1

December 2013

A WORD fROM THE EXECUTIvE DIRECTOR

“On November 22nd

2013, a Multilateral

Memorandum of

Understanding (M.O.U)

was signed at the offices

of the Association of

Kenya Insurers (AKI)

in Nairobi.”

Mr. Tom Gichuhi, AKI Executive Director

In the AKI Bulletin issues of April 2010 and August 2010, I wrote on the possibility of the fi ve East African Insurance Associations coming together and forming an East African Insurers Association. In those two articles, I had expounded on what I thought at the time would have been the core mandate and responsibilities of such an Association.

While the basic principle has not changed, a lot of work has already been done towards the formation of an East African Insurers Association. On the 24th September 2010, high level representatives of the respective associations met in Arusha Tanzania and unanimously agreed that there was need for such an Association. The meeting even attempted to put together what it thought would be the objects of such as Association.

In 2012, the process of putting together a bilateral memorandum of understanding was started.

On November 22nd 2013, after back and forth exchanges of communication between and among the Associations a Multilateral Memorandum of Understanding ( M.O.U) was signed at the offi ces of the Association of Kenya Insurers (AKI) in Nairobi. The memorandum of understanding addresses itself mainly to;-

The formation of the East African Insurers Association Co-operation in promoting the objectives of East Africa integration and establishing a fair and competitive Insurance Business Environment within the East African Region.

The long journey that started in the early part of 2010 is about to be completed. This fi rst step of the signing of the M.O.U is a major milestone. A lot is required to be done as we move towards the actual formation of the Association with all the attendant instruments in place.

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GENERAL INSURANCE UPDATE

A. Accident Technical Committee(a) CUSTOM BONDS SEMINARThe Accident Technical Committee organized the above seminar on 4th December 2013 at Sarova Panafric Hotel. The following papers were presented and well received by the participants:

(i) Bonds Underwriting and Cancellation by Mr. Suresh Kumar, APA CEO/Principal Officer

The Participants were taken through the following presentations:

1. General definition of bonds2. Underwriting principles and concepts

of bonds3. Various types of bonds and parties

involved4. Purpose of bonds and areas of

application5. Legal procedures that govern the

execution of customs bond6. Difference between Bonds and

Insurance

(ii) Customs Bonds Execution and Retirement by Mr. Mugambi Simon, Kenya Revenue Authority (KRA).The following areas were covered:

1. Execution and retirement of bonds2. Legal provisions on securities3. Forms of bonds4. Period of validity5. Procedure for bond execution

• The participants were informed that IRA issues KRA with the bond capacity of all Insurance companies annually. Any member whose capacity is queried should liaise with IRA and not raise the issue with KRA.

• The participants were encouraged to do due diligence on the principals to ensure that they are of good business repute before executing bonds on their behalf. It was noted that some principals with outstanding bonds move from one insurance company to another for bonds.

(iii) Regional Customs Transit Guarantee (RCTG) by Diana Odhiambo, Indigo Consultants.

The highlights were as follows:1. Recent developments2. Roles of the participating parties3. Fundamentals of RCTC Scheme4. Operational mechanism5. Primary surety6. Reinsurance Pool7. Joining the scheme8. Operational manual

The RCTG-MIS will assist the RCTG CARNET to be accounted for promptly before new ones are supplied by the National Sureties. It was noted that all members must register into the RCTG scheme by 31st December 2013 to

underwrite bonds in future.

(iv) Customs Bonds Single Window System by Mr. Daniel M. Kiange, KENTRADE

KENTRADE is a State Corporation established by the Government of Kenya in 2011. The mandate is to implement, operationalize and manage the National Electronic Single Window System in Kenya. KENTRADE facilitate trade by building capacity for government agencies and departments in cargo clearance and by facilitating electronic payment via any available option.

Key stakeholders for piloting are shipping lines, clearing and forwarding agents, Container Freight Stations, Insurance and Banks, Importers and exporters.Participants were encouraged to contact KENTRADE for further information and free training. The website is www.kentrade.go.ke

A section of the participants follow the proceedings at the Customs Bonds Seminar.

