Introduction

Insurance is a contract of reimbursement. For example, it reimburses for losses from specified
perils, such as fire, hurricane, and earthquake. An insurer is the company or person who
promises to reimburse. The insured (sometimes called the assured) is the one who receives the
payment, except in the case of life insurance, where payment goes to the beneficiary named in
the life insurance contract. The premium is the consideration paid by the insured—usually
annually or semiannually—for the insurer’s promise to reimburse. The contract itself is called
the policy. The events insured against are known as risks or perils.

Different forms of insurances available in insurance contract

Life Insurance

Life insurance provides for your family or some other named beneficiaries on your death. Two
general types are available: term insurance provides coverage only during the term of the policy
and pays off only on the insured’s death; whole-life insurance provides savings as well as
insurance and can let the insured collect before death.

Health Insurance

Health insurance covers the cost of hospitalization, visits to the doctor’s office, and prescription
medicines. The most useful policies, provided by many employers, are those that cover 100
percent of the costs of being hospitalized and 80 percent of the charges for medicine and a
doctor’s services. Usually, the policy will contain a deductible amount; the insurer will not make
payments until after the deductible amount has been reached. Twenty years ago, the deductible
might have been the first $100 or $250 of charges; today, it is often much higher.

Disability Insurance

A disability policy pays a certain percentage of an employee’s wages (or a fixed sum) weekly or
monthly if the employee becomes unable to work through illness or an accident. Premiums are
lower for policies with longer waiting periods before payments must be made: a policy that
begins to pay a disabled worker within thirty days might cost twice as much as one that defers
payment for six months.

1
Homeowner’s Insurance

A homeowner’s policy provides insurance for damages or losses due to fire, theft, and other
named perils. No policy routinely covers all perils. The homeowner must assess his needs by
looking to the likely risks in his area—earthquake, hailstorm, flooding, and so on. Homeowner’s
policies provide for reduced coverage if the property is not insured for at least 80 percent of its
replacement costs. In inflationary times, this requirement means that the owner must adjust the
policy limits upward each year or purchase a rider that automatically adjusts for inflation. Where
property values have dropped substantially, the owner of a home (or a commercial building)
might find savings in lowering the policy’s insured amount.

Automobile Insurance

Automobile insurance is perhaps the most commonly held type of insurance. Automobile
policies are required in at least minimum amounts in all states. The typical automobile policy
covers liability for bodily injury and property damage, medical payments, damage to or loss of
the car itself, and attorneys’ fees in case of a lawsuit.

Other Liability Insurance

In this litigious society, a person can be sued for just about anything: a slip on the walk, a harsh
and untrue word spoken in anger, an accident on the ball field. A personal liability policy covers
many types of these risks and can give coverage in excess of that provided by homeowner’s and
automobile insurance. Such umbrella coverage is usually fairly inexpensive, perhaps $250 a year
for $1 million in liability.

Workers’ Compensation

Almost every business in every state must insure against injury to workers on the job. Some may
do this through self-insurance—that is, by setting aside certain reserves for this contingency.
Most smaller businesses purchase workers’ compensation policies, available through commercial
insurers, trade associations, or state funds.

2
Automobile Insurance

Any business that uses motor vehicles should maintain at least a minimum automobile insurance
policy on the vehicles, covering personal injury, property damage, and general liability.

Property Insurance

No business should take a chance of leaving unprotected its buildings, permanent fixtures,
machinery, inventory, and the like. Various property policies cover damage or loss to a
company’s own property or to property of others stored on the premises.

Malpractice Insurance

Professionals such as doctors, lawyers, and accountants will often purchase malpractice
insurance to protect against claims made by disgruntled patients or clients. For doctors, the cost
of such insurance has been rising over the past thirty years, largely because of larger jury awards
against physicians who are negligent in the practice of their profession.

Business Interruption Insurance

Depending on the size of the business and its vulnerability to losses resulting from damage to
essential operating equipment or other property, a company may wish to purchase insurance that
will cover loss of earnings if the business operations are interrupted in some way—by a strike,
loss of power, loss of raw material supply, and so on.

Liability Insurance

Businesses face a host of risks that could result in substantial liabilities. Many types of policies
are available, including policies for owners, landlords, and tenants (covering liability incurred on
the premises); for manufacturers and contractors (for liability incurred on all premises); for a
company’s products and completed operations (for liability that results from warranties on
products or injuries caused by products); for owners and contractors (protective liability for
damages caused by independent contractors engaged by the insured); and for contractual liability
(for failure to abide by performances required by specific contracts).

3
Nature of insurance industry in east Africa

East Africa’s insurance industry grappling with disruptive regulations. The insurance industry
globally is currently racing to comply with significant changes in the regulatory environment and
accounting standards. IFRS 17 Insurance Contracts effective on January 1, 2022 is one such
change. The sector, amongst the most highly regulated, is central to financial services, providing
risk coverage, wealth, investment and fund management opportunities to a wide public.

