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Insurance sector on verge of collapse

Dumisani Muleya

A NUMBER of insurance companies are facing collapse or forced mergers following a recent dramatic increase in paid-up share capital requirements. Companies have been given a March 31 dead

line to register under the new conditions prescribed by the Commissioner of Insurance.

Under the new requirements, re-insurance companies now need $2 billion in paid-up share capital, short-term insurance companies $800 million, long-term firms $800 million, funeral assurance $750 million, insurance brokers $250 million and multiple agents $150 million.

These new capital regulations are very high compared to the few millions that were needed by insurance companies – short and long-term firms including mutual societies – in the past to operate.

Documents to hand say the new regulations were designed to ensure the security of policyholders and protect the broader financial system from bogus operators.

“The paid-up share capital should not include working capital injected as administrative expenses in setting up the project,” the documents say.

“The investor shall produce audited accounts for the previous financial year or a bank statement showing proof of capital.”

The companies will also pay new application, registration and renewal fees for licences. The licences will have a lifespan of between two and three years.

Insurance brokers and multiple agents would be compelled to open up a trust account where all the premiums would be kept before passing them on to the relevant insurer. This account would be monitored by the Commissioner of Insurance from time to time.

“Brokers and multiple agents are to submit name of independent bank and provide reconciliation statements or cash-in cash-out report on a monthly basis,” the documents say.

“More emphasis is placed on the security to policyholders and hence the requirement for professional indemnity cover and insurance/bank guarantees and trust accounts (to protect) policyholders.”

Insurance brokers who are already trading need indemnity cover or bank guarantee of $100 million or 50% of net brokerage income, while multiple agents need $20 million or 50% of net brokerage income.

Insurance companies are also required to meet stipulated requirements on the margin of solvency.

Non-life assurance companies would be considered as having a sufficient margin of solvency if the total value of their assets in respect of such business exceed the amount of their liabilities by $200 million or 25% of the net premium income of the preceding year.

With regard to life assurance business, firms would be considered as having a sufficient margin of solvency if the total value of their assets exceeds the amount of their liabilities under unmatured life policies by $200 million.

Insurance companies are currently in the same situation as banks with regard to capital adequacy issue.

Commercial banks now need $10 billion in capital compared to $500 million last year. Merchant banks and finance houses require $7,5 billion, up from $300 million.

Building societies now need $7,5 billion compared to $300 million, while discount houses require $5 billion, an increase from $200 million. As a result some banks face the prospect of either closing down or merging.

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