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GENERAL INSURANCE UPDATE

(b) OCCUPATIONAL SAfETy AND HEALTH (OSH) WORKSHOPS IMPACT ASSESSMENT SURvEy. AKI commissioned TNS to assess the impact of the OSH workshops that were conducted in conjunction with the Ministry of Labour. The sensitisation workshops were held in four regions:- Nairobi, Nakuru, Mombasa and Eldoret. The aim of the impact assessment is to find out if the workshops have assisted the insureds to improve their risks. A report was received and the Secretariat will organise a dissemination workshop. B. Motor Technical Committee. 1. Road Safety CampaignThe Secretariat organised a road safety campaign to run from the month of December up to early January 2014. The campaign was aired on Kenya Broadcasting Corporation and Milele FM. Members are encouraged to forward feedback on the same to the Secretariat.

C. Marine & Aviation Technical Committee

(a) Marine Cargo Surveillance SeminarThe Secretariat together with Oceanic Marine Surveyors organized the above

seminar at Voyager Hotel, Mombasa on 29th November 2013.The following papers were presented:

(i) Role of Cargo Surveillance Scheme by Oceanic Marine Surveyors:Participants were taken through the historical background of the scheme and how the scheme operates. Prior to 1980s, most imports were shipped as “loose or break-bulk” thus exposing cargo to risks of mishandling, pilferage and theft. This was reversed by shipping industry in an effort to increase efficiency in terms of vessels turnaround times and safety of cargo paving way to containerization of cargo. This too posed a challenge involving pilferage of cargo through skilful opening of containers without tampering with seals.It’s against this backdrop that AKI established a cargo surveillance scheme to safeguard marine underwriters against losses that were considered preventable. This is enforced through the Cargo Inspection Clause. Members continue to engaged the services of the scheme managers and this has seen a drop in losses especially pharmaceuticals and electronics.

(ii) Role & future of Container freight Stations (CfS) – by Daniel Nzeki

A CFS also referred to as Inland Cargo Depot is any facility that can act as a secondary customs clearance point for cargo. Mombasa port was seriously congested until 2002 when the port management entered partnership with private sector to engage the services of CFSs to ease the congestion by acting as the extension of the port. This reduced the cargo dwell time from 6 days to 3.6 days. The level of demurrage and pilferage reduced as CFSs are well secured and have advanced security measures to ensure safety of cargo.

There was also a presentation from Kenya Ports Authority and an afternoon tour of the port.

(b) Marine & Aviation Technical Seminar.

The Marine & Aviation technical seminar was held on 18th October 2013 at Sarova Panafric Hotel. The following papers were presented and well received by the participants:-

• Marine Hull Underwriting and Claims Procedures

• Marine Open Covers (Challenges & Recommended Solutions)

• Air Transport Conventions by Kenya Airways representative.

D. Medical Technical Committee.

fraud survey The Committee commissioned Maxworth Associates in August 2013 to carry out a fraud survey to establish the extent of fraud in health insurance. The exercise has been completed and a report forwarded to the Secretariat. A dissemination workshop will be organised in the first quarter of the year.

Participants who attended the Marine Cargo Surveillance Seminar pose for a group photo.

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LIfE INSURANCE UPDATE

4

Life Business Division

1. NSSf BILL, 2013

Various stakeholders came together to lobby against the bill and engaged the parliamentary committee on the various issues that stakeholders felt should be changed. The various stakeholders who came together under the leadership of KEPSA were; AKI, FKE, ARBS, KAM, LAPTRUST, KBA and APAK.

The Parliamentary Committee on Labour and Social Welfare invited the KEPSA led team for a meeting on 19th November 2013 to discuss the proposal earlier submitted to the Committee.

However, only minimal proposals were adopted by the Parliamentary committee before the bill was passed by parliament

and subsequently signed by the president. Details of the NSSF ACT, 2013 are covered under the Legal Section.

