prescribed format for reporting

Any other pertinent issues encountered to be

reported to IRA

Annual Disclosures

External Annual Audit Reports

Annual Financial Statements to have notes on

income/revenue and costs/expenses.

Reporting Requirements

POSSIBLE FUTURE POLICY

DIRECTION

After ‘8.5. Products’; the issue of Commission, Claims

Handling, Pricing /Risk Assessment/Insurance related

documents; and Marketing Brochures and Sales Materials

could be added.

N.B. It is not clear how commission is to be shared in the

Specialist Bancassurance Model (unless covered in the Agency

Agreement).

Under “9 Consumer Protection”, the provision that “The Bank

shall not charge, to the policyholder, any service fee

processing fee, administration charge or any other charge

unless such charge has been included by the Insurer in the

premium and communicated to the policyholder in advance”.

Issues Guideline should address

Regulators will continue with their positive and supportive stance

on bancassurance. Regional integration of regulatory regimes

expected to align current guidelines in the long term interests of

stakeholders.

Globalisation of regulation, e.g through Basel III and Solvency II,

WTO, OECD, et al, could also affect local regulation.

Specific provisions for Life Insurance when banks start selling life

insurance products are likely.

CBK will probably have to add further guidelines to banks dealing

in bancassurance as further development unfold.

Guidelines will evolve into “Regulations” dependent on

development and direction bancassurance takes. Such

regulations would enhance various provisions of the guidelines as

well as contain other features

(C. F. Pakistan case)

Future Policy Issues

Thank You!

Questions?

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