Presented at the 1st Annual Bancassurance Conference | Villa Rosa Kempinski | Nairobi | Kenya. Lloyds Africa Markets

1. 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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2. “ 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.

3. Overview on convergence of financial
services
Developments in the regulatory
Environment – Specific reference to Kenya
Possible future policy direction
Agenda

4. OVERVIEW ON CONVERGENCE
OF FINANCIAL SERVICES

5. 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

6. 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.)

7. 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)

8. 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)

9. 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)

10. DEVELOPMENTS IN REGULATORY
ENVIRONMENT

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. POSSIBLE FUTURE POLICY
DIRECTION

18. 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

19. 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

20. Thank You!
Questions?
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