The Pensions Committee is exploring possible ways of changing the structure of the current schemes to incorporate protected rights to enable the schemes pass the scheme reference test in order to apply for contracting out of NSSF Tier II.

2. LIfE MANAGERS WORKSHOP

The Secretariat organised a Life Managers Workshop on 8th November 2013 at Zen Gardens. The workshop was very successful and the presentations were very well done. The managers

have given very positive feedback and the request that we hold the managers workshops more often.

Topics presented:-i) Topic: Reaching the Uninsured Market through Alternative Distribution Channels.

Presenter: Mr. Reuben Gathemia, CEO, SBO ResearchSession Chair: Mr. Richard Oyare , Asst. General Manager, Ordinary Life – ICEA Lion Life & Convener, Individual Life Committee

ii) Topic: Innovation & Product Development in Insurance - Getting it Right.

Participants who attended the Individual Life Seminar pose for a group photo.

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LIfE INSURANCE UPDATE

Presenter: Mr. Waweru Njoroge, Managing Consultant – Enterprise Dimensions ConsultingSession Chair: Mr. David Ogega, Head of Pensions -Jubilee & Convener, Pensions Committee

iii) Topic: Sectors that have frog Leaped in Growth -Lessons for the Insurance Industry.

Presenter: Mr. Abel Kabiru, Director – Enhanced Performance & Innovation CentreSession Chair: Mr. David Ronoh, CEO, CIC Life Insurance

iv) Using I.T to Revolutionalize Life Insurance.

Presenter: Dr. Bitange NdemoSession Chair: Brettah Muthuri, ICT Manager, AKI

2. INDIvIDUAL LIfE INDUSTRy SEMINAR

The Individual Life industry seminar was held on 29th November at the Sarova Panafric Hotel. The seminar was very well attended and was very successful.

The topics presented:-

i) Topic: Alternative Distribution Channels for Personal Life Business

Presenter: Mr Jack Kionga, Assistant General Manager, Ordinary Life, CIC Life

Session Chair: Mr Ezekiel Owour - Member, Individual Life Committee

ii) Topic: Exceeding Customer ExpectationsPresenter: Mr. Milton Otuoma, Managing Partner - Bellaton ConsultantsSession Chair: Mr Edward Gachoya,

Member, Individual Life Committee

iii) Topic: Individual Life Profit Drivers: Emphasis on Persistency Ratio

Presenter: Mr. Dennis Mworia, Actuarial Manager - Britam

4. MORTALITy REvIEW DATA

The Group Life data collected for this exercise had a lot of missing details on the dates of birth. This is a reflection of the trend in the market where underwriters are using unit rates and have abandoned the individual rating based on clients’ ages. This is a worrying trend because proper details enables the underwriter to rate the risk properly.

We would like to urge the industry to collect and keep proper details of insured persons for proper evaluation of risk.

5. GROUP LIfE TENDER PROCESS

The Secretariat has held several meetings with PPOA (Public Procurement Oversight Authority) and IRA to discuss the challenges encountered by insurance companies during the tender process. Following the meetings PPOA prepared a standard document on the procurement of insurance services. Some of the main issues that were incorporated are;

• Removal of the minimum premium income threshold that is a common requirement in most tenders. This does not in any way reflect on the financial soundness of the insurer.

• The issue of the list posted on the PPOA Website of Insurance companies licensed to transact bonds business continue to be misinterpreted

by procuring entities. It was agreed that a clear caption will be given and a reference made to the IRA website for the full list of underwriters.

• A list of all the requirements for both life and General Insurance business will be provided as appendices to the document. The procuring entities will be required to provide these requirements when the tender is requested.

• The requirements to be submitted with the tenders by the insurance companies will be minimised. The most crucial being IRA License, positive share capital and Reinsurance certificate.

6. UNIT LINKED POLICIES

The Secretariat has also noted that many life companies are discouraging the sale of the Unit Linked products with cases where companies have discontinued the sale of these products. This is attributed to the high commissions paid under this product. The structure of this product needs to be looked into given that in more developed markets, this is one of the best-selling products.