In East Africa, the sector is under strict regulations on, amongst others, capital, commissions
paid to intermediaries, application of the ‘cash and carry’ rules and management expenses.

Risk-Based Capital (RBC)

The Insurance (Capital Adequacy) Guidelines requires insurers to maintain a capital adequacy
ratio of at least 200 per cent of the minimum capital by 2020. Insurers are required to monitor the
capital adequacy and solvency margins on a quarterly basis and file the results with the relevant
authorities. The main objective here is to safeguard the insurer’s ability to continue as a going
concern and to provide stakeholders adequate returns by pricing insurance and investment
contracts commensurate with the level of risk. Non-compliance with the required capital ratios
can lead to sanctions by regulators, who specify assets that are admissible in the determination of
the capital. As a result, insurers need to relook the quality of their assets to meet these
requirements. For instance, premium debtors are not admissible and attract a significant capital
charge.

Override Commissions

In January 2019, Kenya’s Insurance Regulatory Authority (IRA), through a circular re-cautioned
insurers, brokers, medical insurance providers and insurance against the payment of
commissions and/ or administrative fees above the limits prescribed by the Insurance Act. The
payment of override commissions has been used by sector players to win and retain business.
However, the practice can result in, amongst other things, unfair competition and affect
insurance product prices across the industry. The regulator has indicated punitive measures
against non-compliance which could include temporary or permanent withdrawal of business
licences.

4
Cash and Carry Rules

The “cash and carry” principle requires that premiums should be paid upfront or at the point at
which the cover is issued in order to ensure that insurer is able to settle claims appropriately. The
practical expediency of the cash and carry principle continues to draw mixed reactions from the
different players in the insurance industry as there are parties who still need credit to finance the
policies. Further, strict application of the rule has been hampered by the low level of insurance
penetration in the region despite the growth in population. Inability to apply this rule has resulted
in significant premium debtors in insurance business, hence depletion of working and regulatory
capital for the insurers.

Excess Expenditure

The Kenyan Insurance Act, 2015 states that “No insurer shall spend in any financial year as
expenses of management an amount in excess of the prescribed limits, and in prescribing those
limits regard shall be made to the size and age of the insurer and the provision generally made
for management expenses in the premium rates of insurers”. A recent analysis of the available
industry statistics indicates that expenses of management in insurance business are far greater
than the prescribed limits. Attempts by the regulator to enforce the above rule has not borne
much fruit due to the high inflation rate and increased standards of living, which has a direct
correlation with the level of management expenses incurred by the insurance companies.

Preparation of IFRS 17 Adoption

The standard sets out the accounting requirements that insurers should apply in reporting
information about insurance contracts they issue and reinsurance contracts they hold. It requires
a more granular analysis of the components of an insurance contract and the actuarial models
used in projecting future cash flows, discounting of cash flows and adjusting them for non-
financial risk in assessment of insurance liability. Adoption of the standard requires investment
in robust IT systems with capabilities to handle huge volumes of data for the required outputs,
finance, IT and actuarial specialists, and indeed those charged with governance, will be deeply
involved.

5
Insurance Market and Its Components

The term “market” is used for describing the facilities for buying and selling a product. An
insurance market therefore refers to the facilities for buying and selling insurance. Insurance, in a
broad sense, may include private insurance, government compensatory schemes and takaful
business.

Like any other market, the market for private insurance comprises the following main
components: Buyers; Sellers; and Intermediaries.

Buyers

The buyers of private insurance include individual persons, associations, societies, small
business enterprises, large national and multinational corporations, and public enterprises.

Sellers

The sellers of private insurance are the insurance companies. In 2007, there were 41 direct
insurers and seven professional reinsurers carrying on insurance business in Malaysia. Insurers
carrying on life business only are the life insurers; those carrying on general business are the
general insurers, and those carrying on both life and general businesses are the composite
insurers. Of the 41 direct insurers, there were six life insurers, 25 general insurers and 10
composite insurers. Of the seven professional reinsurers, five were registered to transact general
reinsurance business, one registered for life only, and one for both general and life reinsurance
business.

Intermediaries

The intermediaries or middlemen in the insurance market are composed of insurance agents and
brokers. The intermediaries’ main function is to match the needs of buyers with the insurance
product offered by sellers.

6
Conclusion

Depending on the terms of the agency agreement, an insurance agent may be authorized to solicit
insurance business, collect premiums, and issue cover notes on behalf of the insurer and is
remunerated through the payment of commission.

7
References

Arkell, J. (2011). The Essentail Role of Insurance Services for Trade Growth and Development.
Geneva, Switzerland: Geneva Association.

Baranoff, E. (2004). Risk Management and Insurance. Virginia, United state of America: John
wiley and sons,Inc.
Hassa, P. (2006). The Relationship of insurance and Economic growth-A theoritical and
empirical framework. EcoMOD conference. Hongkong.