7. AKI Agents’ Registry

The Secretariat has completed the enhancement of the AKI Agents Registry to make it an online information management system that is able to generate reports on new agents, terminated agents and also analyze the trends on retention of agents. The registry will also capture fraudulent cases reported by the industry.

Two representatives from each company have been trained on the system use. The representatives will be the primary reference point for the system and will be responsible for the updates.

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LEGAL UPDATE1. NSSf ACT, 2013The NSSF Act, 2013 is now law and it upgrades the Old Provident Fund to a Pension Scheme. It took effect immediately in January, 2014 but both employers and employees got a temporary reprieve from the Cabinet Secretary Ministry of Labour who graciously extended the implementation date to 31st May, 2014It further enhances monthly contribution payable by both employers and employees to a combined rate of 12% of pensionable earnings per employee per month which is tax deductible despite the existence of any other written law. The Act establishes two new funds (a) The Pension fund where it is

envisaged members of the Old provident fund automatically become members except those who were making voluntary contributions. Persons 18 years and above upto age 60 are eligible to contribute

(b) A new provident fund where persons who are self employed, Retired persons above age 60 years and persons who do not meet the eligibility for membership of the pension fund can make contributions here. Since there is no lower age or upper age limit.

(c) The Old provident fund will remain but no contributions can be made into it and the assets and liabilities will not be transferred.

One can request to receive two statements of account under old scheme and new pension scheme Contributions Employers will be required to make both Tier 1 and Tier 11 contributions into the pension fund for each employee. Contributions will be graduated for the first five(5) years based on the upper earnings limit. Every employer is therefore required to register their employees with NSSF, and failure to do so attracts a penalty of kshs 50,000/=.Opting Out of making Tier 11 Contributions to NSSfEmployers who wish to opt out of making Tier 11 contributions are required to

make a written request to the RBA at least sixty (60) days before opting out of NSSF. But such applications must clearly show proof that it satisfies the Reference Scheme Tests as stipulated under Section 21 as well as the fourth (4th ) schedule of the Act. Under reference testing an occupational retirement benefits scheme or individual retirements benefits scheme must show it has a valid registration certificate, is registered by RBA, is registered with KRA as an exempt scheme, maintains an accurate record of protected rights as prescribed by the Authority and complies with the investment guidelines of the Retirement Benefits ACT , it will also have to produce a reference scheme test certificate from an actuary.The benefits under the New pension Scheme include Retirement pension, Survivors benefit, Invalidity pension, Emigration benefit and Funeral grantThe benefits under the Provident fund include the age benefit, Survivors benefit, Invalidity benefit, Withdrawal benefit and emigration benefit.Penalties • Kshs 50,000/= for an employer who

fails to register employees• A sum equal to 5% of the contribution

amount should one fail to remit contributions

• Kshs 100,000/= for any other offence under the Act where no penalty is prescribed

• Kshs 2,000,000/= or imprisonment for two (2) years for any person who attempts to defraud the fund or defeat the successful implementation of the Act

Impact on employers and employees (a) There may be no need to retain private

pension scheme with employers seeking to pay the mandatory contributions unless the issue of the management of these funds initiates an effort to opt out for Tier 11 contributions to a better managed private pension.

(b) Increase in NSSF Contributions will result in less bottom line profits

Grey Areas

• There are no guidelines on how the new NSSF Act is to be applied

• Lack of age limit for the provident fund suggests that individuals less than eighteen years can make contributions to the new provident fund, it is not clear if this was intended.

• If one has two employers both must make separate contributions to the fund

• There are no detailed regulations available on Tier 11 opt out criteria

It is envisaged that there will be numerous applications for opting out of Tier 11 by various organizations ahead of the implementation date of 31st May, 2014 which may overwhelm the Authority. As a way of avoiding any last minute rush Members are advised to write in good time and request the RBA to assess their pension schemes and advise on whether their members qualify to opt out of the Tier 11 contributions. The fact that the law makes it mandatory for every employer to register their employees under the NSSF pension scheme means there will be an increase in pension business for the industry which will benefit from the Tier 11 contributions if the opting out process is well managed by the RBA.2. PROPOSED DRAfT INSURANCE BILL, 2013The Cabinet Secretary Treasury, Mr Henry Rotich had proposed to overhaul the legislative framework for the efficient delivery of Insurance services during his Budget Speech in June, 2013.The IRA was then requested at the time to come up with a new draft law by September, 2013 . Arising from this directive the Insurance Regulatory Authority released the Insurance Draft Bill, 2013 which was discussed by Industry stakeholders at a two (2) day workshop held on 20th and 21st November, 2014. A further meeting now comprising Chief Executive Officers was also held on 18th December, 2013 was also held at the College of Insurance. It was noted the law was less prescriptive and more principle based. It is meant to introduce flexibility to accommodate

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LEGAL UPDATEchanges in international standards and best practice and accommodate the ongoing changes in the insurance market . It creates a framework for the supervision and regulation of the Insurance sector in Kenya in line with the Insurance Core Principles and Practices. The law omits technical details or matters that will require to be changed arising from the fact that it is extremely difficult to change the principle Act.The draft Act provides for regulations which will be issued by the Insurance Regulatory Authority in line with International best Practices. The Regulations will be technical and detailed as they require to be specific and very clear to avoid any ambiguity. Under the new dispensation there will also be guidelines issued from time to time by the Authority which are not intended to be compulsory but will give guidance notes on various processes or procedures to be followed by the Industry in order to achieve compliance.The Bill does not specify clearly how issues of Self Regulation will be dealt with and it remains to be seen whether this will be dealt with under Regulations.3. fINANCE ACT, 2013 10% Excise Duty Levy On fees, Commissions & Charges for Insurance Services The Finance Act, 2013 received Presidential Assent on 24th October, 2013. Under this law an amendment was introduced to the Customs and Excise Act, Cap 472 under which all financial institutions would be required to levy 10% Excise Duty on all fees, charges and commissions charged during the course of their business. The effective date was 18th June, 2013.It was noted from the amendment proposed that all persons registered under the Insurance Act, Cap 487 would be required to levy the excise duty and it was not clear whether premiums, reinsurance and brokerage commissions were to be included. Further it was observed that there was no enabling legal framework for insurers to charge, collect and pay Excise duty to the Kenya Revenue Authority.

AKI immediately engaged the Services of the firm of Kaplan and Stratton who moved to court and obtained an injunction preventing KRA from making any demands for the remittance of excise duty from Insurance companies. In the meantime there were various concerted efforts to lobby the Parliamentary Committee on Finance Trade and Planning but to no avail.Justice David Majanja has since extended the Court injunction upto 21st February, 2014, to give the ongoing dialogue between AKI ,KRA, and other representatives of the Insurance industry such AKR, AIBK, Loss Adjustors, Assessors a chance to resolve the matter amicably. In the meantime a meeting will be held with The Commisioner for Domestic Taxes, Commissioner Nyaga in due course to discuss the matter further.4. INSURANCE MOTOR vEHICLE THIRD PARTy RISKS (AMENDMENT) ACT, 2013 The Insurance Motor Vehicle Third Party Risks (Amendment) Act, 2013 has been passed effectively introducing structured compensation for various injuries under the Insurance Motor vehicle Third Party Risks Act, Cap 405. It caps insurers liability at Kshs 3 million, seeks to peg compensation to earnings and will allow for an initial process of negotiations to settle a claim using either arbitration /mediation within a period of sixty days before one can resort to court. It aims to proactively tackle the issue of fraud where persons who seek to benefit from use of fraudulent, documents will have the entire judgement cancelled including facing criminal charges.5. THE INSURANCE (AMENDMENT) BILL, 2013Although Parliament passed the Insurance (Amendment) Bill, 2013 it was not signed by the President. The contentious amendment proposed to Section 203 has therefore been suspended for the time being.6. THE UNITED STATES fOREIGN ACCOUNT fOR TAX COMPLIANCE ACT, 2010The concept of a Global market is now with us. We are all aware of the Proceeds

of Crime and the Anti Money Laundering Act, 2009 which has made alive this concept in view of the fact, failure of a country to adhere to this crucial legislation can lead to the country being blacklisted or an economic embargo being imposed.There is a statute that was enacted in the United States of America in the year 2010 that is also seeking to have global reach by enabling the US based IRS spread its tentacles into other parts of the world. This new law requires foreign financial institutions to use an enhanced due diligence procedure to identify the account holders who are U.S nationals. It aims to prevent foreign US nationals from hiding overseas income and assess from the US Internal Revenue Service (The IRS).It requires all foreign financial institutions to enter into an agreement either directly or indirectly with the US Internal Revenue Service to identify U.S Account holders and disclose specific account information. It imposes a 30% withholding tax on transactions of U.S Source income with non US financial institutions which are not FATCA complaint.This law affects foreign financial institutions that have US nationals as account holders or financial dealings with the US. Even institutions with no US clients are required to prove this.Kenyan financial institutions are therefore required to register with the IRS and comply with the FACTA Act by engaging in a thorough due diligence of their customers for purposes of identifying US Accounts ahead of the upcoming effective date of 1st July, 2014. 7. UNCLAIMED fINANCIAL ASSETS REGULATIONSThe Unclaimed Financial Assets Authority established under the Unclaimed Financial Assets Act, 2011 has commissioned a consultant to come up with draft regulations for purposes of implementing the law.Draft regulations have been prepared by the Consultant and forwarded to AKI. The Secretariat is currently reviewing the Regulations.

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8ASSOCIATION Of KENyA INSURERS

AKI Centre,Mimosa Road, Mucai Drive, off Ngong Road • P.O Box 45338-00100, Nairobi • Tel: 254 20 2731330/1/2/3,254 20 2599718 • Mobile: 0722 204149 ,0733 610325 • Fax: 254 20 2731339 • Website: www.akinsure.com

PUBLIC RELATIONS UPDATE

1. AKI Journal

The AKI journal is an important channel of communication for the Secretariat. The Journal is published bi-annually in June and December. The December 2013 journal was on “Mega Projects in Kenya and associated insurance Risks” and will be circulated shortly.

2. Road Safety Awards Day

This year’s ceremony was held on 7th November 2013 at Crowne Hotel Nairobi. The theme was “Maisha Yangu Jukumu Langu” (“My Life My Responsibility”). Over one hundred and twenty guests attended. The Cabinet Secretary Transport and Infrastructure was the Chief Guest. Awards were given for the following:

• Best goods transporting company fleet of 50 vehicles and above

• Best Matatu 14 seater- fleet of 10 vehicles and above

• Best mini-buses fleet of 5 vehicles and above

• Best bus fleet of 5 buses and above• Best Bus Driver.• Corporate organizations involved in

road safety initiatives

• Best Driving School • Non- governmental Organizations• Best three traffic police officers • Print, TV & Radio – involved in road

safety initiatives.

3. Sponsorship of Two Girls from SDAREP Home in Kajiado Town.

The Association has sponsored two girls from SDAREP home in Kajiado town to pursue Diploma in Insurance at the College of Insurance. The College has graciously waived the tuition fee and AKI will take care of other expenses.

The SDAREP home was identified by AKI as a worthy CSR cause as it takes care of destitute girls and rescues them from early marriages and FGM. AKI paid the secondary school fees for the two girls up to form four.

The AKI Chairman (left) appreciates the Guest of Honour, Cabinet Secretary Hon. Eng. Michael Kamau during the Road Safety Awards ceremony.

AKI extends a warm welcome to the following new staff members who joined the Association in the last quarter of the year:- Diana Shefo

Management TraineeNaomi Ngugi

Administrative Assistant

NEW APPOINTMENTS

Representatives of the five East African Insurance Associations after signing the Multilateral MOU at AKI offices on 22nd November 2013,

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